IR Officers Gain Authority to Recover Unpaid Taxes in Pakistan

IR Officers Gain Authority to Recover Unpaid Taxes in Pakistan

Karachi, July 8, 2024 – The Finance Act of 2024 has granted new powers to Inland Revenue (IR) officers in Pakistan, significantly enhancing their authority to recover unpaid or underpaid taxes from individuals and businesses.

This legislative change aims to bolster tax compliance and close loopholes that have previously allowed some taxpayers to evade their fiscal responsibilities.

This increased authority stems from the incorporation of section 11E into the Sales Tax Act of 1990. The new provision empowers IR Assistant Commissioners and above to take decisive action in several scenarios where tax evasion or discrepancies are suspected. Specifically, the IR officers can intervene in situations where:

• Tax has not been levied at all, potentially due to collusion or deliberate evasion.

• An IR officer suspects, based on audits or other investigations, that a taxpayer has failed to pay or underpaid their sales tax.

• Taxpayers have claimed ineligible input tax credits or refunds.

• Taxpayers have received tax refunds to which they were not rightfully entitled.

Upon identifying such discrepancies, the IR officer is required to issue a show-cause notice to the taxpayer. If the taxpayer fails to provide a satisfactory explanation, the officer can then issue an order to determine the amount of unpaid or underpaid tax, inadmissible input tax or refund, or unlawful refund obtained. Additionally, the officer is empowered to impose penalties and default surcharges as outlined in sections 33 and 34 of the Sales Tax Act, 1990.

Furthermore, the new provision grants IR officers the authority to disallow input tax claims on goods or services if the taxpayer cannot produce reasonable justification, such as receipts, invoices, or other documentation supporting the transaction. This measure is intended to ensure that only legitimate transactions are eligible for tax credits, thereby preventing fraudulent claims.

In cases where no tax was initially levied, the recoverable amount will be determined as a tax fraction of the supply value. This approach ensures that the tax recovery is proportional to the value of the goods or services supplied, maintaining fairness in the tax system.

The expansion of IR officers’ powers is part of a broader effort by the Pakistani government to strengthen tax collection mechanisms and increase revenue. By empowering IR officers to take more proactive and stringent measures against tax evasion, the government hopes to address potential loopholes that have previously allowed some taxpayers to avoid their obligations. This move is expected to enhance compliance, increase tax revenues, and contribute to the overall fiscal health of the country.