FBR Granted Arrest Powers Over CEOs & CFOs

The Finance Bill 2025-26: A Turning Point for Corporate Tax Enforcement

Pakistan’s Finance Bill 2025-26 has introduced a bold and controversial provision: it authorizes the Federal Board of Revenue (FBR) to arrest company directors, CEOs, and CFOs suspected of tax fraud. This development signals a more aggressive tax enforcement approach aimed at reducing evasion in the corporate sector.

According to Propakistani.pk, this clause gives Inland Revenue (IR) officers power to act against key company officials based on reasonable suspicion—raising questions about both fairness and transparency.

What Does the New Law Say?

Under the amended Income Tax Ordinance 2001, any IR officer not below the rank of Assistant Commissioner can arrest a person if there is "reason to believe" that tax fraud has occurred. For corporate cases, this means personal liability can now be placed on high-level executives even if they were not directly managing tax matters.

Official document: Finance Division – Budget 2025-26

Critics argue that such wide discretion could open the door for selective or politically motivated enforcement unless adequate safeguards are introduced.

The Legal Safeguards — Are They Enough?

FBR claims to have built in checks to prevent abuse of power. Here are the key legal constraints:

• Approval from Commissioner Inland Revenue (CIR) required in most cases
• Arrest without approval allowed only in "urgent" circumstances
• Review of arrest justification must follow immediately
• Compliance with the Criminal Procedure Code (CrPC) is mandatory
• Detainees must be presented before a magistrate within 24 hours

Despite these, legal experts argue that the law remains vague on definitions—particularly around what constitutes “reason to believe.”

How Does It Compare Globally?

Pakistan is not the first country to link executive accountability to tax enforcement. However, the execution and legal context differ significantly across jurisdictions:

• In India, under Section 276C of its Income Tax Act, arrests are permitted but rarely used without court involvement.
• In the UK, HMRC primarily uses civil measures before considering criminal arrests.
• The OECD recommends transparent enforcement policies that protect taxpayer rights while discouraging evasion.
  OECD Tax Administration Forum

Pakistan’s implementation will be under scrutiny, especially if arrests occur without strong evidence.

What This Means for CEOs, CFOs, and Directors

If you are part of a company’s top leadership, here’s what you need to know:

• You can now be arrested if found linked to any willful tax fraud—even if your role was non-financial.
• The FBR may use circumstantial or documentary evidence, such as unauthorized payments, misreporting of income, or false invoicing.
• Arrests will not require a court warrant initially, although legal proceedings must follow standard criminal law.

Business Recorder on industry reaction

This law essentially elevates tax compliance from a back-office issue to a C-suite liability.

Real Concerns from the Business Community

Several industry groups and tax bar associations have criticized the move as too extreme. Here are some concerns:

• Ambiguity of “reasonable cause” could result in wrongful arrests
• Risk of harassment or misuse by tax officials
• No dedicated oversight committee to review arbitrary detentions
• Limited protection for non-executive directors who may not be involved in daily operations

According to PILDAT, Pakistan’s governance framework must ensure institutional powers do not outweigh legal safeguards.

How Companies Can Mitigate Risk

To prevent falling into legal trouble, organizations must act proactively:

✅ Establish a robust internal tax compliance system
✅ Conduct periodic independent audits
✅ Train all executives on tax accountability laws
✅ Assign documented tax responsibilities to dedicated staff
✅ Develop an emergency legal response plan

In today’s regulatory climate, ignorance of fraud is not a defense. Executives must be able to demonstrate due diligence.

FAQs: Arrest Powers of FBR Explained

Q: Can a CFO be arrested for a company’s tax fraud even if unaware of it?
Yes, unless they prove they took reasonable measures to ensure compliance.

Q: Does this apply to foreign directors of Pakistani companies?
Yes, if the director resides or operates in Pakistan, or if the company’s tax jurisdiction is local.

Q: Is there a limit to the time FBR can detain someone?
Under the CrPC, detainees must be brought before a magistrate within 24 hours.

Conclusion: Corporate Accountability Redefined

The Finance Bill 2025 marks a paradigm shift in Pakistan’s tax regime. While the FBR’s goal of reducing evasion is valid, execution must be guided by fairness, transparency, and judicial review.

Executives in Pakistan must now treat tax compliance as a legal duty, not just a financial one. Failure to do so could mean criminal liability and arrest, even without a conviction.