Govt proposes strict penalties for tax fraud in budget FY26

June 12, 2025 (MLN): The Federal budget FY2025- 26 proposes strict penalties for tax fraud, including fines of up to Rs10 million, imprisonment for up to 10 years, full tax recovery, and an additional penalty equal to 100% of the tax loss for any deliberate act or omission intended to cause such a loss.

These measures specifically target the generation of fake inputs and fictitious compliance with Section 73, as discussed during the Post-Budget Seminar held by the Pakistan Institute of Taxation.

A new levy of 2% is proposed on the proceeds of digital transactions, aimed at enhancing tax compliance in the growing digital economy.

This levy will apply to domestic vendors supplying goods ordered online and services delivered digitally.

To enforce this measure, banks and courier services will be designated as withholding agents.

These entities will be responsible for collecting and remitting the levy at the point of payment or delivery, thereby ensuring end-to-end compliance across the digital transaction chain.

This tax will be final, with no input tax adjustments allowed, and applies to online marketplaces, vendors, and apps.

To further formalize e-commerce, all sellers operating through online platforms are now mandated to register for both income and sales tax.

However, since the 2% is treated as final liability, the practical significance of this registration may be limited to compliance.

The FBR is also proposed to be empowered to fix retail prices for items under the Third Schedule.

For imported goods, the retail price must not be less than 130% of the assessed customs value, a move aimed at curbing undervaluation and tax evasion.

Additionally, a uniform 5% allowance for chilling charges will be applied to beverages and mineral water, aligning statutory law with earlier FBR practices.

New coercive powers have been proposed to enforce mandatory sales tax registration.

These include the ability to bar operations of bank accounts, halt transfer of immovable property, and seal business premises.

Such actions must follow due process, including public notice and hearings.

The budget also moves to strengthen FBR's legal and technical capacity.

It authorizes the appointment of up to 2,000 auditors and grants legal backing to officers from various directorates, whose previous actions are now ratified.

Electronic invoicing and real-time reporting are also made mandatory under the law, especially for Tier-1 retailers and service providers.

Additionally, audit firms may be referred to the Audit Oversight Board (AOB) if their reports are found unreliable.

FBR may now demand data from ISPs and telecom companies to investigate tax fraud.

The government plans to withdraw exemptions gradually. Locally manufactured cars up to 850cc will now face the standard 18% tax rate, and the sales tax exemption on photovoltaic cells is being removed.

A phased tax levy will also begin in July 2025 for the erstwhile tribal areas, increasing gradually until 2029, though electricity exemptions will continue for another year.

Furthermore, the government confirmed the introduction of a cargo tracking system, which includes the generation of an e-Bilty, a digital transport document linked to the tax invoice, to track goods in transit in real time and deter tax evasion.