Karachi, December 18, 2024 – Registered taxpayers in Pakistan may face significant challenges as the federal government has proposed the removal of input tax adjustment for supplies made to unregistered persons. The amendment, introduced as part of the Tax Laws (Amendment) Bill, 2024, seeks to tighten compliance and broaden the tax net under the Sales Tax Act, 1990.
The proposal involves amending sub-section (4) of Section 73 of the Sales Tax Act, 1990. This adjustment aims to disallow registered persons from claiming input tax deductions on taxable supplies made to individuals or entities not registered under the Act.
Following the proposed amendment, sub-section (4) would now read:
“A registered person shall not be entitled to deduct input tax (credit adjustment or deduction of input tax) which is attributable to such taxable supplies exceeding, in a financial year or in a tax period, as are made to certain persons who are not registered under this Act.”
However, the government has provided exceptions to this restriction. The proposed amendment explicitly states that the removal of input tax adjustment will not apply to supplies made to the following:
1. Federal, provincial, or local government departments and authorities that are not engaged in taxable supply activities.
2. Foreign missions, diplomats, and privileged persons who are exempted under diplomatic arrangements.
3. Individuals or entities not involved in the supply of taxable goods, thereby falling outside the scope of the Act.
4. Persons or categories of persons specified by the Federal Board of Revenue (FBR), subject to conditions outlined in an official Gazette notification.
The move is part of the government’s broader strategy to encourage tax compliance and increase the number of registered persons under the Sales Tax Act, 1990. By disallowing input tax adjustment on transactions with unregistered individuals, the measure aims to incentivize registration within the taxable supply chain.
While the amendment seeks to strengthen tax administration, businesses may face operational hurdles in dealing with unregistered suppliers, potentially increasing compliance costs and disrupting supply chains. The government, however, has emphasized that exceptions and conditions are designed to minimize the impact on essential sectors and non-commercial entities.
If enacted, this amendment could significantly reshape the operational dynamics of registered taxpayers and encourage greater registration compliance across Pakistan.