FBR tightens rules on mismatched tax credit claims

Summary If the discrepancy is confirmed after the prescribed process, the taxpayer will have to return the inadmissible input tax credit. In addition to repaying the disputed tax amount, the taxpayer will have to pay a penalty equal to 20% of the mismatched input tax. The Finance Act also provides for a 20% penalty in cases involving input tax credit claimed through fake invoices. AI Generated Summary ISLAMABAD: Taxpayers will face stricter penalties for claiming incorrect or mismatched input tax credits under the Finance Act 2026-27. They will be required to repay any input tax credit found to be inadmissible. A 20% penalty will also be imposed on the disputed amount, in addition to the applicable default surcharge. The new provisions are aimed at preventing misuse of input tax credit claims. They are also intended to strengthen the Federal Board of Revenue's (FBR) monitoring of transactions between registered taxpayers and their suppliers. Under the Finance Act, the FBR's computerised system can identify cases where the input tax credit claimed by a registered person does not correspond with the output tax declared by the relevant supplier. The comparison can cover the same tax period or a nearby tax period. When such a discrepancy is detected, the taxpayer will be issued a notice. The taxpayer will be given an opportunity to explain the difference and will also be provided a chance for a hearing. If the discrepancy is confirmed after the prescribed process, the taxpayer will have to return the inadmissible input tax credit. In addition to repaying the disputed tax amount, the taxpayer will have to pay a penalty equal to 20% of the mismatched input tax. Default surcharge will also be charged under Section 34 of the Income Tax Ordinance. The Finance Act also provides for a 20% penalty in cases involving input tax credit claimed through fake invoices. If the wrongly claimed tax credit is not repaid within 60 days, the taxpayer will be liable to pay the penalty. The new mechanism strengthens digital scrutiny of tax claims. It allows the FBR to compare the tax credit claimed by a buyer with the output tax declared by the corresponding supplier. Any significant mismatch can therefore trigger further examination. However, the identification of a mismatch by the computerised system does not by itself establish wrongdoing. The taxpayer must first be notified and given an opportunity to explain the discrepancy. The final recovery and penalty can follow after the mismatch is examined and confirmed.