Karachi, August 30, 2024 — The Karachi Tax Bar Association (KTBA) has raised serious concerns about the complications faced by taxpayers in dealing with sales tax on advances, following recent legislative changes.
In a letter addressed to Mir Badshah Khan Wazir, Member (Inland Revenue – Operations) of the Federal Board of Revenue (FBR), KTBA President Syed Zafar Ahmed highlighted several technical and procedural issues that have emerged since the reintroduction of the concept of sales tax on advances in the Finance Act, 2024.
The KTBA pointed out that the reintroduction of sales tax on advances, after a gap of five years, came through changes in the definition of the ‘time of supply’ under Section 22(44)(a) of the Sales Tax Act, 1990. However, corresponding updates to the Integrated Revenue Information System (IRIS) — the FBR’s tax management software — have not been implemented, leading to numerous difficulties for taxpayers.
“This has given rise to several technical and mechanical irritants,” the KTBA stated in its letter. It emphasized that while the Sales Tax Rules, 2006, specifically Rule 160, outline the treatment of advance payments against supplies, the necessary modifications to align the IRIS system with these rules have not been made.
Complications Due to New Rules
Under the newly introduced Rule 160, taxpayers receiving advance payments are required to issue an advance receipt invoice at the time of receiving the payment. The output tax on such amounts must be reflected in the tax return for the period in which the advance is received. When the actual supply is made, a sales tax invoice is to be issued, referencing the advance invoice and taking due credit for the sales tax already accounted for.
However, the KTBA has highlighted several issues with this process:
1. Credit Note Restrictions: For the last year, the FBR has imposed restrictions on declaring credit notes on the IRIS portal. Suppliers cannot declare credit notes unless a debit note is declared by the buyer. Additionally, the credit note must be issued within six months of declaring the sales tax invoice, which complicates the process for transactions that extend beyond this timeframe.
2. Issues with Unregistered Buyers: The IRIS portal does not allow the declaration of credit notes against unregistered buyers, creating a significant obstacle for suppliers dealing with such customers. This restriction prevents suppliers from adjusting sales tax in their returns when the actual supply differs from the advance invoice.
3. Complexity with Multiple Products: Many distributors deal in multiple products, some of which fall under different tax regimes (such as goods taxable at a standard 18% rate, exempt goods, and goods taxable at a reduced rate). The current system does not provide a clear mechanism for handling sales tax chargeability on advance invoices and subsequent adjustments for these varied products.
4. Delayed Supplies and Adjustments: Actual supplies made by distributors often vary in quantity from the advance invoice issued at the time of receiving the advance payment. Adjustments based on actual quantities can only be made through a credit note, but this process has been restricted on the FBR portal, further complicating compliance.
5. Cancellation of Supplies: In cases where a supply is canceled, taxpayers are unable to declare a credit note until a debit note is issued by the buyer, which could lead to complications in reversing advance sales tax and sales tax withholding already declared and paid in returns.
Call for Clarification and Reforms
The KTBA warned that the inability to declare or pay sales tax on advance invoices and to take necessary adjustments could lead to a deterrent effect on businesses. “Taxpayers will remain unable to declare or pay sales tax on advance invoices in their returns and take due credit/adjustments, which will deter them from charging sales tax on advances,” the KTBA stated.
In light of these issues, the KTBA has urged the FBR to provide immediate clarifications and guidelines on how to declare advance invoices and take credit or adjustments in the tax return at the time of actual supplies or in case of cancellation of supplies. “It is, therefore, requested to kindly provide clarification/guideline for the declaration of advance invoices and how to take credit/adjustments in the return at the time of actual supplies or in case of cancellation of supplies,” the letter concluded.
