Rebuilding tax justice—IV When State litigates without consequence

Part III ended with an uncomfortable asymmetry: a tax system that penalises every day of taxpayer default cannot treat judicial delay as an administrative inconvenience. The same asymmetry appears earlier in the litigation chain. A taxpayer challenging an unlawful demand pays counsel, professional time and the opportunity cost of blocked capital. When the State pursues a weak or settled case, the officer normally litigates with public money and bears little institutional consequence if the appeal fails.¹

Pakistan’s tax backlog cannot be cured simply by appointing more Appellate Tribunal Inland Revenue (ATIR) members, creating more benches or fixing shorter deadlines. If the system manufactures disputes faster than adjudicators can decide them, expanding capacity resembles widening a drain while leaving the tap open.

Section 132 of the Income Tax Ordinance, 2001 now recognises that litigation has a price. An adjournment before ATIR is permissible only for compelling reasons recorded in writing and carries costs of not less than Rs50,000. The provision is not a special penalty for taxpayers. Parliament has accepted that scarce judicial time should not be consumed without consequence.²

The principle should not end at adjournments. A high-pitched assessment can survive for years, consuming legal expense and working capital. An automatic FBR appeal can then repeat the process before the High Court and, later, the Supreme Court or Federal Constitutional Court.

The Supreme Court recorded the problem in Commissioner Inland Revenue, Lahore v The Bank of Punjab. Three forums had decided the dividend issue for the taxpayer and an earlier Supreme Court precedent covered the point. The department still pursued the matter. The Court said the authorities had wasted “time, money and effort”; persistence without cause did not engender taxpayer confidence. The petitions were dismissed with costs throughout. ³

That order should have become an administrative turning point. It did not. In March 2025 we documented how FBR petitions continued to reach the Supreme Court despite factual controversies, settled propositions or absence of a question warranting further scrutiny. Every weak revenue appeal also displaces judicial time needed for other cases. ⁴

The Mayfair Spinning Mills litigation shows the cost of endurance. The dispute arose from a sales-tax refund claim connected with cotton purchased in 1996. The Lahore High Court decided the principal issue in 2001. The department’s appeal reached final disposal in the Supreme Court only in November 2024, where the taxpayer’s legal position was upheld.⁵

Income-tax law contains a limited corrective. Section 171 provides additional payment for delayed refunds, recognising that the State’s retention of money has a time value. However, this does not reimburse the full cost of defending an inflated assessment for years, including financing costs, management disruption and uncertainty.⁶

The answer is not to frighten tax officers into never appealing. Revenue authorities must test genuinely doubtful questions of law.

A system that punishes every unsuccessful appeal would be as damaging as one that rewards automatic litigation. The distinction is between a bona fide legal contest and an appeal pursued mechanically despite settled law, concurrent findings or absence of a substantial legal question.

Pakistan has finally begun to acknowledge this distinction. Finance Act 2026 introduced Independent Case Scrutiny Committees. Under the income-tax framework, a reference before a High Court or an appeal or review before the Federal Constitutional Court or Supreme Court requires prior scrutiny. Rules notified in July provide for committees including retired judges and experienced tax or commercial practitioners.⁷

Parallel mechanisms cover sales tax, federal excise and customs. Their stated purpose is to stop frivolous appeals and ensure that only legally sustainable matters travel to superior courts. This is a welcome break from the old bureaucratic instinct that every adverse order is safest when appealed.⁸

The reform will fail if scrutiny becomes another rubber stamp. Each committee should identify the precise question of law, governing precedents, concurrent findings and realistic revenue at stake. Its decisions should feed a national litigation database so that rejected arguments are not revived by different field formations.

Performance evaluation must change. Officers should not be rewarded for demands that repeatedly collapse on appeal, nor legal wings for the volume of litigation filed. Meaningful indicators are sustainable assessments, success rates, adherence to precedent and reduction of avoidable disputes.

The same accountability must apply to taxpayers who abuse process. Artificial adjournments, concealment of material facts and appeals filed only to postpone an unquestionably lawful demand consume judicial time. Realistic costs should operate symmetrically.

