Karachi Tax Bar Association (KTBA) on Tuesday demanded the tax authorities to immediately suspend the application of further sales tax due to implementation of amendments brought through Finance Act, 2022.

KTBA President Syed Rehan Hasan Jafri in a letter to Asim Ahmad, chairman of Federal Board of Revenue (FBR), stated that before the changes brought about by the Finance Act, 2022, further tax at 3 per cent under section 3(1)(A) of the Sales Tax Act, 1990, was only required to be charged and paid on taxable supplies made to a person, who is liable to be registered under the Sales Tax Act, 1990 but had not obtained a Sales Tax Registration Number.

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The Finance Act, 2022 has broadened the scope of applicability of further tax on supplies made to registered persons who are not active taxpayers. The above change in law has brought about various practical issues and hindrances in its implementation which are being discussed below in the ensuing paras.

In pursuance of the above change, a registered person making taxable supplies is required to check active taxpayer status of a person at the time of issuance of invoice.

This condition has created quite a hassle for them to check and verify the particulars of each customer at the time of filing of sales tax return.

It may be noted that in various cases, there are hundreds of customers to whom thousands of invoices are issued.

Previously, the FBR had its own mechanism to identify the registered person, if the person is active or not.

“Therefore, it is requested that similar feature may be enabled by the FBR for the ease of taxpayers or alternatively kindly device an amicable way through which the above condition can be eased for the registered person,” KTBA president said.

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The term “active taxpayer” as defined in Clause (1) of section (2) of the Act which inter-alia provides that following persons would not be termed as active taxpayers –

— who fails to file the return of income under section 114 of the Income Tax Ordinance, 2001 by the due date; and

— who fails to file quarterly or annual withholding tax statement under section 165 of the Income Tax Ordinance, 2001.

The KTBA said that the above conditions are quite harsh, and it is practically impossible for a RP to be aware of the fact that whether its customer has filed (i) return of income by the due date, and (ii) quarterly/annual withholding tax statements under section 165 the Ordinance.

It may be noted that active taxpayer status of a person is updated in March each year based on the status of filing of return of income for the latest completed tax year. Even if the return of income is not filed by the due date, the person would appear in active taxpayer list (“ATL”) for income tax purposes by way of paying a penalty.

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However, the condition to become an active taxpayer for sales tax purposes stipulates that only the person who have filed return of income by the due date would be an active taxpayer.

Therefore, even in cases where a person is appearing in the ATL for income tax purposes, may not be an active taxpayer for sales tax. Consequently, you would agree that it is practically impossible for a RP to confirm the status of its customer whether he is an active taxpayer or not.

In addition to the above, for a RP to achieve active taxpayer status for sales tax, he needs to file quarterly/annual withholding tax statements under section 165 of the Ordinance. Interestingly, there is no option on the IRIS portal which may reflect filing status of the quarterly/annual withholding tax statements under section 165 of the Ordinance of a RP. Accordingly, again it is major impediment based on which a person could not determine active taxpayer status of its customers. 

In view of the above, it is humbly requested that rather than stipulating these conditions, the above definition may be linked with the active taxpayer status under the Ordinance.

The active taxpayer status reflection on online verification portal for sales return is based on filing of monthly sales tax returns irrespective of the fact that these are filed by the due dates or not. “This does not align with the condition provided in the definition of active taxpayer in the Act,” Jafri added.

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Moreover, online portal does not have any option to check the status of the person on any given specific date rather it reflects the status on the given time. Therefore, if a person wants to verify the status of its customer on any given date, he is unable to check the same from the online portal. It may be noted that for income tax purposes, active taxpayer status of a person could be checked on any given specific date.

Further, the active taxpayer status is updated on the FBR Portal on a real time basis, and therefore, it is difficult to track the status of any customer from the date of issuance of the invoice to the declaration of such invoice.

“You would recollect that for income tax purposes, when a payment is reported in the quarterly withholding tax statement under section 165 of the Ordinance, the portal automatically identifies the person as an active taxpayer or otherwise and simultaneously calculates the amount of applicable withholding tax.

“Likewise, it is requested that Annexure – C of the sales tax return may also be automatically linked with the active taxpayer status under the Act and if a person is not an active taxpayer, the portal may automatically calculate further tax on such sales. This would enable effective monitoring of the above change in law and its application. Alongside, this would also cater to the situations where further tax could not be charged due to a mistake or an inadvertent error,” according to the letter.

Even otherwise, until such an option is optimized in sales tax return, the option to manually levy and charge further tax may be enabled in the sales tax return to discharge further tax liability.

The KTBA urged the FBR chairman that the application of further tax onto persons other than active taxpayers may be kept in abeyance till the issues identified above are resolved in an amicable manner.