Criminal sales tax fraud cases taken away from regional FBR offices, but who are they being given to?

For years, Pakistan’s sales tax fraud cases began where most tax disputes began. Inside the same field formations and regional offices that handle assessments, audits, refunds and recoveries. But now the Federal Board of Revenue wants that criminal track to run somewhere else. 

The Federal Board of Revenue (FBR) has withdrawn the powers of regional tax offices to initiate criminal prosecution in sales tax fraud cases and has instead authorized the Directorate General of Intelligence and Investigation Inland Revenue (I&I-IR) to handle such matters.

In this regard, the FBR has issued detailed Standard Operating Procedures (SOPs) governing inquiries, investigations, prosecutions and arrests under Section 37A of the Sales Tax Act, 1990 during assessment proceedings involving alleged tax fraud.

Under the new framework, criminal prosecution in sales tax fraud cases will be processed by the Directorate General of Intelligence and Investigation Inland Revenue, while the FBR’s Operations Wing and regional tax offices will no longer deal with such prosecutions.

According to an FBR notification, cases of tax fraud that are already under investigation will continue to be processed by respective RTOs However, all future cases will be handled by the directorate of the I&I-IR.

The cases requiring criminal prosecution will be forwarded to the directorate, which will follow the procedures prescribed under the Finance Act 2025 and other relevant notifications and circulars issued by the FBR.

What is the amendment?

The latest changes to Section 37A of the Sales Tax Act, introduced through the Finance Act 2025-26, were meant to put clearer limits around the state’s power to arrest in sales tax fraud cases. 

Under the revised framework, arrest is meant to be used only in serious cases of alleged tax fraud, particularly those involving fake or flying invoices or larger fraud cases generally said to involve around Rs50 million or more.

But just as important as the threshold is the process. Under the amended law, an arrest cannot be made simply because suspicion exists or because a discrepancy has been detected in the course of proceedings. A formal inquiry must first be conducted by an Inland Revenue officer not below the rank of Assistant Commissioner. Even at that stage, the process is not meant to move automatically. A prior written approval from the Commissioner Inland Revenue is also required before matters can proceed further.

The law adds another institutional check before an arrest warrant is issued. A designated committee must authorise the move, which means the decision is intended to pass through multiple administrative layers. 

Taken together, these amendments appear designed to narrow the use of criminal proceedings to cases involving deliberate and substantial fraud, while reducing the risk that ordinary taxpayers are exposed to coercive action over disputes that may not justify such treatment. The stated objective, in effect, is to reserve the harshest enforcement powers for the most serious cases rather than allowing them to hover too loosely over the wider tax base.

Before these changes, however, the enforcement structure looked different. The FBR had empowered regional tax offices and Inland Revenue officers to register criminal cases or First Information Reports in sales tax fraud matters, especially where evidence pointed to the use of fake or flying invoices. In practice, this meant that the field formations that were already dealing with tax matters could also become the starting point of criminal enforcement.

Following consultations with trade organisations during the budget anomaly exercise, the government sought to calm those concerns by promising additional safeguards. The broad understanding that emerged was that only cases involving significant and deliberate elements of tax fraud would be referred to the Directorate General of Intelligence for action under Section 37A. Minor discrepancies, even where they might technically fall within an expansive reading of tax fraud, were not supposed to be pushed into the same channel.

The issue was also taken up in the Senate Standing Committee on Finance during post-budget meetings attended by trade body representatives and FBR officials. That forum became an important space where the proposed enforcement architecture was tested not only as a legal measure, but as a question of taxpayer confidence and administrative restraint.

During those discussions, FBR officials sought to clarify a key point which was that the mere invocation of Section 37A does not automatically result in the arrest of a taxpayer or businessman. Any such action, they said, must still follow the due process requirements laid down in Section 37(8) of the Sales Tax Act. In other words, the provision may open the door to criminal proceedings, but it does not allow that door to be crossed without procedural compliance.

What does the amendment mean?

Before this latest shift, a sales tax fraud case in Pakistan did not really leave the tax office where it began. The same field formations that audited returns, detected suspicious invoices, questioned refunds and pursued recoveries was responsible for pushing a matter toward criminal prosecution. 

