Correctness of sales tax returns: FBR drops CFOs’ affidavit idea after resistance from businesses

ISLAMABAD/KARACHI: The Federal Board of Revenue (FBR) has withdrawn its orders for submission of affidavits by the chief financial officers (CFOs) of companies for filing sales tax returns after conducting due diligence for filing input adjustment claims.

The FBR had found that the input adjustment claims became the worst phenomena in shape of tax frauds happening in the country. Keeping in view representations from the FPCCI and other CFOs bodies, the FBR announced on Thursday that on request of trade bodies and in order to take all stakeholders in confidence, it has been decided that: a) The filing of affidavit will not be required for return filing for the tax period September, 2024 to be filed in October, 2024. b) The FBR will receive alternative proposals from the stakeholders till Oct 31 to curb menace of falsified sales tax return. c) The Board may modify the particulars of affidavit where valid concerns of stakeholders do exist.

According to the FBR’s statement, during the data-driven analytic exercise of sales tax returns, filed by major businesses, it was observed that significant fraudulent practices are being employed by some of their authorised representatives and CFOs and that they are not exercising due diligence. Even the analysis within sectors and sub-sectors shows huge discrepancies. It is noteworthy that such discrepancies could not exist if the authorised representative and CFOs of the companies had exercised due diligence.

In this backdrop, it was decided by FBR that CFOs/authorised representatives will submit an affidavit along with sales tax return regarding its correctness. Since then, a number of representations have been received from various trade bodies including FPCCI that affidavit for CFOs/authorised representatives of the companies about correctness of the sales tax return in terms of Section 26 of Sales Tax Act, 1990 has caused hardship.

It is clarified that the said affidavit was only introduced by the Board in order to sensitise the authorised representatives/CFOs about the existing provisions of Sales Tax Act and that the said affidavit only reiterates the legal obligations of the persons filing return for any tax period and informs them about the criminal liability that they may incur if such returns contain false information.

However, it is again emphasized that no new legal obligation arises out of the “affidavit” and that the registered taxpayers should always be cognizant of the fact that declaration of fake or flying invoices and suppression of sale is a cognizable offence under the sales tax law and all registered persons need to exercise extreme caution while filing returns in order to avoid pecuniary and criminal liabilities under Section 33 of the Sales Tax Act, 1990.

Earlier, the businesses in the country termed the requirement of FBR for affidavit from the CFOs for verification of transactions to check the “flying invoices” of sales tax “impractical”, saying how come they could give the affidavit on part of suppliers and buyers.

Flying invoices of sales tax came into limelight recently when the FBR high-ups held that flying invoices were one of the reasons for the massive tax evasion in the country. Fake invoices are those which don’t have any business transaction at all whereas flying invoices have the backup of any business transaction.

The FBR high-ups held a meeting with the CFOs of different companies in Karachi recently, requiring them to submit affidavit that turnover or supply has been declared correctly and no fictitious figures had been entered in sales tax return to put an end to flying invoices.

According to one participant of the meeting, the CFOs were informed that from now onwards, they must submit an affidavit every month along with their sales tax returns, confirming that company purchases and sales weren’t impacted by flying invoices and suppliers and buyers didn’t engage in flying invoice practices as well as claimed invoices are for taxable activities.

He said the CFOs strongly objected terming it practically impossible for them to verify all transactions. This sudden implementation by the FBR was legally questionable. “How can I give an affidavit that all companies supplying me or buying from me are above board and honest,” the CFO of a textile company, requesting not to be named, told The News.

He said during the meeting, some participants asked the FBR high-ups to first get an affidavit from their officials that they wouldn’t take bribe while disposing of the sales tax returns cases, if they want affidavits from CFOs of companies.

The requirement of affidavit also evoked reactions from the trade bodies of the country. President Karachi Chamber of Commerce & Industry (KCCI) Muhammad Jawed Bilwani advised the FBR to defer the condition of submitting an affidavit for sales tax returns as it compelled the taxpayers to affirm that the information provided was completely accurate and true, but it was most probable that the information provided would be correct to the best of taxpayers knowledge yet CFO will be penalised because of the wrongdoings done by the vendors.

Khurram Mukhtar, Patron-in-Chief, Pakistan Textile Exporters Association (PTEA), in a statement said that requirement for an affidavit from the CFO by the FBR should be deferred, as buyers did not have access to the multi-tier supply chain. He said the FBR owed billions in legitimate refunds to businesses, who were bearing a 19pc financial cost due to delays. Such harsh measures would only increase the hardships of legitimate businesses.

Overseas Chambers of Commerce & Industry (OICC), the representative body of overseas investors in the country, also wrote a letter to the FBR chairman saying that after implementing sales tax real-time invoice verification system (STRIVE), the system only allows input sales tax offset if two criteria are met i.e. if by the 10th of the month following the supply, the supplier uploads the output tax on STRIVE; and if the supplier discharges the output tax liability to the FBR on the supply by the end of the month.

“This effectively means that the STRIVE system denies input sales tax adjustment if both these requirements are not met,” the OICCI noted. Therefore, asking for an affidavit on this issue is not warranted nor will it be acceptable to OICCI members.

Giving his opinion, Ashfaq Tola, a tax expert, said there was no provision in the law for such affidavit and clarified that the requirement was not only for the CFOs but for authorised principal officers, which could be even CEO of the company.

Talking to The News, he said any person could be responsible for his conduct, but how could he be asked to submit affidavit for the linked-up companies, who could be a supplier or buyer.