Most of the Common Sales Tax Mistakes in Pakistan occur when businesses are late in registration, misreport sales in their sales tax returns, claim input tax without proper invoices, charge sales tax without a valid STRN, forget to check their ATL status, neglect to select the proper tax period in IRIS, or fail to respond appropriately to notices issued by the FBR.

What Are the Most Common Sales Tax Mistakes in Pakistan?

The most common FBR sales tax mistakes include:

1. Not Understanding NTN and STRN Difference

What may start out as a simple filing error can turn into a significant legal problem if it relates to tax liability, input tax adjustment, supplier verification, sales tax withholding or ATL status or a response to the Commissioner Inland Revenue. This is not just a matter of their bookkeeping. These are tax compliance issues for businesses which can cause sales tax audit Pakistan proceedings.

Many tax payers think that NTN is equal to STRN. National Tax Number (NTN) is associated with the identity of a taxpayer as well as registration in the income tax. STRN, which is short for Sales Tax Registration Number is mandatory to get sales tax registration Pakistan and sales tax return filing.

The difference between NTN and STRN is significant as an individual can be registered with an NTN, but not registered for sales tax. A supplier may raise an invoice containing only NTN (and sales tax) which may create issues for the buyer in claiming input tax.

2. Charging Sales Tax Without Registration

A common example is wholesale markets where there is a practical application. Supplies are charged as “GST” but no proper “STRN” is displayed on the invoice. Now, the buyer is claiming input tax adjustment and FBR is challenging the invoice in view of incomplete information of sales tax registration of the supplier.

How to Fix This Mistake

Without doubt, one of the riskiest sales tax violations committed by Pakistani businesses is the non-registration of the business for sales tax. A business shouldn’t charge customers for sales tax, unless it is registered and has permission to provide valid sales tax invoices.

For instance, a retailer collects the tax (GST) on the receipts but doesn’t have any STRN. There is a possibility of complaints by customers and FBR investigation for lack of registration for collecting the sales tax.

3. Late Sales Tax Registration

Firstly, look to see if the business needs to be registered under the law. Later, complete FBR sales tax registration on IRIS and get STRN / portal login and start issuing proper tax invoices and timely filing sales tax return on IRIS.

Those who are not certain about the registration can read a practical guide on how to get Sales Tax Number in Pakistan before proceeding registration process.

4. Late Sales Tax Registration

Another big mistake is in late registration. Registration may be required for importers, wholesalers, distributors, manufacturers, some retailers, zero-rated suppliers and others as specified in the law. Depending on the province and type of service, service providers might also be required to be registered with PRA, SRB, KPRA or BRA.

Required Details for Sales Tax Registration

Common details and documents may include:

5. Filing Monthly Sales Tax Return Incorrectly in IRIS

IRIS errors on their sales tax returns are not uncommon since many taxpayers fail to reconcile their tax returns. Issues are: Wrong tax period selected in IRIS, Wrong sales figure, Wrong purchase figure, CPR is not applied, problem with payment of sales tax return challan, incorrect withholding adjustment, mismatch of output tax and input tax, and sales tax return not submitted IRIS problem.

Step-by-Step Fixing Method

  1. Download the filed sales tax return and CPR.
  2. Compare sales data with invoices and ledgers.
  3. Reconcile purchases with supplier invoices.
  4. Check whether input tax is supported by valid documents.
  5. Review output tax calculation.
  6. Identify whether a revised return, correction or legal reply is needed.
  7. Consult a tax lawyer if a notice has already been issued.

Before filing their sales tax return on their own, readers can also view a detailed process How to file Sales Tax Return in Pakistan and FBR IRIS Login Guide.

6. Claiming Input Tax Without Valid Invoice

Input tax adjustment” is the tax paid on taxable purchases which can be adjusted against tax on taxable sales based on law and documentation. The issue is that the problem begins when the taxpayer wants to claim input tax without a proper tax invoice or in the case of a questionable supplier.

Examples of some common errors that Pakistan businesses make when filing the input tax claim are:

How to Reduce Input Tax Risk

For instance, a company purchase the goods from a supplier and claim the input tax on the purchase. Later, the supplier looks like he/she is suspended or blacklisted. FBR could have issues with audit, disallow input tax or could issue a show cause notice.

How to Reduce Input Tax Risk

Check supplier STRN before buying; check whether the supplier is on the Active Taxpayer List (ATL); maintain original tax invoices; reconcile the value of the tax invoice with the bank payment/ledger entry; and reconcile purchase information prior to filing.

