Karachi, March 7, 2025 – The Karachi Tax Bar Association (KTBA) has raised serious concerns over the virtual standstill in the Federal Board of Revenue’s (FBR) sales tax registration system, stating that the process has nearly come to a halt.
This development has created significant hurdles for businesses seeking fresh registration under the Sales Tax Act, 1990.
In a formal letter addressed to FBR Chairman Rashid Mahmood Langrial, the KTBA highlighted the challenges arising due to the suspension of new registrations. While the measure appears to be an attempt to combat the menace of flying invoices and curb the misuse of input/output tax adjustments, it has inadvertently led to a host of unintended consequences that may negatively impact genuine taxpayers, shrink the tax base, and discourage overall compliance.
Challenges Arising from the Halt in Sales Tax Registration
1. Exclusion of Genuine Taxpayers: A significant number of legitimate businesses, particularly small and medium enterprises (SMEs), are struggling to obtain sales tax registration. This is restricting their ability to operate within the formal economy and is deterring compliance with tax laws.
2. Shrinking Tax Base: The continued restriction on new registrations threatens to further shrink the country’s tax base, as many emerging SMEs may choose to operate informally instead of facing bureaucratic hurdles.
3. Unfair Business Environment: Unregistered businesses that continue to operate without contributing to the tax system gain an unfair advantage over compliant taxpayers who bear the tax burden.
4. Economic Slowdown: The inability of new businesses to secure sales tax registration poses a direct threat to investment, especially in startups and SMEs. This will ultimately hinder economic growth and weaken the country’s tax-to-GDP ratio.
KTBA’s Recommendations to Address the Issue of Flying Invoices
While the KTBA acknowledges the FBR’s concerns regarding flying invoices, it strongly recommends targeted strategies that mitigate fraudulent activities without penalizing genuine taxpayers. Some of the proposed measures include:
1. Enhanced Verification Mechanisms: A robust verification system should be implemented for new sales tax registrations, including physical inspections of business premises, verification of bank account details, and scrutiny of supply chains. Additionally, third-party references from trade bodies and industry associations could be integrated into the process.
2. Risk-Based or Provisional Registration: The KTBA suggests introducing a risk-based registration model wherein businesses are initially granted provisional registration for six months. Those demonstrating a clean compliance record can then be granted permanent sales tax registration, while high-risk applicants undergo heightened scrutiny through data analytics, artificial intelligence, and audits.
3. Digital Integration and Real-Time Monitoring: The FBR should enhance digital integration by linking IRIS with databases from NADRA, SECP, SRB, and PRA to authenticate applicants. Additionally, real-time monitoring of sales and purchase transactions should be implemented to curb fraudulent invoicing practices.
Conclusion
The KTBA has cautioned that the ongoing suspension of new sales tax registrations, despite its well-intended objective, is inadvertently discouraging tax compliance and narrowing the tax base. A more balanced approach is required—one that effectively combats tax fraud while simultaneously facilitating legitimate businesses.
To achieve this, the KTBA has urged the FBR to consider gradual liberalization of economic and tax policies in collaboration with trade bodies and business federations. Past experiences have shown that engagement with industry stakeholders can lead to more effective and sustainable tax reforms.
Finally, the KTBA expressed confidence that the FBR will take necessary steps to resolve this impasse by formulating a transparent and efficient policy. A well-structured sales tax registration framework will not only encourage compliance but will also help expand the tax net, ultimately benefiting Pakistan’s economy.