Section 25AA of the Sales Tax Act, 1990 grants Inland Revenue (IR) officers the authority to determine the fair market value of supplies in transactions between associates.
This provision, introduced through the Finance Act, 2021, reflects the Federal Board of Revenue’s (FBR) commitment to addressing potential discrepancies and ensuring arm’s length transactions are in line with fair market values.
Section 25AA of the Sales Tax Act, 1990 reads as follows:
25AA. Transactions between Associates – (1) The Commissioner or an officer of Inland Revenue may, in respect of any transaction between persons who are associates, determine the transfer price of taxable supplies between the persons as is necessary to reflect the fair market value of supplies in an arm’s length transaction.
(2) The Board may, by notification in the official gazette, prescribe rules for carrying out the purpose of sub-section (1).
The introduction of this provision empowers both the Commissioner and officers of Inland Revenue to scrutinize transactions involving associates and ascertain the transfer prices of taxable supplies. The emphasis on determining prices that reflect fair market values in arm’s length transactions aims to prevent potential manipulation and ensure that transactions between associates are conducted fairly and transparently.
Associates, in this context, typically refer to entities or individuals with significant relationships, such as those with common ownership, control, or other close connections. Determining transfer prices in transactions between associates becomes crucial to avoid potential misuse of such relationships for tax avoidance or other financial gains.
The provision not only grants authority to IR officers but also recognizes the need for clear guidelines and rules to carry out the purpose effectively. Sub-section (2) allows the Board to prescribe rules through official gazette notifications, providing a structured framework for the determination of transfer prices in transactions between associates.
While the amendment is welcomed for its potential to enhance transparency and curb potential tax evasion, concerns have been raised about the subjective nature of determining fair market values. Critics argue that establishing an objective and consistent methodology for such determinations will be crucial to prevent arbitrary assessments and ensure fairness in the taxation system.
Section 25AA in the Sales Tax Act, 1990 signifies a proactive step by the FBR to address potential discrepancies in transactions between associates. By empowering IR officers to determine fair market values, the amendment aims to uphold the principles of transparency and fairness in commercial dealings. As the FBR moves forward with these amendments, establishing clear guidelines and rules will be imperative to ensure consistent and objective assessments, fostering a tax environment that strikes a balance between enforcement and fairness.
