In a significant move aimed at broadening the tax base and addressing long-standing inequities within Pakistan’s tax structure, the Federal Board of Revenue (FBR) has operationalised Section 175C of the Income Tax Ordinance, 2001.
This specific provision authorises Inland Revenue Officers to be stationed at business premises across the country. Their role will be to monitor various aspects of operations, including production, stock levels, supply of goods, and crucially, the rendering of services. The focus on the service sector is particularly aimed at integrated enterprises within this area, which is often largely undocumented.
Bringing Services into Tax Net Parity
The FBR highlighted that similar enforcement mechanisms under provisions like the Sales Tax Act, 1990, and the Federal Excise Act, 2005, have long existed with respect to goods. Operationalizing Section 175C for income tax, particularly focusing on services, is intended to bring this sector into parity, ensuring fair and comprehensive oversight across all economic activities. This measure is also seen as a direct step towards tackling the underground economy, which is estimated to constitute more than 30% of the formal GDP.
The operationalization of Section 175C is also a response to growing public concern over the increasing tax fatigue experienced by the salaried class and documented manufacturers. By enhancing the documentation of the high-potential service sector, the FBR aims to create fiscal space that could potentially allow for downward revisions in personal income tax rates on salary earners in the future. In contrast to the documented sectors, the service sector, which represents nearly 60% of Pakistan’s GDP, remains largely undocumented, with reports suggesting over 70% of enterprises within it are unregistered, resulting in significant tax leakages.
FBR Calls for Compliance and Cooperation
The scope of this section specifically targets businesses identified as high-earning yet under-documented. The list includes restaurants, hotels, guest houses, marriage halls, clubs, courier and cargo services, beauty parlors, clinics, hospitals, diagnostic laboratories, gyms, foreign exchange dealers, photographers, and traders. The FBR noted with alarm reports that some private hospitals are allegedly charging inpatient room occupancy rates between Rs 100,000 and Rs 200,000 per day, exceeding rates charged by some five-star hotels. Many of these entities are reportedly underreporting their revenues and failing to comply with tax laws, which the FBR states undermines public trust and deprives the state of critical revenue needed for social services and infrastructure development.
The FBR has reiterated that the fundamental intent behind implementing this legislation is to ensure that those rendering services and profiting from Pakistan’s burgeoning urban and semi-urban markets appropriately shoulder their lawful tax obligations. The FBR urged all stakeholders to cooperate with tax authorities and ensure full compliance. “Together, we can create a more just and robust fiscal architecture—one that does not penalizes the honest and reward the non-compliant,” the FBR stated.