7. Issuing Incorrect Sales Tax Invoices

Some sales tax invoice errors by businesses in Pakistan may seem minor, but can turn into serious issues during an audit. The general requirements of a proper tax invoice are that they should contain the information of the supplier, STRN, Buyer details if required, Date of the invoice, Serial number of the invoice, Description of the goods/services, Value exclusive of tax, Rate of tax, Tax amount and Value including tax.

Some of the most frequent invoice mistakes are: the omission of an invoice STRN, using an incorrect sales tax rate, incorrect classification of exempt sales as taxable sales, incorrect classification of taxable sales as exempt sales, incorrect HS code or service category and duplicate invoice numbers.

8. Incorrect Treatment of Taxable, Exempt and Zero-Rated Supplies

Taxable supplies Pakistan are not exempt or zero rated supplies Pakistan. This distinction will impact the output tax, input tax and refund claims.

Sales tax applies to taxable supplies, which are generally, all items and services except for those that are specifically exempt. Although sales tax will not apply to exempt supplies, they can have an impact on input tax. There are certain supplies which are not exempt and are yet provided with zero rate of tax and are often linked with certain legal treatments provided in the Sales Tax Act, 1990 and relevant notifications.

Some common classification issues are incorrect HS code, incorrect classification of services, exempt supplies not classified as such, zero rated supplies not classified as such and stuck in FBR due to mismatch of classification.

9. Late Filing, Late Payment and Default Surcharge

Auditing risk, ATL issues, notices and defaults from FBR or concerned Provincial tax office and sales tax penalty in Pakistan can result from late filing of sales tax return.

Another issue with short payment is if it occurs. Submitting a return is of no benefit if the tax liability is not paid properly. The department can inquire about the short payment and proceed with assessment/recovery actions.

The latest Sales Tax Act, 1990 along with Sales Tax Rules, 2006 and FBR circulars and applicable provincial laws should always be consulted to ascertain the costs. So there are also differences in the charges of professionals. If a simple filing correction is all that is necessary, it will be less expensive than a notice reply or audit representation/appeal.

10. Ignoring FBR Sales Tax Notice or Audit Notice

One of the top gross errors committed by the taxpayer is to ignore a notice for sales tax sent by FBR. Popular Notices are Show Cause notice, Audit notice, Recovery notice, Input tax disallowance notice, STRN suspension notice and Blacklisted supplier invoice objection.

How to Respond to FBR Sales Tax Notice

Read the notice carefully, put a note on the tax period and the legal section, determine whether it is related to registration, invoice, input tax, output tax, return filing or withholding tax, collect the documents, draw a reconciliation report, prepare a written reply with supporting documents, submit it via the appropriate process and attend the hearing if requested.

Documents can comprise of sales tax returns, CPRs/challans, purchase and sales invoices, bank statements, ledgers, stock records, supplier STRN verification, ATL evidence of status, contracts, delivery documents, debit notes and credit notes and previous correspondence with FBRs.

11. Not Checking Sales Tax ATL Status

Active Taxpayer List sales tax status is an indicator of the sales tax status of a taxpayer whether the person is active or not. Buyers might be unwilling to transact with suppliers that are not active and input tax claims may be a risky proposition where supplier status is not clear.

To check the status of sales tax in ATL, you need to visit the official FBR verification or ATL section, search using the available taxpayer information and have evidence to record. Before claiming input tax, businesses should ensure that their suppliers are in business, particularly for large purchases.

12. Not Filing Null Sales Tax Return

A registered person will still have to submit a return if there has been no taxable activity in a tax period. There are many reasons why many businesses don’t get null returns every year, such as no sales, the business was temporarily closed, the accountant didn’t think they needed to be filed, or the taxpayer didn’t know how to log in to IRIS.

13. Wrong Sales Tax Withholding Adjustment

Pakistan withholding certificates and CPRs are not being reconciled by the withholding agents, suppliers and buyers, which results in Pakistan sales tax withholding certificates. The following are some common errors: withholding tax adjustment (incorrect), withholding certificate (missing), payment reference (incorrect), mismatch between buyer and supplier, and reporting the return (incorrectly).

It is a practical solution to reconcile withholding certificates, CPRs with buyer ledger, supplier ledger and return data before submitting.

14. Confusing FBR Sales Tax with PRA, SRB, KPRA and BRA Sales Tax

The federal sales tax and provincial sales tax on services are sometimes mistakenly referred to as the same tax. FBR is referred to collecting federal sales tax on goods and provincial authorities are typically responsible for collecting sales tax on services.

