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Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. •

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The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. •

Complexities of Input Tax Credits in Pakistan

Navigating Input Tax Credits in Pakistan can be complex! Our guide explains the challenges: fragmented system, supplier non-compliance, strict disallowances & FBR's new rules. Essential for businesses to avoid pitfalls & ensure compliance.

Faiza Ehsan
October 15, 2022
Tax Essentials

The system of Input Tax Credit (ITC) is a cornerstone of the Value Added Tax (VAT) regime, aiming to eliminate the cascading effect of taxes by allowing businesses to offset the sales tax paid on their purchases (input tax) against the sales tax collected on their sales (output tax).

The Fundamental Concept of Input Tax Credit

At its core, input tax credit enables a registered person to deduct the sales tax paid on their inputs (raw materials, utilities, services, capital goods) from the sales tax they charge on their outputs. The difference is the net sales tax payable to the Federal Board of Revenue (FBR) or provincial revenue authorities. This ensures that sales tax is effectively levied only on the “value addition” at each stage of the supply chain.

For a valid input tax credit claim, a registered person must hold a valid tax invoice, ensure payment through banking channels, and use the goods or services for making taxable supplies.

Key Complexities and Challenges

The complexities in input tax credit system arise from various legal provisions, regulatory changes, and technical limitations:

Fragmented Sales Tax System (Federal vs. Provincial)

Pakistan’s sales tax system is fragmented, with the FBR administering sales tax on goods and provincial revenue authorities (e.g., Sindh Revenue Board, Punjab Revenue Authority) levying sales tax on services. This creates challenges for businesses operating across provincial boundaries or dealing with hybrid contracts involving both goods and services.

Inter-Provincial Adjustment: Historically, adjusting input tax paid to a provincial authority against output tax payable to the FBR (or vice versa) has been a significant hurdle. A recent landmark case highlights instances where the FBR’s online portal was modified to block adjustments for provincial sales tax paid on services received from non-resident providers under the reverse charge mechanism, despite clear legal provisions allowing such adjustments. Such issues often require legal intervention to resolve.

Strict Conditions and Disallowances (Section 8 of Sales Tax Act, 1990)

Section 8 of the Sales Tax Act, 1990, along with subsequent notifications, outlines specific conditions under which input tax cannot be claimed. These include:

Non-business Use: Input tax on goods or services used for personal or non-business purposes is strictly disallowed.
Discrepancies and Irregularities: Input tax cannot be claimed on purchases with discrepancies in sales ledger data or where the input tax is unverifiable in the supply chain.
Fake Invoices: Claiming ITC based on fake, flying, or bogus invoices is strictly prohibited and subject to severe penalties, including criminal proceedings.
Missing Information: Failure to provide required information to the FBR can restrict ITC claims.
Unrelated Purchases: Goods and services not directly related to the registered person’s taxable supplies are ineligible for ITC.
Specific Exclusions: Certain goods and services, even if used for business, are specifically excluded, such as vehicles falling under Chapter 87 of the Customs Act (unless for sale or re-sale), food, beverages, garments, and gifts. Construction materials and fittings permanently attached to immovable property are also generally disallowed unless acquired for sale or re-sale or direct use in manufacturing.

Supplier Non-Compliance and its Impact on Buyers

A significant challenge arises when the supplier fails to comply with tax laws. Recent amendments, such as those introduced through SRO 350(I)/2024, make a buyer’s sales tax return provisional until the respective seller files their return and deposits the sales tax.

Automated Disallowance: If the seller fails to file a return or submits an invalid/incomplete one, the buyer’s provisional return is automatically finalized, leading to the deletion of input tax entries related to purchases from non-compliant suppliers. This unjustly burdens compliant buyers, impacting their working capital and disrupting financial planning.
Supply Chain Disruption: This “ripple effect” means that the non-compliance of one entity can adversely affect all associated parties in the supply chain, exacerbating operational challenges for compliant taxpayers.

Limitations on Adjustment (Section 8B and HS Codes)

90% Restriction: Section 8B of the Sales Tax Act, 1990, restricts the adjustment of input tax to 90% of the output tax for a particular tax period. This provision ties up a portion of the input tax credit, affecting cash flow.
HS Code-Based Restrictions: The FBR has been moving towards a system where input tax adjustments are limited to specific Harmonized System (HS) codes for certain industries. This aims to streamline revenue collection and curb misuse but significantly increases the compliance burden.
Businesses must meticulously categorize their purchases, and errors can lead to audits and penalties. For example, specific positive lists of input goods and services have been prepared for sectors like weaving, dyeing & printing, steel, oil & ghee, chemicals, cement, and batteries, allowing input tax only on items included in these lists.

Technical Glitches and Portal Issues

The reliance on online portals like IRIS for filing returns and managing sales tax also presents challenges. Technical glitches, forced disconnections, invoices failing to sync with the FBR portal, and a lack of timely communication on system updates create significant operational hurdles for integrated retailers. Such system failures can lead to unjustified disallowances of input tax and arbitrary enforcement actions by field officers.

By understanding these complexities and adopting best practices, businesses can minimize risks, optimize their tax positions, and contribute to a more transparent tax ecosystem in Pakistan.