FBR Circular No. 01 of 2026: Sales Tax & FED Amendments Explained

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A business-focused guide to the changes introduced through the Finance Act, 2026 in the Sales Tax Act, 1990 and Federal Excise Act, 2005.

Why this circular matters to businesses

The amendments move Pakistan's indirect-tax system further toward real-time reporting, automated matching and technology-driven enforcement. Registered manufacturers, importers, retailers, wholesalers, distributors and businesses claiming input tax should review their invoicing, inventory, sales tax return and system-integration controls. A mistake that previously resulted mainly in an audit query may now lead to automated reversal, higher penalty exposure, public listing or suspension of registration, depending on the applicable provision and facts.

Key Sales Tax Act amendments

New digital definitions

Definitions were inserted for advance receipt invoice, algorithmic settlement mechanism, electronic invoicing system, National Faceless Centre and production monitoring system.

Tier-1 retailer threshold

The circular explains a turnover threshold exceeding PKR 200 million for the specified wholesaler-cum-retailer category and related declared or worked-back turnover tests.

Invoice for exempt supplies

A registered person is now required to issue an invoice for taxable as well as exempt supplies, including an advance-receipt invoice, bearing a verifiable unique FBR invoice number.

Faceless proceedings

The framework covers faceless audit, assessment, appeal and jurisdiction through electronic communication and separate audit, assessment and quality-control functions.

1. Tier-1 retailer definition revised

Under the amendment explained in the circular, the relevant wholesaler-cum-retailer category is linked with turnover exceeding PKR 200 million. The earlier debit-card, credit-card or digital-payment point-of-sale limb was omitted, which is intended to avoid categorising a small retailer as Tier-1 merely because it accepts digital payments. A new limb also considers declared turnover above PKR 200 million or worked-back turnover based on withholding tax under sections 236G and 236H during the immediately preceding twelve consecutive months. FBR has also been empowered to exclude a person or class of persons through notification.

2. Valuation may use official data or third-party support

The Board's power concerning value fixation has been expanded so that Pakistan Bureau of Statistics data may be used and valuation functions may be outsourced to a third party. Businesses affected by notified valuations should retain product specifications, cost records, import documents and market evidence.

3. Electricity-based sales tax mechanism for the steel sector

FBR may collect tax from the steel sector based on monthly electricity units consumed. The amount is adjustable against output tax and is to be claimed in the return for the month in which payment is made. The Board may prescribe a lower per-unit rate for compliant, digitally integrated steel melters, re-rollers and composite units. The mechanism may also cover units operating through captive power plants or alternative energy sources.

4. Input tax adjustment linked with digital compliance

Section 8B has been amended to allow the Board to reduce or enhance the permitted input-tax adjustment ratio according to compliance or non-compliance with prescribed digital systems, including production monitoring, digital invoicing, e-bilty, POS and other electronic integration systems.

5. Electronic debit and credit notes

A proviso added to section 9 enables FBR to prescribe a mechanism, including electronic adjustment, for debit and credit notes. Businesses should ensure that sales returns, discounts, cancellations and price revisions are supported and processed through the prescribed system.

6. National Faceless Centre and electronic hearings

The Finance Act, 2026 created a framework for faceless audit, assessment, appeals and jurisdiction. Communications between units, taxpayers and authorised representatives are to be electronic. Where a hearing or statement on oath is required in a faceless audit, it may be conducted through e-hearing while the identity—including facial and voice identity—of the officer remains confidential.

7. Registration risk for failure to integrate

The scope of section 21(2) has been expanded beyond fake invoices and fraudulent activity to include failure to integrate an electronic invoicing system with FBR or failure to install a required production monitoring system. Affected registered persons should not wait for an audit to test integration status.

8. Invoice required for exempt supplies and advances

Section 23 now requires registered persons to issue invoices for taxable and exempt supplies, including invoices for advance receipts, with a verifiable unique FBR invoice number. This is a material operational change: businesses dealing mainly in exempt goods may still need invoice-system changes even where no output sales tax is charged.

9. Re-audit, inventory revaluation and audit report

The Commissioner may, after providing a reasonable opportunity of being heard, direct a registered person to have accounts re-audited by an accountant and inventory revalued by a cost accountant, having regard to factors such as complexity, volume, doubts about correctness and multiplicity of transactions. The officer conducting the audit is also required to issue an audit report containing observations and findings after obtaining the registered person's explanation.

10. Stronger penalties for digital non-compliance

For failure to integrate business, sales or production with FBR's system, the substituted provision includes a PKR 1 million penalty. Continued default after one month may attract a second penalty up to PKR 5 million. The premises may also be sealed, with or without imposition of penalty, in the prescribed manner.

11. Simulated Invoice Issuers Register

Where, after notice and adjudication, a registered person is established to have issued an invoice for a simulated or fictitious transaction or where no actual supply occurred, a penalty equal to the value of the fictitious invoice—including sales tax—may apply. The person's name and registration number may be placed on a publicly accessible register. Input tax claimed by buyers against invoices of a listed issuer becomes exposed to automatic reversal from the date of listing.