Depending on province and type of service, service providers may be required to be PRA, SRB, KPRA or BRA compliant. Some of the common provincial errors are the filing of the FBR return when PRA, SRB, KPRA or BRA is applicable, wrong choice of the service category, return form, ignoring the provincial notices and the wrong application of inter-provincial services.

15. Poor Record-Keeping and Weak Reconciliation

Lack of sales tax records is another common cause of sales tax audit disallowances. FBR and provincial may require to provide them with the following documents: Invoices, Ledgers, Bank statements, Stock records, Verification and return information from suppliers.

Invoices for sales, purchase, tax, bank statements, stock register, suppliers’ and buyers’ ledger, CPRs, PSIDs, import documents (if applicable), debit notes, credit notes, contracts, ATL evidence and tax return acknowledgments are examples of records that should be kept on a monthly basis.

Comparisons to be done on a monthly basis include sales ledger, sales tax return, purchase ledger, input tax claim, bank receipts, sales, CPR, return payment, supplier STRN, invoice, output tax, and taxable sales, and withholding certificates and return adjustment.

Legal References and Appeal Route

The Sales Tax Act, 1990 (STA) applies to issues of registration, taxable supplies, tax invoice, input tax adjustment, returns, penalties, default surcharge, recovery and enforcement. The Sales Tax Rules, 2006 address the issues of registration process, filing, documentation and compliance process.

The Income Tax Ordinance, 2001 will be applicable if the details of NTN, Taxpayer profile, ATL and Business registration overlap.

In the event of a controversy, it can escalate from an officer level dispute to an order-in-original appeal, appeal with Commissioner Appeals (if available), Appellate Tribunal Inland Revenue and then to the high court reference for a question of law.

When Should You Contact a Sales Tax Lawyer or Consultant?

If you receive a sales tax notice from FBR, an audit notice, show cause notice, input tax disallowance, an STRN suspension, blacklisted supplier dispute, a recovery notice, a PRA notice, SRB notice, KPRA notice and BRA notice or tax fraud allegation then professional help is recommended.

A Sales Tax Consultant Lahore Pakistan can also check the documents, figure out the legal risk and construct a feasible solution until it escalates.

Final Sales Tax Compliance Checklist

Prior to filing each month, make sure you have checked sales and purchase invoices, supplier STRN and ATL, input tax/reconciliation of output tax, tax period in IRIS is correct, CPR and payment challan is available, no exempt supplies or zero-rated supplies are outstanding, timely filing and responding to notices.

Registration category, business activity, provincial sales tax exposure, supplier risk, refund position and pending notices, appeals and updated business information should also be included in a periodic review.

FAQs

What are the common sales tax mistakes in Pakistan?

Late registration, late filing, incorrect IRIS return data, incorrect and invalid invoices, claims for wrong input tax, issues in STRN and non-responding to FBR notices are common errors.

Can a business charge sales tax without STRN?

No. No sales tax should ever be charged on an invoice if the business is not registered for sales tax and the invoice is not valid with a valid STRN.

What happens if I file my sales tax return late?

Notices and penalty, default surcharge and ATL may be incurred due to late filing.

Can input tax be claimed without a valid tax invoice?

In general, the input tax needs to be evidenced by tax invoices and adequate record keeping. Claims made in the unsupported section may not be accepted at audit/assessment.

How do I correct a sales tax return mistake in IRIS?

Do identify the error and reconcile the invoices, CPRs and ledgers and then check if any of the following is required: Correction, Revised return or Legal Reply.

What should I do after receiving an FBR sales tax notice?

Read the notice and record the due date, gather documents, reconcile and provide a written response with documentation. For serious notices, it is recommended that legal assistance be sought.

Do service providers file sales tax with FBR or provincial authorities?

Depending on the province and service type, there are many services that are within the provincial jurisdictions of PRA, SRB, KPRA or BRA.

When should I hire a sales tax lawyer in Pakistan?

If you are getting to know that you have received a show cause notice, audit notice, penalty notice, STRN suspension, input tax objection or recovery notice, then you must hire a sales tax lawyer.

Conclusion

Timely registration, maintaining proper invoices, timely filing of IRIS, supplier verification, ATL checks, input tax claims and organized bookkeeping are some of the common sales tax issues in Pakistan that can generally be avoided. Don’t ignore a notice, if one has already been issued. Don’t allow an issue to get complicated and costly; review the facts, gather documents and provide an appropriate legal explanation.