40 B Sales Tax Act, 1990

Scheme of Sales Tax Act, 1990.
Provisions of Section 40 B of the
Sales Tax Act, 1990.
Ingredients of Section 40 B
Material Evidence.
Definitions of Material Evidence
Case Law
Reason to Believe.
Meaning of Reason to Believe
Citations on “Reason to Believe”
Tax Fraud
Definition of Tax Fraud
Investopedia Explains 'Tax Fraud'
Provision of Tax Fraud Under
Section 2(37)
Relevant citation on Tax Fraud
In Writing
Citations on “In Writing
Constitutional Remedy
Departmental Remedy
Examples:Orders/Notices under section 40B
The Sales Tax Act, 1990.
Judgments of Lahore High Court,
Tax Evasion
Definition of 'Tax Evasion'
Investopedia Explains 'Tax Evasion
Judgment of Supreme Court of
Pakistan on Tax Evasion
1. Under the Sales Tax Act, 1990, the liability to
collect and or pay tax by a registered person
arises at two stages. The first stage arises at the
time of purchases/acquisition of taxable
supplies/inputs, by the said person; the tax
paid then is known as ‘’input tax’’ under
section 2(14) of the Sales Tax Act, 1990.
The second stage arises when upon utilization
of taxable inputs, the registered persons makes
taxable supplies; the tax paid thereon is known
as ‘’output tax’’ under section 2(20) of the
Sales Tax Act, 1990.
2. In the above sequence of events, the liability to
taxation of the registered person is determined for
a tax period, under section 7 of the Act. Therein the
input tax already paid is deducted from the output
tax, subject to the bar contained viz impermissible
adjustment in section 8 of the Sales Tax Act, 1990;
the net amount arising thereby is paid, along with
the monthly return in the treasury, as per section 6
of the Sales Tax Act, 1990.
3. This chain of supplier and recipient, under the Sales
Tax Act, 1990, is an elaborative scheme regulated
by various provisions of the mentioned statute
wherein the law treats each registered person,
within the mentioned chain, to be the agent of the
exchequer who collects and pay the tax at each
stage of value addition till the time taxable supplies
either reach the end consumer and or are
4. It is pertinent to mention that on determination of net liability
under section 7, the registered person cannot claim input tax of
such items which have been declared to inadmissible in terms of
section 8 the Sales Tax Act, 1990. The basic scope of
inadmissibility, under the mentioned section, is to prohibit the use
of input tax paid on any activity which is other than the taxable
activity under the Sales Tax Act, 1990.
5. It is also relevant to mention that in the event a registered
person, in the afore referred chain of supply, collects the tax but
does not deposit the same in the treasury, commits the act of
‘’tax fraud’’ as defined under section 2(37) of the Sales Tax Act,
1990; it is thus liable for both civil and criminal actions as
provided in the Sales Tax Act, 1990.
6. That, it is pertinent to mention that if any tax payer is
black listed/suspended/ blocked, the FBR website
does not even allow uploading data in respect of the
said listed suspended/blocked tax payers. No input
tax credit of the said supplier can then be claimed viz
the mentioned taxable suppliers.
It is therefore clear that input tax on purchases made
from an active tax payer only can be claimed under
the system. Even in case of small difference between
sales tax paid by the suppliers vis-à-vis claimed by the
buyer, a disallowed.
40B. Posting of 2[Inland Revenue] Officer.—Subject to
such conditions and restrictions, as deemed fit to
impose, the 3[Board], may post Officer of 2[Inland
Revenue] to the premises of registered person or
class of such persons to monitor production, sale of
taxable goods and the stock position:
Provided that if a 4[Commissioner}, on the basis of
material evidence, has reasons to believe that a
registered person is involved in evasion of Sales Tax or
tax fraud, he may, by recording the reason in writing,
post an Officer of 2[Inland Revenue] to the premises
of such registered person to monitor production or
sale of taxable goods and the stocks position.
