Federal Board of Revenue (FBR) recently introduced a new measure to combat fake invoices used for tax evasion. This article explains the system and its implications for businesses.
The Problem: Fake Invoices
Unethical businesses create fake invoices to inflate input tax credit claims, reducing their tax liability. This not only harms the government’s revenue but also creates an unfair advantage for these businesses.
The New System:
As per SRO 350 issued on March 7th, 2024, a new rule applies to Rule 18(B) of the Sales Tax Rules. Here’s how it works:
- Late Return, Deleted Input Tax Credit: If a seller fails to file their monthly sales tax return by the due date (typically within a month of the month-end), the buyer’s input tax credit for that particular invoice will be automatically disallowed.
Example:
- Company A sells goods worth Rs.1 lakh to Company B with Rs.18,000 GST charged.
- Company B claims this as input tax credit, reducing its tax liability.
- If Company A fails to file its January sales tax return by the February deadline (around 18th February) and doesn’t deposit the tax by the month-end (around 28th/29th February), Company B’s input tax credit for this purchase will be disallowed.
Benefits for FBR:
- Reduced Fake Input Tax Claims: This discourages fake invoices as buyers lose the benefit if the seller doesn’t comply.
- Increased Tax Revenue: By minimizing fake claims, FBR aims to collect more tax.
Impact on Businesses:
- Sellers: Need to ensure timely filing and tax deposits to avoid impacting their buyers’ input tax claims.
- Buyers:
- Should be cautious when dealing with unknown sellers.
- Consider requesting a copy of the seller’s tax return filing receipt.
- May need to hold back a portion of the payment until the seller files their return.
Important Points:
- This system doesn’t completely eliminate the risk of fake invoices.
- FBR plans to address other aspects like working capital discrepancies in future updates.
Conclusion:
This new FBR system is a significant step towards curbing fake invoices. Businesses need to adapt their practices to comply with the regulations and avoid potential disruptions. Remember, this is just one measure, and further updates are expected.
