Tax experts allege Inland Revenue officials misuse Section 40B to pressure businesses, urging the FBR to investigate administrative excesses.
Tax experts have raised serious concerns over the misuse of Section 40B of the Sales Tax Act 1990, which allows Inland Revenue (IR) officials to be deputed at business and manufacturing premises. The primary allegation is that this provision is being exploited by certain officials to exert undue pressure on registered taxpayers, particularly exporters, under the pretext of monitoring production, sales, and stock positions.
FBR’s Justification vs. Allegations of Misuse
While the Federal Board of Revenue (FBR) maintains that honest tax officials are being deputed at manufacturing premises, such as tobacco units in Khyber Pakhtunkhwa, tax professionals argue that the provision is being misused to extract taxes that are not legally due. The misuse of Sections 38 and 40B is reportedly widespread, with field formations selectively targeting registered persons, misleading local supervisory officers, and obtaining approvals from the FBR to post officials at factories. Once posted, these officials allegedly engage in coercive tactics, leveraging their authority to pressure businesses into making unwarranted tax payments.
Legal Framework and Intended Use
Section 40B grants the FBR the authority to post officers of Inland Revenue at the premises of registered persons, subject to specific conditions and restrictions. This power is meant to be exercised sparingly and after due diligence to prevent abuse. Historically, the FBR has applied this provision primarily to the sugar and cement industries. However, in recent times, its application has expanded, raising concerns among taxpayers and business communities. Instances have surfaced where sales tax auditors initiate proposals for posting themselves at business premises, purportedly for monitoring purposes, but in reality, to exert undue influence and pressure on businesses.
Instances of Alleged Coercion
A Lahore-based tax consultant highlighted several cases demonstrating the misuse of these powers. In October 2024, a Commissioner of Inland Revenue authorized a team to conduct stocktaking under Section 38. Instead of issuing show-cause notices based on their findings, the department reportedly pressured taxpayers into depositing additional sales tax by deferring their input adjustments. A similar incident occurred in January 2025, where businesses were again coerced into making payments without adjusting their input tax. Due to amendments made in May 2024, which removed the direct appeal to the Tribunal against such orders, taxpayers now find themselves without a viable legal remedy.
Disruptions to Business Operations
In a particularly concerning case, a team of tax officials, accompanied by armed guards, allegedly entered the premises of a prominent leather exporter during an inspection by foreign buyers. The intrusion not only disrupted business operations but also raised serious questions about administrative overreach and its impact on Pakistan’s export industry. The exporter in question has a longstanding record of compliance, with decades of sales tax and income tax documentation to prove that its manufacturing operations are exclusively for export purposes. Yet, the department is allegedly pressuring the business to pay sales tax on speculative local sales.
Call for Investigation and Reforms
The excessive use of these powers has led tax experts to call upon the FBR Chairman to investigate such administrative excesses, particularly in Lahore. They argue that the unchecked actions of lower functionaries are tarnishing the reputation of the tax department and eroding business confidence. They urge the FBR to constitute a fact-finding committee to examine these cases and introduce safeguards to prevent further misuse of Section 40B, ensuring that its application remains within the intended legal framework and does not serve as a tool for undue coercion.
