Taxman’s powers of arrest

TODAY it will be the third day of a line-by-line deliberation over the budget in both the National Assembly and the Senate committees, and the revenue plan brought by the government is sparking a justifiable pushback by the lawmakers.

Nobody likes taxes, so any plan to raise taxes anywhere will raise objections. But some objections carry more merit than others. In this budget, the government is seeking to raise incremental tax revenues of Rs600 billion via new measures, and the finance minister has proudly told us that Rs400bn of that will come from “enforcement measures”. That’s two-thirds of the new revenue mobilisation that is going to be squeezed out of those who are already compliant and paying their taxes. That’s not a plan. That’s a hit job.

In response, the lawmakers have started questioning the powers the tax authorities are demanding. Chief among these are powers to arrest being given to the FBR. And herein lies an interesting story.

To be fair, these powers always existed and the new Finance Act is only seeking to modify them. The real question is the nature of the modifications being sought.

The earlier powers were contained in Section 37A of the Sales Tax Act. Back in 2013, the Lahore High Court (LHC), in a judgement authored by justices Mansoor Ali Shah and Mamoon Rashid Sheikh found that “Section 37A of the Sales Tax Act, 1990, could be employed to select or pick a taxpayer out of the pool of self-assessed taxpayers to undergo criminal prosecution without first carrying out an objective selection process of audit followed by assessment of tax under S. 11 of the Sales Tax Act, 1990”.

The legislators are right to look at how regressive the new tax measures are.

That judgement was issued in a case in which 134 people had criminal prosecution opened against them on the charge of selling fake sales tax invoices against which people could claim input tax adjustment. The FBR claimed that these individuals ran a racket using 144 dummy suppliers that caused a loss of Rs7.5bn to the state. FIRs were cut, arrests were made.

The tax authority also argued that “civil proceedings leading to assessment of tax and penalties followed by the recovery procedure under section 48 has not proved successful over the years” according to the judgement, and using criminal prosecution to deter such practices and enable proper tax recovery was essential.

However, the court found a problem. If the purpose of the criminal proceedings is only to deter criminal behaviour, then the law is fine. But if the purpose includes recovery of dues, or imposition of a fine the amount of which is linked with the recovery of dues, then it is necessary to first determine the quantum of the tax due before criminal proceedings can be initiated. And that quantum must be determined in accordance with Section 11 of the Sales Tax Act which lays down the procedures through which assessment and recovery of tax evaded is to be computed.

In the words of the judgement, the “civil and criminal proceedings can run independently and simultaneously or otherwise. The purpose and objective of criminalising tax fraud and tax evasion is retribution and deterrence which is achieved through punishment or fine or both. If the law, however, goes further and criminalises recovery of tax in addition to retribution and deterrence, then tax assessment has to take place first under the provisions of the Act.”

The 2025 Finance Act brings in new language however: “The officer of Inland Revenue, during the investigation, having reason to believe on the basis of evidence that actions of any person may have caused or attempted to cause tax fraud or any other offence warranting prosecution under this Act, may cause arrest of such person with prior approval of the Commissioner”. The legislators should examine this language to see how it impacts the restraints the courts have demanded in the construct of these powers.

Over the years, a number of other such cases surfaced, and a large number of them were clumped under a single appeal filed in the Supreme Court by the FBR. That appeal was dismissed quickly last year, though the longer order with detailed reasoning is still awaited.

The courts had already interpreted the powers of arrest and overall criminalisation of tax recoveries after allegations of tax fraud. And they had circumscribed these powers. The tax authority had to first determine the quantum of tax allegedly defrauded, via the collection of material evidence in accordance with defined law. An individual thus arrested had to be produced within a day before a special judge, who could order release. But now these powers are being changed fundamentally, and the legislators should look to see how the restraints applied by the courts in the past will be maintained in the new wording, given that the LHC found that serious constitutional issues are at stake, including the right to a fair trial.

The legislators are right to look at how regressive the new tax measures are. A tax on solar panels, for example, aims to collect tax primarily from those who are off-users of electricity since they are the largest buyers of solar panels. If this tax falls on net-metering consumers, or industry, then it’s fine. But the poor, those underserved by the grid, should be protected. It is not clear how this will be possible since a full and final tax is usually collected at the import stage, irrespective of who the panels are sold on to.

The most grievous of the tax measures include the withdrawal of a rebate for school teachers and university professors. This is coming up for discussion in the committees soon, and committee members should stand firm that this cannot be withdrawn. A commitment had already been given by the government to the National Assembly’s finance committee in a hearing at the end of May that this rebate will not be withdrawn. That commitment must be upheld.

The writer is a business and economy journalist.

Published in Dawn, June 19th, 2025