Material Evidence
Reasons to Believe
Evasion of Sales Tax
Tax Fraud
In Writing
connection with the consequential
facts or the issues. Cf. relevant
 Black
Law Dictionary
“MATERIAL EVIDENCE: - Such as is relevant
and goes to the substantial matters in
dispute, or has a legitimate and effective
influence, or bearing on the decision of the
case. Materiality, with reference to
evidence does not have the same
signification are relevancy.
Babylon English
“Proof or testimony that has significant
relationship with the facts or issue of a case
or enquiry and can affect its conclusion or
“Material Evidence that could affect the
decision of a court case”.
“Material evidence (Law), evidence which
conduces to the proof or disproof of a
relevant hypothesis”.
[ (1993)67 tax 311 (H.C. Kar) ]
Pakistan Educational Society VS Government of Pakistan
The Lordship of Karachi High Court defines the material
evidence as under:-
“Basic, cardinal, central, compelling, consequential,
essential, extensive, far-reaching, fundamental,
indispensible, momentous, necessary, paramount,
pertinent, pivotal, prevalent, primary, principal,
relevant, remarkable, salient, signal, significant,
“Reason to believe' means “an incident
circumstantial evidence or support to
substantiate the truth” by Mr. AmitavaIndian Scholar
“Basis for belief, body of evidence, chain
of evidence, clue, data, datum,
documentation, evidence, exhibit, fact,
facts, grounds, grounds for belief,
manifestation, mark, material grounds,
muniments, mute witness, piece of
evidence, premises, proof, relevant fact,
sign, symptom, token”.
PLD 1952 FC 19
Moulvi Fazlul Qader Choudhry vs Crown
PLD 1971 SC 174
Nisar Ahmad vs The State
1994 SCMR 1283;
Government of Sindh vs Raeesa Farooq
PLD 1968 SC 349
Ch. Abdul Malik vs The State
1995 SCMR 1249
Ch. Shujat Hussain VS State
The Lordship of Supreme Court speaks
about reasons to believe as under:-
“The term "reason to believe" can be
classified at a higher padestal than mere
suspicion and allegation but not equivalent
to proved evidence. Even the strongest
suspicion cannot transform in "reason to
“An illegal practice where a person,
organization or intentionally avoids
paying his/her/its true tax liability. Those
caught evading taxes are generally
subject to criminal charges and
substantial penalties”.
There is a difference between tax
evasion. All citizens have the right to
reduce the amount of taxes they pay as
long as it is by legal means
1993 SCMR 1267
Commissioner Of Income Tax VS Sultan Ali Jeoffrey
The Lordship of Supreme Court deduces the
meaning of Tax Evasion as under:-
"Evasion" with reference to taxation laws ---Meaning.
Evasion with reference to taxation laws means to
illegally manipulate things in such a manner that the tax
payable under law cannot be assessed. By an act of
evasion the assessee can reduce his tax liability or
completely eliminate it. Evasion of tax or duty is always
in breach of the applicable and binding law. In taxation
laws evasion will mean adoption of such deceitful
mechanism and manipulation not permitted by law
which may result in reduction or elimination of legal tax
liability. In the field of taxation, tax avoidance and tax
evasion are two different terminologies conveying
completely different meaning.
Tax avoidance occurs when a person in a legitimate
manner as provided by law adopts a course by which
the tax liability is reduced or eliminated. In doing so the
assessee seeks his remedy and mechanism within the
provisions of law.
Avoidance of tax is not tax evasion and it carries no
ignominy with it, for it is sound law and, certainly not
bad morality for anybody to so arrange his affairs as to
reduce the brunt of taxation to a minimum. Avoidance
of tax by adopting legal methods will not amount to
evasion of tax. But the moment avoidance is sought by
illegal contrivance, deceitful methods and adopting a
course not permissible in law, it turns into evasion.