In legal terms, Section 37A already gave an Inland Revenue officer of at least Assistant Commissioner rank the power to arrest, on the basis of material evidence and a belief that tax fraud had been committed, while regional tax offices and the Operations Wing remained part of the machinery that handled such cases in practice. The criminal track was therefore not fully separate from the ordinary tax-administration track, but rather it sat inside it. 

This meant that a dispute over invoices or input claims could begin as a routine encounter with the tax department and gradually acquire a harder edge without ever changing rooms. The officer assessing your sales tax position, the office examining your refund, and the formation building the case against you were often part of the same administrative universe.

This redundancy creates a larger room for corruption. Informal accommodations between traders and local tax offices become easy, sometimes not only at the level of senior officers but deep within the office chain itself. That made the old system look like a negotiated local ecosystem in which some businesses buy themselves the leverage to delay consequences and settle matters quietly before they ever harden into a criminal case.

This blurs the line between civil enforcement and criminal suspicion was one reason the business community reacted so sharply when arrest powers under Section 37A came under renewed focus. 

This does not mean that the amendment absolves the trader for tax theft. Traders are now genuinely fearing that what should have remained a tax dispute could too easily begin to look like a criminal case. 

There is a second structural complication. Pakistan’s legal map for tax-fraud enforcement is becoming more crowded, not less. Section 30A covers the Directorate General of Intelligence and Investigation, Inland Revenue. Section 30AB, inserted through the Finance Act 2024, separately created a Tax Fraud Investigation Wing with its own fraud intelligence, investigation, legal, forensic and data-analysis units and empowered the Board to define its functions and jurisdiction. Field formations under Section 30 still retain broad tax powers. 

On top of that now sit the committee approvals, member-level consultations and grievance mechanisms built around Section 37A. That can make the system look more specialised, but it can also produce overlap unless FBR keeps jurisdictions and handoffs exceptionally clear. Under this new system the regional tax offices are not disappearing, but their responsibility is being reduced. They will still be the ones who detect irregularities, raise demands and pursue civil enforcement.

On the traders’ end, the business community is also generally more comfortable appearing before field offices than before the Directorate General of Intelligence and Investigation, Inland Revenue. The more power moves away from territorial formations and into an intelligence-led forum, the greater the perception that tax administration is turning from compliance management into criminal enforcement. 

There is also a risk of bottlenecks. Every suspected case now has to be screened by the relevant directorate within 30 days, which may improve consistency but could also slow down decisions if referrals rise sharply. And the only thing standing in the way of all that now is a much higher office, which is more difficult (not impossible) to game in your favour.

So the older arrangement can be described less as a specialised fraud regime and more as an enforcement system in which criminal power was embedded within day-to-day tax administration. 

Tax experts have gone further in stressing what due process must mean in practice. In their view, a person accused of tax fraud must be given a proper opportunity to be heard before any arrest is made. They argue that the accused should be confronted with the allegations in a transparent manner and, as previously notified by the FBR, in the presence of representatives of the business community so that the process does not become one-sided or opaque.

Their final point is constitutional as much as procedural. Article 10A of the Constitution guarantees the right to fair trial and due process, which means any enforcement mechanism that sidesteps these protections risks more than criticism from traders. 

It risks legal challenge. That is why the debate around Section 37A is not simply about tax administration. It is also about where Pakistan draws the line between fraud enforcement and the minimum protections owed to any person facing the possibility of criminal action.

As for the Directorate of Intelligence and Investigation Inland Revenue, it has already existed and already had a legal standing under the Act, but it was not yet the sole gateway for future Section 37A prosecutions. The significance of the new SOP, then, is not that FBR has invented an intelligence arm overnight, but rather it is that it has decided the moment a tax dispute turns criminal, it would no longer be controlled by the same regional office.

The amendment also brings into light the capacity and role of the DG of Intelligence and Investigation, Inland Revenue. It raises questions like what volume and nature of work was the directorate already handling before this transfer of powers, and does it have the manpower, administrative support and operational resources to process these additional cases within the 30-day window now prescribed?

Because if that capacity does not already exist, the shift will require further public spending on personnel, mobility and investigative infrastructure. And if that expenditure is not made the opportunity cost of expedited procession is going to be selective, and sometimes poor justice. 

The more important question, however, is not simply whether the state can expand this machinery, but whether the fiscal and enforcement gains from doing so justify the cost. Any such restructuring will ultimately have to be judged not only by the number of cases it pursues, but by whether it delivers credible, timely and economically rational enforcement.