Important Update: SRO 350(I)-2024 - Key Changes to Sales Tax Registration, Sales Declaration and Input Tax Adjustment

Introduction

The Federal Board of Revenue issued SRO 350(I)/2024 on March 7, 2024 — a significant notification that introduces important changes to the sales tax registration process, sales declaration rules, and input tax adjustment mechanism in Pakistan. This SRO directly affects individual traders, Associations of Persons (AOPs), and Single Member Companies operating in the sales tax system.

The notification addresses three key areas of sales tax compliance: registration requirements, sales verification, and input tax adjustment rules. Each area introduces new obligations and restrictions that registered persons must understand and comply with to avoid penalties and disallowance of input tax claims.

This article explains all three aspects of SRO 350(I)/2024 in detail — who it applies to, what the new requirements are, and what happens if these requirements are not met.

Legal Basis — SRO 350(I)/2024

SRO 350(I)/2024 was issued by the Federal Board of Revenue on 7 March 2024 under the authority of the Sales Tax Act, 1990. It introduces targeted compliance measures specifically designed to address documentation issues, capital adequacy concerns, and input tax fraud risks associated with certain categories of registered persons.

The SRO is applicable to a specific set of target persons — and importantly, it explicitly excludes manufacturers from its scope. This means the new requirements under SRO 350(I)/2024 apply only to the trading and services segments of the registered sales tax population, not to manufacturing entities.

Who Does SRO 350(I)/2024 Apply To?

Area 1 — Registration Requirements

SRO 350(I)/2024 introduces enhanced registration requirements for the target persons. These changes affect both new applicants seeking sales tax registration and existing registered persons during the renewal or verification process.

Requirement 1 — Balance Sheet with Registration Application

Taxpayers covered by SRO 350(I)/2024 are now required to submit a balance sheet along with their registration application under Section 14 of the Sales Tax Act, 1990. This is a significant new documentation requirement that was not previously mandatory for all categories of applicants.

The balance sheet requirement serves the following purposes:

• It allows FBR to assess the financial capacity of the applicant to conduct the volume of business activity they are proposing
• It helps identify under-capitalised entities that may be seeking registration for the purpose of generating fake input tax invoices rather than conducting genuine business
• It creates a financial baseline for the registered person that can be compared against their subsequent sales declarations
• It supports the capital-to-sales ratio requirement discussed in the Sales area below

Requirement 2 — Verification by Local Registration Office (LRO)

After submission of the registration application (with balance sheet), the application must be verified by the Local Registration Office (LRO) before a registration order is issued. This adds a physical verification step to the registration process that goes beyond the standard online IRIS application procedure.

The LRO verification typically involves:

• Physical inspection of the declared business premises
• Verification that the business premises actually exists and is being used for the declared business activity
• Assessment of the business's capacity to conduct the volume of trade or supplies being proposed
• Confirmation that the balance sheet figures are plausible given the scale of the operation

Only after successful LRO verification is the registration order issued. This prevents the registration of shell entities and fictitious businesses whose sole purpose is the generation of fraudulent invoices.

Requirement 3 — Annual Biometric Verification

SRO 350(I)/2024 introduces mandatory annual biometric verification for registered persons in the target categories. This is a recurring requirement — not a one-time process at the time of registration.

Annual biometric verification requires the registered person (or authorised representative) to physically present themselves at the designated FBR facility or facilitation centre for biometric identity confirmation. This ensures that:

• The registered person is a real, identifiable individual or entity representative
• The NTN/STRN is not being used by ghost entities or persons operating under false identities
• The registration remains active and linked to a genuinely operating business

Area 2 — Sales Declaration Requirements

SRO 350(I)/2024 introduces a capital-to-sales ratio rule that directly affects how registered persons in the target categories can declare sales in their monthly returns.

The Five Times Capital Rule

Under SRO 350(I)/2024, if the declared sales of a registered person exceed five times their declared capital, they must obtain prior approval from the Commissioner before such sales can be accepted and processed.

This rule is designed to detect and prevent a common fraud mechanism in the sales tax system — where under-capitalised entities register for sales tax and immediately begin issuing invoices for sales volumes far exceeding what their financial capacity would allow, generating fraudulent input tax credits for other businesses.

Practical Example — Capital to Sales Ratio

In Scenario B, the trader must approach the Commissioner and obtain prior approval before declaring sales of PKR 30,000,000. Without approval, such sales declarations may not be processed or may be subject to audit and rejection.

This requirement directly affects traders, distributors, and wholesalers who operate with relatively low declared capital but high sales volumes — a common profile in certain trading sectors. Such businesses should either:

• Increase their declared capital to bring it in line with their actual sales volumes, or
• Proactively seek Commissioner approval for sales exceeding the five-times threshold

Area 3 — Input Tax Adjustment Restrictions

This is the most impactful aspect of SRO 350(I)/2024 for most registered persons. It fundamentally changes the risk landscape for input tax claims — by making the buyer responsible for their supplier's compliance failures.

