SALES TAX GENERAL ORDERS NO 5 OF 1994,

DATED 6TH APRIL,1994

           A question has arisen about calculation of sales tax liability of a vendor or job worker who makes goods for his principal with the help of raw materials supplied by the principal. Moreover, the principal uses the goods supplied to him by the vendor for making another commodity.

2.         The question has been examined in the Central Board of Revenue. Under section 7 of the Sales Tax Act a registered person is entitled to deduct input tax from the output tax that is due from him in respect of the relevant tax period. However, such input tax credit can be availed if he buys the raw materials and pay sales tax thereon. In the case under consideration the vendor/job worker does not buy raw materials; he gets them free of cost from his principal.

3.         The situation under consideration is covered by sub-section (31) of section 2 of the Sales Tax Act. According to this section “value of supply” in respect of taxable supply, means the consideration in money including excise duty if any, which the supplier receives from the recipient for that supply. Since a vendor receives only his charges for making a commodity by converting raw materials into finished products, the value of supply for calculating sales tax is the gross amount of conversion charges without any deduction therefrom. In such a situation sales tax is to be calculated on the gross amount of such charges and excise duty, if any, levied thereon. However, input tax credit for sales tax paid on the raw materials and packing materials or other goods, supplied by the principal will not be adjusted against the tax so calculated.

4.         The sales tax is to be calculated in the manner indicated in para 3 above if the following conditions are fulfilled:

(i)   The principal does not sell the commodity produced by a vendor either in the same form or by putting a brand name thereon or by re-packing it.

(ii)   The principal uses the goods made by a vendor/job worker for producing another marketable commodity.

(AKHTAR ALI)

SECRETARY (STP)