[Reported as PTCL 1998 St. 1484]

Subject:-- LEVY OF SALES TAX ON GOODS PRODUCED BY VENDORS FROM THE RAW MATERIALS SUPPLIED BY THE PRINCIPALS.

Various queries have been raised by taxpayers regarding the chargeability of sales tax and value of taxable supply in cases where raw materials and/or semi-manufactured goods are supplied by the principals to their vendors for further processing. Following clarifications are issued for information and guidance in this regard:--

(i) The first question is whether a vendor providing a "service" e.g. printing, textile processing, corrugation, etc. is a manufacturer or not. The definition of "manufacture" as given in section 2 (16)(c) of the Sales Tax Act, 1990, covers the processes and operations of assembling, mixing, cutting, diluting, bottling, packaging, repackaging or preparations of goods in any other manner. A 'manufacturer' is a person who is involved in any of the said processes. Therefore, vendors, by very nature of their job, are manufacturers and liable for registration or enrollment, as the case may be.

(ii) The definition of "supply" in section 2(33) of the Act states that "supply" includes sale, lease or other disposition of goods in the course or furtherance of business carried out for consideration. The supply by such vendor is covered by words "other disposition of goods" and hence is chargeable to sales tax.

(iii) The most important question now is the value on which such vendor shall charge and pay the tax. According to the definition laid down in section 2 (46) of the Act, "Value" is the consideration in money against which the registered person supplies the goods. Therefore, a vendor is required to charge sales tax on the consideration/charges of conversion. If during this "disposition of goods", he has used tax-paid raw materials procured by the vendor himself, tax credit of the same shall be available to the vendor.

(iv) The aforesaid principle will inter alia apply even the cases where goods are chargeable to sales tax on the basis of retail price. The principal will pay tax on the basis of retail price whereas the vendor will be liable to pay tax only or his gross conversion charges.

(V) There is, however, one exception to the foregoing. Under section 2 (46)(f), in case of processing of non-taxable raw materials, the value of processed goods will be the open market price of finished goods and not the processing charges alone.

2. All previous instructions/Circulars/General Orders subject may be treated as withdrawn.