The Supplier Return Filing Rule

Under SRO 350(I)/2024, input tax invoices will be disallowed if the supplier fails to file their monthly sales tax return within the same month in which the supply was made. Specifically:

• If a supplier sells goods to a buyer in, say, January 2024 but does not file their sales tax return for January 2024, the buyer cannot claim input tax on those purchases
• This applies regardless of whether the buyer has a valid tax invoice from the supplier
• The input tax on such purchases is entirely disallowed — it cannot be adjusted against the buyer's output tax
• The entire cost of the disallowed input tax is borne by the purchaser — not recoverable from the supplier or FBR

Practical Example — Input Tax Disallowance

A registered trader (covered by SRO 350) purchases goods worth PKR 1,000,000 plus PKR 180,000 sales tax (18%) from a supplier in January 2024. The supplier issues a valid tax invoice. However, the supplier fails to file their January 2024 sales tax return.

The buyer loses PKR 180,000 in input tax — permanently — simply because the supplier did not file their return. The buyer paid the tax to the supplier, the supplier did not deposit it with FBR by filing the return, and the buyer has no mechanism to recover this loss.

How to Protect Yourself from Input Tax Disallowance

Given the severe financial consequences of supplier non-compliance under SRO 350(I)/2024, registered persons in the target categories must take proactive steps to manage their supplier risk:

1. Verify supplier registration status before every purchase
   Always confirm that your supplier is a registered person under the Sales Tax Act — check their STRN on FBR IRIS.
2. Monitor supplier return filing monthly
   After each tax period, check on FBR IRIS whether your key suppliers have filed their monthly returns. If a supplier has not filed, do not claim input tax on purchases from that supplier for that period.
3. Prefer suppliers with a consistent filing track record
   Build your supply chain around registered persons who have a history of timely monthly return filing. Avoid suppliers with irregular or late filing patterns.
4. Include supplier compliance as a contract condition
   When entering into supply agreements, include a clause requiring the supplier to file their monthly returns on time — with the buyer's right to withhold payment or seek indemnity if input tax is disallowed due to the supplier's non-compliance.
5. Diversify supply sources
   Avoid dependency on a single supplier. If one supplier's non-compliance results in input tax disallowance, having alternative suppliers reduces the financial exposure.

Summary — Key Requirements of SRO 350(I)/2024

Frequently Asked Questions (FAQs)

Q1: I am already registered for sales tax. Does SRO 350(I)/2024 affect my existing registration?
Yes. The annual biometric verification requirement applies to existing registered persons in the target categories — not just new applicants. You must complete biometric verification annually to maintain your active registration status. The balance sheet and LRO verification requirements primarily affect new registrations, but existing registrations may also be subject to enhanced scrutiny under the SRO's framework.

Q2: My supplier filed their return late — one month after the supply. Can I still claim input tax?
SRO 350(I)/2024 requires the supplier to file their return within the same month as the supply. A late filing in a subsequent month does not satisfy this requirement for the purposes of input tax eligibility for that supply period. The input tax remains disallowed for the relevant period. Consult a tax professional for the specific position on late-filed supplier returns.

Q3: How do I check whether my supplier has filed their monthly return?
You can verify your supplier's return filing status on FBR's IRIS portal. Log in to IRIS and use the supplier verification tools to check whether the supplier has filed their return for the relevant month. This check should be done regularly — especially after the 18th of each month (when returns are due).

Q4: My company is a Single Member Company (SMC) but we are a manufacturer. Does SRO 350 apply?
The SRO explicitly excludes manufacturers. If your SMC is engaged in manufacturing activities, the manufacturing exclusion should apply regardless of the legal form (SMC). However, the classification as a "manufacturer" must be genuine — an SMC engaged in trading that claims manufacturing status to avoid SRO 350 requirements could face scrutiny. Consult a tax advisor to confirm your correct classification.

Q5: What documentation should I maintain to defend against input tax disallowance under SRO 350?
Maintain: (a) original tax invoices from all suppliers, (b) screenshots or records of supplier ATL/return filing verification checks performed monthly on FBR IRIS, (c) supplier NTN and STRN details, and (d) any communications with suppliers regarding their return filing obligations. This documentation demonstrates due diligence and may be relevant in any audit or dispute regarding input tax claims.

Conclusion

SRO 350(I)/2024 represents a significant tightening of sales tax compliance requirements for individuals, AOPs, and Single Member Companies in Pakistan. Its three key areas — enhanced registration with balance sheet and biometric verification, capital-to-sales ratio rules, and the supplier return filing condition for input tax — collectively create a more demanding compliance environment for the target categories.

The most operationally significant change is the input tax disallowance rule: buyers now carry the risk of their suppliers' compliance failures. This requires registered persons to actively monitor their suppliers' return filing status and restructure their supply chains around consistently compliant suppliers.

All registered persons in the target categories should review their current compliance position against SRO 350(I)/2024, complete the required annual biometric verification, maintain adequate declared capital relative to sales, and implement supplier monitoring protocols to protect their input tax claims.