There is a fundamental difference between the parties. The taxpayer pays from private resources; the State litigates through public funds and wields coercive power. An adverse costs order against a department should therefore trigger internal review: who authorised the appeal, what precedent was considered and why public money was spent.

Personal liability should remain exceptional so honest officers can take difficult legal positions. But repeated disregard of binding precedent, concealment of material facts or persistence after several forums reject the same point cannot be protected as good-faith revenue collection.

The Supreme Court’s committee on longstanding tax cases recorded in March 2025 that, on information placed before it, 108,366 revenue cases involving about Rs. 4.457 trillion were pending before superior courts. Those figures were not simply evidence of slow judges; they were the accumulated output of assessment and litigation decisions throughout the tax administration.⁹

By April 2026, FBR figures discussed in our earlier work put disputed tax cases at about Rs. 5.457 trillion, with more than Rs. 3.3 trillion before ATIR alone. Reporting dates and definitions vary, but the conclusion does not: Pakistan cannot adjudicate its way out of a culture that treats every disputed demand as potential revenue and every adverse order as a candidate for another appeal.¹⁰

The National Tax Court proposed in Part I must be paired with reform below it. A specialised court will improve consistency and expertise, but it cannot become a more expensive warehouse for disputes generated by defective assessments and automatic appeals. Its statute should contain a meaningful costs regime.

Where a party persists on a point settled by binding precedent, suppresses relevant authority, repeatedly seeks unjustified adjournments or proceeds without a reasonably arguable legal basis, the court should be able to award realistic costs. For egregious conduct, compensatory costs should be available with recorded reasons and safeguards.

The court should publish annual data on issues generating the most litigation, success and reversal rates, costs awarded and cases stopped by scrutiny committees. Transparency would expose systemic error better than periodically announcing rupees “stuck” in courts.

The language also needs correction. Money under dispute is not automatically “revenue stuck in litigation”. Until legality is adjudicated, it is a State claim. Some claims become lawful revenue; others are found never to have been due.

A credible tax State should be as willing to abandon an unlawful demand as it is determined to collect a lawful one. Public power carries a price when exercised carelessly.

Taxpayers must pay for delay, default and abuse of process. The State cannot claim a permanent exemption from the same discipline.

Endnotes

1. Huzaima Bukhari & Dr Ikramul Haq, Rebuilding tax justice—III: When judgment itself becomes the problem, Minute Mirror, October 8, 2026.
2. Tax Laws (Amendment) Act, 2024, section 132 of the Income Tax Ordinance, 2001.
3. Commissioner Inland Revenue, Lahore v The Bank of Punjab, 2022 SCMR 1110 / (2022) 125 TAX 271 (S.C. Pak.).
4. Dr Ikramul Haq, FBR’s Frivolous Appeals: A Crisis In Judicial Efficiency And Taxpayer Justice, The Friday Times, March 15, 2025.
5. The Commissioner Inland Revenue v Mayfair Spinning Mills Ltd, 2025 SCMR 1.
6. Income Tax Ordinance, 2001, section 171, “Additional payment for delayed refunds”; see FBR’s and refund guidance.
7. Finance Act 2026 and the new independent scrutiny mechanism: FBR Finance Act 2026 page; final Income Tax Rule 231CB was notified through SRO 1165(I)/2026.
8. For the four federal-tax scrutiny mechanisms, see FBR issues notifications for “independent case scrutiny panels”, Business Recorder, July 29, 2026; see also Salient Features of Finance Act 2026.
9. Supreme Court of Pakistan, Report of the Committee to Resolve Longstanding Tax Cases, final draft March 3, 2025.
10. Huzaima Bukhari, Dr Ikramul Haq & Abdul Rauf Shakoori, Tax cases backlog, Business Recorder, April 24, 2026.

[To be continued]

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Huzaima Bukhari, lawyer and author, has been Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE). She also served Civil Services of Pakistan from 1984 to 2003.

Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.