ISLAMABAD: The Inland Revenue officers of the Federal Board of Revenue (FBR) have been empowered to exercise the powers of civil court under the Code of Civil Procedure, 1908 to arrest persons involved in sales tax fraud.
According to sales tax circular number 02 of 2025-26 issued by the Federal Board of Revenue (FBR), a new sub-section (4) in Section 37 has been inserted in the Sales Tax Act to empower the officer of Inland Revenue to exercise the powers of civil court under the Code of Civil Procedure, 1908.
Power to inquire and investigate sales tax frauds and procedure for arrest: Through Finance Act, 2025, powers and procedure of inquiry and investigation in cases of sales tax fraud and other offences warranting prosecution under sales tax act have been streamlined. Under the new framework, the Officer of Inland Revenue can initiate inquiry only after obtaining approval of Commissioner on the basis of material evidence pointing to commission of tax fraud or other offence warranting prosecution.
After completion of inquiry and after providing an opportunity of being heard to the accused, Officer shall present inquiry report to the Commissioner who shall then decide to either close the inquiry or allow further investigation. In the case of approval of investigation, officer shall be required to complete investigation within three months and submit report before Special Judge for prosecution.
The subsections (8) and (9) of Section 37A regarding arrest shall only be applied when investigation under subsection (6) of this section has been initiated & warrant of arrest under subsection (8) of Section 37A may be issued only after approval by a committee comprising of three members of the FBR as may be notified by the Chairman and that too only in the cases where fraud involves amount exceeding Rs. 50 million and nature of the fraud falls within the ambit of any of the first six sub-clauses of the clause (37) of Section 2, which are reproduced as under:
(a) Using or preparing false, forged, and fictitious documents, including returns, statements, annexure, and invoices.
(b) False claim of input tax credit based on fictitious transactions.
(c) Issuance of any tax invoice without supply of goods.
(d) Tampering with or destroying of any material evidence or documents required to be maintained under this Act or the rules made there-under.
(e) Generating fake input through manipulation of return filing system of the Board and making fake entries in the sales tax returns or in the annexure.
(f) Making fictitious compliance of section 73, including routing of payments back to the registered person, or for the benefit of the registered person, through a bank account held by a supplier or a purported supplier; and when the fraud amount exceeds Rs. 50 Million.
Additional pre-conditions which can compel the officer to seek approval for arrest are:
(i) The accused may tamper with documents.
(ii) The accused may abscond.
(iii) The accused does not help investigations despite three served notices.
Further, the power to compound an offence warranting prosecution has been provided where Commissioner can compound the offence if the person pays the amount of tax evaded along with default surcharge and penalty.
The warrant of arrest from judge under subsection (9) of Section 37A may be obtained primarily in the sales tax frauds which are heinous or material including fake and flying invoices. Under this subsection, the following pre-conditions shall also apply as is the case of arrest under subsection (8) of section 37A.
(i) The accused may tamper with documents.
(ii) The accused may abscond.
(iii) The accused does not help investigations despite three served notices.
In addition to that, the board will separately notify the detailed procedure, preconditions and restrictions through an STGO for the smooth operation of subsections (8) and (9) of Section 37A.
Through the substitution of Section 37A, sufficient safeguards have been introduced and multiple approvals are required at inquiry stage, as well as, investigations stage to prevent the misuse of the provisions of prosecution.
The provisions of this section also state that the intent of the prosecution proceedings is not to recover the revenue but to create deterrence against the sales tax frauds.
Section 378 has been substituted by further elaborating the procedure to be followed on arrest of a person and producing the accused person before the court of law for further proceedings in accordance with the provisions of this Act as well as the code of criminal procedure.
Finance Act, 2025 – Explanation regarding important Amendments made in Sales Tax Act, 1990 and Federal Excise Act 2005.
Prior to Finance Act, 2025 provisions of the STA did not include or define the role of an ‘abettor’ in a tax fraud, who facilitates or connives with the tax fraudsters to evade the sales tax. The term ‘abettor’ and his/ her role have now been defined to expand the scope of tax fraud, and punishment for the abetment of tax fraud has also been introduced, FBR added.
Copyright Business Recorder, 2025