“Tax fraud occurs when an individual or
business entity willfully and intentionally
falsifies information on a tax return in order
to limit the amount of tax liability. Tax fraud
essentially entails cheating on a tax return in
an attempt to avoid paying the entire tax
obligation. Examples of tax fraud include
personal expenses as business expenses;
and not reporting income”.
misrepresentation or omission of data on a tax
return. In the United States, taxpayers are
bound by a legal duty to voluntarily file a tax
return and to pay the correct amount of
income, employment and excise taxes. Failure
to do so by falsifying or withholding information
is against the law and constitutes tax fraud. Tax
fraud is investigated by the Internal Revenue
Service Criminal Investigation (CI) unit.
"tax fraud" means knowingly, dishonestly or
fraudulently and without any lawful excuse (burden of
proof of which excuse shall be upon the accused) - (i) doing of any act or causing to do any act; or
 (ii) omitting to take any action or causing the omission
to take any action,(including the making of taxable
supplies without getting registration under this Act;
 (iii) falsifying (or causing falsification) the sales tax
invoice) in contravention of duties or obligations
imposed under this Act or rules or instructions issued
thereunder with the intention of understating the tax
liability (or underpaying the tax liability for two
consecutive tax periods or overstating the entitlement
to tax credit or tax refund to cause loss of tax;
2004 PTD 868
Al Hilal Motors Stores VS Collector Sales Tax
& Others.
Their Lordships of Karachi High Court spells about the ratio
of Tax Fraud as under:-
“The provisions contained in section 2(37) defining the
expression ‘’tax-fraud’’ without realizing that in order to
attract the above provision, the initial burden lies on the
Department to show that an assessee, knowingly,
dishonestly or fraudulently and without any lawful excuse
has done any act or has caused to be done or has
omitted to take any action or has caused the omission to
take any action in contravention of duties or obligations
imposed under this Act or rules or instruction issued
thereunder with the intention of understanding the tax
liability or underpaying the tax liability. Once this burden is
discharged by the Department, only then, the burden is
shifted to the assessee to establish that the act done was
without any knowledge on his part or without any intention
of dishonesty or fraud and was done with any lawful
After the insertions of Article 10A through 18th Amendment
in the Constitution of Islamic Republic of Pakistan now due
process of law has become the fundamental right of
every citizen of Pakistan. Due process of law includes
notice of hearing, reply of the person and then an
reasoned order in writing.
All orders/notices should be in written form.
2007 S C M R 1328
“Verbal order has no sanctity in law and such orders are
alien to the process of the law and the Courts. All orders
passed and acts performed, particularly, by the
State/public functionaries adversely affecting anyone must
be in writing, as section 24-A(1) of the General Clauses Act,
1897 envisages that the powers shall be exercised
reasonably, fairly and justly and subsection (2) further
makes it necessary that the authority passing orders shall, so
far as necessary or appropriate, give reasons for making
the orders and unless the order is in writing, the reasons and
fairness etc. thereof cannot be ascertained/ adjudged”.
PLD 1979 Lahore 699
Munawar-ud-Din VS Federation of Pakistan
“It is a well established position of law and practice
that the public functionaries have to pass all orders in
writing. It is necessary for the purpose of record and
responsibility and to judge their validity”. Since it is
specifically provided in section 38 that the action
specified therein can be taken by any Officer
authorized in this behalf by the Board or Collector,
thereof, it is held that such authorization should
precede the action and shall always be in writing
failing which all the actions taken under section 38
shall be treated as illegal and void”.
2004 PTD 2952(K.H.C)
N.P. Water Proof Textile Mills (Pvt.) Limited Vs
Federation of Pakistan
“It is further held that all matters where a public
officer is supposed to pass an order which can be
exposed to the scrutiny of Appellate Courts
/Superior Courts in exercise of Judicial review of
administrative actions the orders must always be in
Constitutional Remedies
Remedies under the statute
Article 18 of the Constitution of Islamic
Republic of Pakistan ensures that the right
to freedom of trade business and profession
can not be taken away from any citizen.
Reliance is placed on:2008 CLC 1132
o 2005 PTD 2442
o 2011 SCMR 848
Appeal under section 46 of the Sales
Tax Act, 1990.
Judgments of Lahore High Court,

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