11,000 taxpayers sent 'nudging' notices

The Federal Board of Revenue (FBR) has served 'nudging' notices to nearly 11,000 companies and individuals, advising them to fix anomalies in their last sales tax returns or be ready for consequences such as penalties, freezing of bank accounts, and sealing of businesses.

The notices were issued last month in the middle of negotiations between the business community and the government, underscoring the authorities' resolve to recover due sales and income taxes from individuals and companies.

FBR Chairman Rashid Langrial believes that existing taxpayers are paying far less than their due taxes. He has begun applying a risk management system to identify loopholes in the tax returns filed by these entities and individuals over the past five years. Sources said that in the first phase, about 11,000 nudging notices were served by corporate tax offices in Karachi, Lahore, and Islamabad. Traders in Karachi and Lahore also observed a strike last month against the government's decision to give arrest powers to the FBR and add back half of over Rs200,000 in cash expenses in income tax calculations.

When contacted, the FBR said these "non-intrusive and legally non-binding nudging notices" were served to encourage behavioural and social changes among taxpayers.

"Please correct anomalies in your sales tax return. Your failure to act will be viewed as a choice not to comply," cautioned the FBR in its notices to companies and individuals in Lahore. The FBR warned that failure to address anomalies and file accurate returns in the future could lead to financial penalties, placement of FBR staff within businesses for monitoring, and best judgment assessments by tax commissioners, which can result in heavy fines.

It also advised thousands of people that their bank accounts could be frozen and business premises sealed for non-compliance. Taxpayers were informed that the FBR used advanced data analytics to examine returns and benchmark them against peer businesses and jurisdictions. The analysis was fully automated without human involvement. The FBR said that for the tax years 2019 to 2024, its system identified anomalies in 2024 returns. These included unusually high sales claimed as exempt or under reduced-rate categories and low value addition based on the comparison of sales to purchases.

"To avoid enforcement actions, ensure that these anomalies do not reoccur in subsequent returns and file correct sales tax returns for the upcoming due periods," the FBR cautioned. Jawed Bilwani, President of the Karachi Chamber of Commerce and Industry (KCCI), criticised the FBR's decision to serve notices during ongoing talks. He said many KCCI members received notices without any prior awareness campaign.

Bilwani also criticised the FBR's method of comparing one shop's sales patterns with competitors', arguing that sales and value addition depend on brand and quality and are not uniform. "A customer may buy a shoe for Rs100 or Rs1,000. The FBR has no right to treat both values the same," he said.

The FBR, however, claimed that nudging notices helped increase the number of returns filed in July. A final analysis will be made after the extended filing deadline ends on August 4. In another type of nudging notice, the FBR warned that reduced-rate sales were unusually high relative to domestic sales, with many sales claimed as exempt or under reduced-rate categories instead of taxable.

"Your reported output tax is significantly lower than expected for businesses in your sector and location," the notice stated.

However, the business community argued it is unjustified to compare similar businesses without accounting for differences in efficiency, cost structures, and management. The FBR also flagged excessive refund requests stemming from high input tax claims and an unusually high number of credit and debit notes. "Please correct anomalies in your sales tax return to avoid strict enforcement actions," stated another notice. The FBR added that enforcement actions, such as posting inspectors at business sites, particularly in cement factories, have significantly improved collections despite low sales.

The FBR chairman has also transferred over 250 tax officers from grades 17 to 22 as part of a strategy to place only A and B category officers, as classified by various agencies, in key field positions.