Returned or cancelled supplies are a common part of business operations. However, incorrect adjustment of input and output tax can lead to penalties and audit issues. To address this, Rule 22 of the Sales Tax Rules, 2006 (updated for tax year 2026) provides a complete framework for handling tax adjustments through debit and credit notes.
This guide explains who can adjust tax, when adjustments are allowed, and how to report them correctly in sales tax returns.
🔍 What Is Tax Adjustment on Returned Supplies?
Tax adjustment arises when:
• Goods are returned to the supplier
• A supply is cancelled
• The value or tax amount is reduced after issuance of a sales tax invoice
In such cases, both buyers and suppliers must reverse or modify tax entries already reported.
🧾 Input Tax Adjustment Rules for Buyers
❌ When Input Tax Is Not Allowed
Under Rule 22(1), a buyer cannot claim input tax on:
• Cancelled supplies
• Returned goods
• Supplies where sales tax has been reduced
🔄 If Input Tax Was Already Claimed
According to Rule 22(2):
• The buyer must adjust input tax based on the Debit Note or Credit Note
• Adjustment is made in the sales tax return of the tax period in which the note is issued
• Input tax may be reduced or increased, depending on the nature of the note
👉 Interactive Tip: Always match debit/credit note numbers with the original invoice before filing your return.
🏭 Output Tax Adjustment Rules for Suppliers
If a supplier has already declared output tax but later issues a debit or credit note:
• Rule 22(3) allows the supplier to adjust output tax
• Adjustment is reported in the return for the period when the note is issued
• Applies to both increase or decrease in tax liability
📌 Special Case: Unregistered Buyers
When goods are returned by an unregistered person, the supplier may adjust tax only through a Credit Note.
⏰ Time Limit for Tax Adjustments (Critical for 2026)
⏳ Standard Time Limit
• Debit or Credit Note must be issued within 180 days of the original supply
🕒 Extension Option
• The Collector Inland Revenue may grant a further 180-day extension
• Extension must be requested in writing with valid reasons
🥫 Special Relief for Perishable Food Manufacturers
Under Rule 22(4A):
• Companies producing perishable food items with expiry dates
• If goods are returned due to being unfit for consumption and destroyed under Rule 23
• Credit notes may be issued within 15 days of return
✔ This provision helps food manufacturers manage wastage without tax loss.
🔁 Re-Supply of Returned Goods
As per Rule 22(5):
• If returned goods are re-supplied (with or without repairs)
• Sales tax must be charged again in the normal manner
• Tax must be reported in the return for the period of re-supply
✅ Key Compliance Checklist for Businesses
✔ Issue debit/credit notes within prescribed time
✔ Adjust tax in the correct return period
✔ Maintain proper documentation
✔ Follow special rules for unregistered buyers
✔ Seek extension if adjustment exceeds 180 days
📌 Final Thoughts
Correct adjustment of input and output tax for returned supplies is mandatory under Pakistan’s sales tax law for 2026. Businesses that follow Rule 22 carefully can avoid unnecessary disputes, penalties, and audit objections.