Karachi, June 29, 2025 – In a significant move to tighten tax compliance, the Federal Board of Revenue (FBR) has been granted enhanced powers under the Finance Act, 2025, to recover sales tax based on the information derived from withholding income tax deductions.
This amendment is expected to boost FBR’s enforcement capabilities and expand the taxpayer base.
The change comes through a key amendment to Section 11D of the Sales Tax Act, 1990. Originally introduced in the Finance Act, 2024, Section 11D dealt with best judgment assessments for non-filers. However, under the new Finance Act, 2025, the scope of this section has been broadened with the addition of sub-section 5, which specifically targets entities liable to be registered under clause (25) of section 2 of the Sales Tax Act.
According to the newly inserted provision, if a person falls under the definition of a taxable entity due to tax withheld under section 236G of the Income Tax Ordinance, 2001, and fails to file a return upon notice, the FBR can assess sales tax liability on the basis of value addition. This assessment may be conducted using information from purchase data available through the withholding of income tax, particularly under section 236G, which deals with suppliers to distributors, dealers, and wholesalers.
This amendment provides FBR with a legal framework to trace sales tax evasion by linking it to income tax withholding data. By identifying suppliers who have had income tax withheld but failed to register or submit sales tax returns, the revenue authority can now issue recovery notices based on calculated value addition.
Officials believe this mechanism will not only improve documentation but also close loopholes that previously allowed businesses to operate without registering for sales tax, despite evidence of taxable supplies. The use of cross-referenced data from income tax returns and withholding records represents a more data-driven, integrated approach to enforcement.
This measure is part of a broader strategy by the FBR to improve indirect tax collection and reduce reliance on voluntary compliance. Analysts expect this initiative to contribute significantly to raising sales tax revenue in fiscal year 2025–26, particularly from under-reported segments in wholesale and distribution sectors.