Separately, unmatched input tax confirmed after notice and opportunity of hearing may attract a penalty of 20% of the unmatched input tax, in addition to reversal and default surcharge. A person who fails to reverse input tax relating to a listed issuer within 60 days may also face a 20% penalty on the unreversed credit, along with reversal and default surcharge.

12. Seizure, confiscation and auction

The monitoring regime has been expanded to production monitoring, video analytics and other prescribed mechanisms. Goods and a conveyance used to move them may be seized or confiscated where prescribed stamps, labels, barcodes or monitoring requirements are not followed. New section 40F provides an enabling mechanism for auction or electronic auction of confiscated goods.

13. Algorithmic settlement mechanism

New section 47AA permits FBR to establish a digitally operated settlement mechanism for tax proceedings before an order under sections 11D or 11E. The system may generate a settlement offer based on the stage of proceedings, compliance history, nature of discrepancy and other prescribed factors. A registered person may accept the offer on IRIS within 10 days and deposit the settlement amount. Accepted issues may abate, without closing unrelated issues or other tax periods.

14. Independent scrutiny before higher-court litigation

A Commissioner may file specified references, appeals or reviews only after approval by an independent case scrutiny committee. The circular describes a committee including a retired superior-court judge, an experienced tax and commercial-litigation advocate and a senior serving or retired FBR officer, with an option to co-opt a chartered accountant as a non-voting member.

Sales tax relief and schedule changes

Withholding and import-stage changes

For the relevant Eleventh Schedule entry, associations of persons and individuals have been included alongside companies as withholding agents in the circumstances described by the law. A toll manufacturer is required to withhold and deposit four times the tax charged on conversion charges when dealing with persons other than registered persons.

The Twelfth Schedule change restricts a manufacturer from selling in the same state raw materials imported for in-house consumption under the value-addition-tax waiver. If the materials are sold in the same state, value addition tax, default surcharge and other action may follow. The minimum value-addition tax on imported coal was reduced to 1% where it is exclusively and directly supplied to Independent Power Producers, subject to the stated conditions.

Major Federal Excise Duty amendments

• Faceless FED audit and assessment: new section 7A adopts the faceless framework provided under the sales tax regime.
• Invoices for exempt supplies: registered persons must issue invoices for exempt supplies and advance receipts with a unique verifiable FBR invoice number.
• Monitoring and seizure: production-monitoring violations can expose goods and conveyances to seizure or confiscation.
• FED audit settlement: payment before a show-cause notice may require 25% of the prescribed penalty; payment after notice but before the assessment order may require 50%, in addition to duty and default surcharge.
• Acetate tow: the circular states the fixed FED was reduced from PKR 44,000 per kg to PKR 10,000 per kg.
• E-liquids: FED was increased to PKR 16,500 per kg to create parity with heated-tobacco mixtures.
• Electric vehicles: general FED exclusion for qualifying EVs was extended to 30 June 2027, while luxury EVs above specified US-dollar values became subject to 30% or 40% FED.
• Hydration/electrolyte beverages: qualifying WHO-standard-compliant drinks within the circular's conditions were excluded from the 20% FED levy.
• Base lubricating oil: brought within 5% ad valorem FED to align treatment with lubricating oil.
• Specified petroleum products: FED of PKR 80 per litre was introduced on petroleum top naphtha, white spirit/mineral turpentine oil and solvent oil in sales-tax mode, subject to the stated industrial-input mechanism.
• International air travel: fixed FED for club, business and first-class tickets was rationalised to PKR 50,000 for North America, PKR 25,000 for the Middle East, and PKR 40,000 for Europe, the Far East and Australia.

Immediate compliance checklist

1. Re-check whether the business falls within the revised Tier-1 retailer definition.
2. Confirm that invoices for taxable, exempt and advance receipts carry the prescribed verifiable FBR invoice number.
3. Test POS, e-invoicing, e-bilty and production-monitoring integrations and retain technical logs.
4. Reconcile purchase invoices with suppliers' output declarations before claiming input tax.
5. Identify suppliers that may appear on the Simulated Invoice Issuers Register and assess reversal deadlines.
6. Review inventory, valuation and audit-ready documentation.
7. Update withholding-tax mapping for AOPs, individuals and toll-manufacturing transactions.
8. Check product-specific sales tax or FED classifications before applying an exemption or reduced rate.

Frequently asked questions

Is Circular No. 01 of 2026 an SRO?

No. It is an explanatory FBR circular concerning Finance Act, 2026 amendments to the Sales Tax Act, 1990 and Federal Excise Act, 2005.

Does the circular itself impose every measure?

The amendments come from the Finance Act, 2026 and the amended statutes. The circular explains those changes. Implementation may also depend on rules, prescribed procedures and notifications.

Does accepting digital payment automatically make a small retailer Tier-1?

The circular states that the earlier limb based on acquiring a point of sale for debit, credit or digital payments was omitted. Other Tier-1 criteria and turnover tests must still be reviewed.

Must exempt supplies now have an FBR invoice?

According to the circular's explanation of amended section 23, a registered person must issue invoices against taxable and exempt supplies, including advance receipts, bearing a verifiable unique FBR invoice number.

Official sources

• FBR Circular No. 01 of 2026 - Sales Tax and Federal Excise
• FBR - Finance Act 2026
• FBR - Salient Features of Budget 2026-27

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