FBR Decodes Mechanism for Adjustment of Input and Output Tax

FBR Decodes Mechanism for Adjustment of Input and Output Tax

Karachi, January 27, 2025 – The Federal Board of Revenue (FBR) has unveiled the detailed mechanism for the adjustment of input and output tax under the sales tax laws applicable for the tax year 2025. This mechanism, as outlined in Rule 22 of the Sales Tax Rules, 2006, provides clear guidelines to ensure proper compliance.

According to the FBR, the adjustment process addresses situations involving cancelled or returned supplies, changes in tax amounts, and specific conditions where credit or debit notes are issued.

Key Points of the Mechanism for Adjustment:

1. Claiming Input Tax:

Buyers cannot claim input tax for supplies that have been cancelled, returned, or where the tax amount has been reduced.

2. Adjustments via Credit or Debit Notes:

If a buyer has already claimed input tax for such supplies, they must adjust it accordingly. This means either reducing or increasing the input tax by the amount mentioned in the debit or credit note in the tax return for the relevant period.

3. Supplier’s Responsibility:

If a supplier has already reported output tax on a transaction and later issues a debit note, they are required to adjust the output tax in the same way. This adjustment should be reflected in the tax return for the period in which the debit note was issued.

4. Timeframe for Adjustments:

Any adjustments resulting in reduced output tax or increased input tax must be based on credit or debit notes issued within 180 days of the transaction. However, the FBR has allowed flexibility, as the Collector may extend this period by another 180 days under specific circumstances.

5. Special Cases for Perishable Items:

For manufacturers dealing with perishable food items, if goods are returned due to expiration and subsequently destroyed, credit notes must be issued within 15 days of their return to qualify for tax adjustment.

6. Resupply of Goods:

If returned or cancelled goods are resupplied, either to the original buyer or another party, the supplier must charge and account for sales tax on the new transaction in the usual way.

The FBR’s clear emphasis on adjustments aims to simplify tax compliance and minimize errors in tax reporting. By introducing these guidelines, the FBR seeks to ensure transparency and proper reconciliation of taxes for both buyers and suppliers. These rules further highlight the importance of issuing debit or credit notes promptly and adhering to specified timelines to benefit from tax adjustments.