In a groundbreaking decision, the Pakistani tax court, officially known as the Appellate Tribunal Inland Revenue (ATIR), has delivered a ruling that safeguards taxpayers who purchase goods from suppliers later discovered to be involved in fraudulent activities, such as issuing fake invoices.
This landmark judgment is a pivotal moment for businesses across Pakistan, offering clarity and protection to those who adhere to tax regulations.
Specifically, the ruling ensures that buyers who verify a supplier’s active sales tax status and make payments exceeding PKR 50,000 (inclusive of sales tax) through banking channels are not penalized or stripped of their input tax credits, even if the supplier is later identified as fraudulent by the Federal Board of Revenue (FBR).
This decision shifts the onus onto the FBR to target and penalize fraudulent suppliers directly, rather than innocent buyers.
Background of the Case
The case centers on a taxpayer who purchased goods and claimed input tax based on invoices issued by a supplier. Subsequently, the FBR flagged the supplier as part of a fraudulent network engaged in issuing fake invoices—commonly known as “selling input tax.” The FBR responded by issuing notices to the taxpayer, challenging the legitimacy of their purchases and input tax claims.
The taxpayer fought back, arguing that at the time of the transactions, the supplier was an active sales tax registrant, and all payments were made through banking channels in compliance with legal requirements. Although the Commissioner initially rejected this defense, the ATIR overturned that decision, ruling in favor of the taxpayer based on their adherence to two key conditions.
Key Themes and Important Takeaways1. Protection for Compliant Buyers
The cornerstone of the ATIR’s ruling is the protection it offers to taxpayers who exercise due diligence. Businesses that follow legal protocols should not bear the consequences of a supplier’s fraudulent actions. This decision alleviates a significant burden for compliant taxpayers who might otherwise face unfair penalties.
Two Critical Conditions for Buyers
The ATIR outlined two essential requirements that buyers must meet to secure protection under this ruling:
- Verification of Active Sales Tax Status: Buyers must confirm that the supplier was an active sales tax registrant (not blacklisted) at the time of the invoice. This can be verified using the FBR’s online sales tax portal.”He argued that when he was purchasing goods from Mr. A, the individual was active in sales tax. How would he know that they were engaged in illicit activities? Checking this is the responsibility of the FBR staff and department.”
- Banking Channel Payments for Amounts Over PKR 50,000: For transactions exceeding PKR 50,000 (gross, including sales tax), payments must be made via banking channels, as mandated by Section 73 of the Sales Tax Act. This threshold, updated by the Finance Act 2004, applies to the total amount, not just the base price.”Section 73 of the Sales Tax Act states that you must make payment through banking channels if the purchases are more than 50,000. He had complied with that as well.”
3. Shifting Responsibility to the FBR
The ruling underscores that it is the FBR’s responsibility to detect and penalize fraudulent suppliers, not the buyers who rely on the system’s integrity. This shift aims to encourage more proactive enforcement by the FBR.
“So this is the responsibility of the FBR, but what happens here is that after five or six years, when someone is caught, instead of punishing the person who committed the act, the one who purchased goods through the correct legal channels is issued a notice.”
Fraudulent suppliers often maintain a facade of legitimacy, conducting 20-30% of their business genuinely to build trust and evade scrutiny. This practice complicates the buyer’s ability to identify fraud, reinforcing the need for FBR oversight.
The ruling emphasizes that businesses must adopt rigorous supplier verification and payment practices as a standard to protect their interests and input tax claims.
This decision reduces the risk for businesses that follow sales tax rules, ensuring they are not unfairly penalized for supplier misconduct when they’ve met the required conditions.
The ruling pressures the FBR to strengthen its fraud detection and enforcement mechanisms, focusing on the source of the problem—fraudulent suppliers—rather than downstream buyers.
Taxpayers must familiarize themselves with this ruling and integrate its two key requirements into their procurement processes to safeguard their operations.
While the decision provides a strong foundation, businesses may require additional clarification from the FBR or higher courts on edge cases, such as suppliers whose status changes shortly after a transaction.
Recommendations for Businesses
To leverage this ruling and protect against liabilities, businesses should adopt the following practices:
- Implement Supplier Verification Protocols:
- Routinely check suppliers’ active sales tax status on the FBR’s online portal at the time of each invoice and maintain records of these checks.
- Comply with Payment Rules:
- Ensure payments for transactions exceeding PKR 50,000 (gross) are made through banking channels, as required by Section 73 of the Sales Tax Act. For smaller amounts, banking channels are still recommended for transparency.
- Prepare a Defense Strategy:
- If faced with an FBR notice about a fraudulent supplier, businesses should reference this ATIR ruling as a defense, provided they can prove compliance with the two conditions.
- Consult Tax Experts:
- Engage tax advisors to stay updated on this ruling’s implications and ensure full compliance with evolving sales tax regulations.
The ATIR’s ruling marks a significant win for Pakistani taxpayers, offering a clear framework to protect compliant buyers from the fallout of fraudulent suppliers.
By verifying suppliers’ sales tax status and using banking channels for payments above PKR 50,000, businesses can secure their input tax claims and avoid undue penalties.
Simultaneously, the decision challenges the FBR to enhance its efforts in targeting fake invoice schemes at their source.
Businesses should act swiftly to embed these practices into their operations, ensuring compliance and resilience in Pakistan’s evolving tax landscape.
This ruling not only fosters fairness but also promotes a more accountable and transparent tax system for all stakeholders.
