Audit says FBR failed to disallow inadmissible input tax credit claimed by non-compliant Tier-I retailers

ISLAMABAD: The Federal Board of Revenue (FBR) failed to disallow Rs490.58 million in inadmissible input tax credit claimed by Tier-I retailers that did not integrate their POS system at retail outlets, according to the latest audit report of the Auditor General of Pakistan (AGP).

The audit highlighted that under Section 3(9A) read with Section 8B(6) of the Sales Tax Act, 1990, Tier-I retailers are legally required to integrate their POS system at retail outlets with the FBR’s computerized system for real-time reporting of sales.

Mandatory POS Integration Ignored

The law stipulates that where a Tier-I retailer fails to integrate its retail outlet in the prescribed manner during a tax period, the adjustable input tax for that period must be reduced by 60%.

According to the AGP, an audit of FY2023-24 found that 39 registered taxpayers across six FBR field offices had failed to integrate their businesses with the mandatory POS system at retail outlets, as reflected in their sales tax returns.

Despite the violation, the FBR neither applied the mandatory 60% reduction in adjustable input tax nor ensured that the inadmissible input tax credit was excluded from the taxpayers’ output tax liability.

The audit said this lapse resulted in the inadmissible adjustment of Rs490.58 million in input tax credit, causing a significant loss to the national exchequer.

The irregularities were reported to the department between August and November 2024.

FBR Response

In its reply, the FBR informed auditors that cases involving Rs123.55 million were under adjudication, while cases worth Rs367.03 million were under examination or processing.

During meetings held in October and December 2024 and January 2025, the Departmental Accounts Committee (DAC) directed the FBR to expedite adjudication and legal proceedings.

However, the AGP observed that no final recovery or resolution had been reported by the time the audit report was finalised.

AGP Recommendations

The Auditor General recommended that the FBR accelerate adjudication and legal proceedings while introducing system-based checks in the sales tax return filing system to automatically disallow inadmissible input tax credit claimed by Tier-I retailers that fail to comply with mandatory POS system at retail outlets integration requirements.

The report said stronger automated compliance mechanisms would help reduce revenue leakages, improve tax enforcement and ensure that retailers fully comply with the Sales Tax Act, 1990.