Calls for trust-based tax reforms
By Commerce Reporter
LAHORE: As the federal government moves to introduce new legal powers for Inland Revenue officials in the Finance Bill 2025-26, the Lahore Chamber of Commerce and Industry (LCCI) has raised serious concerns over the proposed Section 37AA, which empowers tax officers to arrest individuals allegedly involved in tax fraud.
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While the intent behind the clause may be to curb tax evasion, the LCCI warns that such coercive measures could undermine business confidence and economic stability.
In an exclusive conversation with this correspondent, LCCI Senior Vice President Khalid Usman termed the provision as “unnecessarily harsh” and suggested that the government should adopt “trust-building and facilitative” measures instead of introducing a climate of fear within the business community.
According to the proposed Section 37AA, an Inland Revenue officer can arrest a person involved in tax fraud with prior approval from the Commissioner.
In emergency situations, the officer may even arrest without approval—provided that the Commissioner is informed immediately. The clause also allows for arrest of company directors, CEOs and responsible officers if a company is found guilty of fraud.
Khalid Usman expressed his reservations, stating that while LCCI supports action against willful tax evasion, the mechanism should be fair and transparent.
“There is no objection to holding fraudulent individuals accountable, but allowing arrests without due legal recourse may be seen as an aggressive move. It could open the door to harassment and misuse of authority,” he said.
Highlighting the potential economic impact, the LCCI leader noted that such legislation may do more harm than good by discouraging new investments and threatening existing businesses.
“Our economy is already passing through a delicate phase. The last thing we need is uncertainty among investors and industrialists,” Usman said.
He warned that the arrest powers, if misused, could trigger capital flight, relocation of industries, and a general slowdown in economic activity. “Even local investors may shift their focus abroad if they feel vulnerable. Instead of expanding the tax base, this could push more business into the informal sector,” he added.
Rather than opting for arrests, the LCCI has urged the government to consider softer, more constructive alternatives to increase tax compliance. Usman outlined several suggestions:
1. Taxpayer Education & Simplification: Many cases of non-compliance stem from confusion or lack of knowledge. “We must first ensure the taxpayer fully understands their obligations,” he said.
2. Stronger Audit and Data-Based Enforcement: Instead of physical arrests, the system should rely on audit trails and digital intelligence to catch habitual offenders.
3. Financial Penalties and Asset Recovery: Penalties and recovery actions, such as asset attachment or bank account freezing, can be more effective than custodial measures.
4. ADR and Dispute Resolution Mechanisms: Alternative dispute resolution forums should be strengthened to resolve matters in a business-friendly manner.
5. Oversight and Accountability: Any enforcement action should be reviewed by a high-level oversight committee to avoid abuse of power.
Usman emphasized that compliance cannot be forced through fear.
“A healthy tax system is based on mutual respect and cooperation between the state and its taxpayers,” he said. “We must move toward a system that encourages voluntary compliance by rewarding honesty and discouraging evasion—through due process, not intimidation.”
He also pointed out that other countries have achieved higher revenue through digitalization, simplification, and taxpayer engagement—not through arrest and coercion. “Pakistan should learn from these global models instead of turning tax administration into a law-and-order regime,” he added.
The LCCI leadership has submitted its recommendations to the Ministry of Finance and urged members of parliament to review and amend the proposed clause before final passage of the budget.
“Our message to the Prime Minister and policymakers is simple: Facilitate business, don’t frighten it,” Usman said. “Trust the business community, and they will deliver beyond expectations. Give them an environment of respect, and they will pay their taxes willingly.”
With the Finance Bill 2025-26 under review, voices from the business sector are calling for calm and constructive policymaking. While the goal of reducing tax evasion is valid, stakeholders stress the need for thoughtful enforcement strategies that support rather than stifle economic growth. As debate continues in parliament, it remains to be seen whether Section 37AA will be softened in the interest of stability and progress.
