SMEs struggle as FBR freezes new sales tax registrations

ISLAMABAD: Small and medium-sized enterprises (SMEs) across Pakistan are struggling to continue their operations due to difficulties in securing official sales tax registration. This issue has arisen following what the Karachi Tax Bar Association (KTBA) describes as a “virtual halt in fresh taxpayer registrations” under the Sales Tax Act, 1990, by the Federal Board of Revenue (FBR).

In a letter addressed to the FBR chairman, the KTBA expressed concerns over the significant hurdles faced by legitimate businesses as a result of this measure, which was intended to prevent fraudulent practices like flying invoices and misuse of tax adjustments.

The KTBA highlighted that the freeze on new registrations has inadvertently forced SMEs to operate without formal registration, pushing them into the informal economy. This not only disrupts their ability to function within the legal framework but also discourages tax compliance.

“The halt in sales tax registrations has wide-reaching implications, particularly for emerging SMEs. Many are unable to secure registration, and as a result, are left with no choice but to run informally,” the KTBA said in its letter. This situation, it warned, risks shrinking the tax base as more businesses opt for informal operations instead of navigating the complex registration process, undermining the government’s goal of expanding the tax net.

Moreover, the KTBA pointed out that the absence of a level playing field is creating unfair competition, as unregistered businesses can operate without contributing to the tax system, gaining an unfair advantage over compliant taxpayers.

The association cautioned that the lack of access to sales tax registration could deter new investments and stunt the growth of SMEs and startups, which play a critical role in economic development and boosting the tax-to-GDP ratio.

To address the issue, the KTBA proposed several measures, including the implementation of enhanced verification systems. These would involve physical inspections of business premises, checks on bank account details, and supply chain verification in collaboration with trade associations.

The KTBA also suggested introducing a risk-based or provisional registration system, allowing businesses to operate under temporary registration for six months. Those with a proven track record and low risk of non-compliance would later be granted permanent registration, while high-risk entities would face stricter scrutiny.

Additionally, the association recommended integrating FBR’s IRIS system with other government databases, such as NADRA, SECP, SRB, and PRA, to ensure the authenticity of applicants. Real-time monitoring of transactions was also suggested as a way to prevent fraudulent practices like flying invoices.

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