The Federal Board of Revenue (FBR) has clarified why certain businesses and individuals will not be entitled to claim sales tax credit during the fiscal year 2025–26.
The explanation follows amendments to the Sales Tax Act, 1990, introduced through the Finance Act, 2025, which outline specific scenarios where tax credit cannot be availed.
Legal Framework Under Section 8
Section 8 of the Sales Tax Act, 1990 lays out comprehensive rules for situations in which a registered person cannot deduct or reclaim input tax. The key objective is to ensure that credit is claimed only on legitimate transactions directly related to taxable supplies, thereby minimizing risks of fraud, misuse, and revenue loss to the national exchequer.
Conditions Where Tax Credit Is Not Allowed
A registered person is barred from reclaiming input tax in several circumstances, including:
• When goods or services are used for non-taxable purposes or personal consumption, rather than for taxable supplies.
• If the supplier has failed to deposit the applicable tax into the government treasury or has not declared the transaction in their return.
• In cases where CREST (Computerized Risk-Based Evaluation of Sales Tax) indicates discrepancies, or the input tax is not verifiable through the supply chain.
• On fake invoices or purchases made from sources that do not meet the documentation requirements specified by the FBR.
Additionally, input credit is disallowed for goods permanently attached to immovable property—such as building materials, electrical fittings, and paints—unless these are intended for resale or direct manufacturing use. Similar restrictions apply to certain vehicles, equipment, and furniture that are not meant for resale.
Provisions for Mixed Supplies
For businesses dealing in both taxable and non-taxable supplies, only the proportion of input tax attributable to taxable supplies can be claimed. This ensures fair apportionment and prevents excessive credit claims.
Additional Restrictions
The Act further restricts input tax adjustment on:
• Agricultural machinery taxed at a concessional rate of 7%.
• Supplies made to unregistered distributors without proper National Tax Numbers (NTNs) or Computerized National Identity Card (CNIC) details.
• Goods and services purchased from suppliers who fail to report their sales in their respective returns.
Moreover, no input tax credit is available to those who previously paid a fixed tax under earlier provisions of the Act, as it existed before December 1, 1998.
Objective of Restrictions
The primary aim of these provisions is to safeguard revenue by ensuring that only genuine taxpayers with proper documentation and compliance can benefit from tax credit adjustments. This prevents leakage of revenue through unverifiable claims and strengthens the overall taxation framework.
Disclaimer
This article is for informational purposes only and does not constitute legal or financial advice. Businesses should consult qualified tax professionals or the FBR for specific guidance on sales tax credit regulations for 2025–26.