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New circular of FBR raises eyebrows

KARACHI: Karachi Tax Bar Association (KTBA) has raised concerns about a new circular introduced by the Federal Board of Revenue (FBR).

According to the letter sent to the chairman FBR, the circular no. 5(17) STL&P/ 2021/ 136051-R issued on September 5, 2023, has sparked significant controversy within the taxation community, expressing reservations over its practicality and legality.

The letter said that the circular outlined a series of conditions that must be met before credit notes can be issued, primarily concerning sales returns from unregistered buyers.

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The key objective of these new regulations is to reduce revenue leakages within the tax system. However, the KTBA has taken issue with various aspects of the circular’s implementation.

It pointed out that the circular’s requirements contradict Rule 22 of Chapter 3 of the Sales Tax Rules, 2006, which permits credit adjustments without the need for commissioner’s verification. This legal inconsistency has led to questions about the circular’s legal standing and whether it can be enforced as is.

The KTBA said that since May 2023, the IRIS system barred the incorporation of credit notes into monthly sales tax returns, and this restriction has been a point of contention and added that they first conveyed their concerns in a letter dated September 30, 2023, and have not received a response yet.

Additionally, KTBA argued that the circular has failed to establish clear timelines and document requirements for both taxpayers and the commissioner’s office and added that lack of clarity has left room for arbitrary decision-making and has raised doubts about the transparency of the verification process.

Moreover, KTBA said that the circular did not adequately address various scenarios where credit notes may be necessary, such as supply cancellations, changes in the nature or value of supply, and other events that alter supplies or tax amounts. Therefore, KTBA believes that exceptions should be made for these unique business situations.

There is also concern about the implications for sales returns from service providers who are not required to register for sales tax.

The circular leaves room for ambiguity regarding its applicability to these providers, necessitating clarity, the letter said.

To address these concerns and mitigate unintended consequences, the KTBA has proposed a two-fold solution.

First, they recommend exempting business-to-business (B2B) transactions conducted through bank payments from the circular’s provisions, as these transactions are inherently less susceptible to fraudulent activities, which are commonly associated with cash sales.

This exemption would streamline operations for businesses and reduce regulatory hurdles. Secondly, KTBA urgently calls for a reversal of the circular’s implementation, to be reintroduced only after a thorough review and legal validation.

Copyright Business Recorder, 2023

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