The Federal Board of Revenue (FBR) has issued new instructions to Pakistan Revenue Automation Limited (PRAL), directing the removal of restrictions preventing input tax adjustments in the sales tax returns for 21 companies. This move comes after the Sindh High Court’s interim order on February 6, 2025, which pointed out that the current system was unjustly denying claims for input tax adjustment related to services rendered by non-resident companies.
Under the directive, PRAL is required to enable the adjustment of input tax on sales taxes paid on behalf of non-residents, provided that such payments are electronically verified through the system. The FBR’s decision aligns with the court’s observation, which noted that while the online system was processing sales returns on services rendered by non-residents, it was not granting input tax adjustment, creating an unjust situation for the companies involved.
The FBR has communicated its instructions to the Director General Information Technology at the FBR and to PRAL, highlighting the interim order from the Sindh High Court. According to the court’s order, the online system used by the FBR to process returns related to non-resident services seemed to be hindering the legitimate claims for input tax adjustment. The court’s intervention stressed that the current procedure must be aligned with the law to allow these claims to be processed fairly.
The hearing for the case was adjourned until March 6, 2025, to provide sufficient time for the online system to be updated and brought in line with legal standards. The matter at hand revolves around the admissibility of input tax claims under the provisions of the Sales Tax Act, 1990, and the judgment passed by the Apex Court regarding such levies by Provincial Legislatures.
In response to the court’s observations, the FBR requested that PRAL remove the system check that previously blocked these adjustments. Specifically, the FBR’s letter emphasized that if the input tax payment is electronically verified by the system, the relevant companies should be able to claim their tax adjustments without facing the unjustified denial that was previously in place.
The 21 companies affected by this change are primarily those that pay sales tax on behalf of non-residents for services rendered. By removing the input tax adjustment restriction, the FBR aims to streamline tax processing, providing relief to businesses and ensuring that tax claims are handled fairly and efficiently.
The FBR’s move is seen as a step toward improving transparency and fairness in the tax system, particularly in the context of cross-border transactions involving non-resident service providers. By ensuring that the electronic verification system works in alignment with the law, the FBR seeks to enhance the overall functionality of the tax administration system and promote a more business-friendly environment in Pakistan.
This decision is expected to benefit the affected companies by reducing the burden of unjustified tax denials, improving their cash flow, and boosting confidence in the tax system. As the hearing on the case continues, businesses and stakeholders will be closely monitoring any further developments regarding the implementation of these changes.