FTO Urges Faceless Tax Refund System

The Federal Tax Ombudsman (FTO) has recommended that the Federal Board of Revenue (FBR) introduce a Faceless Income Tax Refund System to automate the processing of eligible tax refunds and transfer approved amounts directly into taxpayers' bank accounts. The recommendation was made while deciding a complaint involving a delayed Rs42.86 million income tax refund.

Separately, the Pakistan Tax Bar Association (PTBA) has urged the FBR to address legal and technical flaws in the newly introduced Income Tax Return for Tax Year 2026 and the Fixed Tax Scheme for Small Traders, warning that the existing framework could create significant compliance challenges for taxpayers.

The FTO's recommendation stemmed from a complaint filed by M/s Sprint Oil & Gas Services FZC, which sought the release of its income tax refund for Tax Year 2025. The company submitted its online refund application on April 13, 2026, but claimed the amount remained unpaid despite the expiry of the legally prescribed 60-day processing period.

The complainant argued that the delay constituted maladministration under the Federal Tax Ombudsman Ordinance, 2000, and referred to an Islamabad High Court directive calling for an automated refund mechanism under Section 170A of the Income Tax Ordinance, 2001, aimed at reducing taxpayer interaction with tax offices and expediting refund payments.

In response, the Chief Commissioner Inland Revenue, Corporate Tax Office (CTO), Islamabad, stated that refund applications were being processed on a first-in, first-out (FIFO) basis in line with FBR instructions and that the taxpayer's claim remained under verification after notices were issued requesting supporting documentation.

Tax Ombudsman Zafar Hijazi ruled that the refund had remained pending beyond the statutory deadline and declared the delay to be maladministration caused by departmental negligence. He also rejected the department's reliance on the FIFO policy, observing that internal administrative procedures cannot override taxpayers' legal rights.

The FTO directed the FBR to instruct the Commissioner Inland Revenue (Refund Zone), CTO Islamabad, to decide the pending refund claim in accordance with the law and submit a compliance report within 30 days.

As a broader reform proposal, the Ombudsman advised the FBR to operationalise a Faceless Income Tax Refund System under Section 170A, enabling verified refunds to be transferred electronically into taxpayers' registered bank accounts without requiring formal refund applications. He noted that the model would be similar to the FBR's existing faceless customs clearance and assessment systems and would improve efficiency, reduce taxpayer inconvenience and support a modern, technology-driven tax administration.

In a separate representation addressed to FBR Chairman Rashid Mehmood Langrial, the PTBA acknowledged the Board's efforts to modernise tax administration but expressed concern over the delayed availability of the revised income tax return on the IRIS portal, arguing that it significantly reduced the time available for taxpayers and practitioners to understand and comply with the new filing requirements.

The Association highlighted several technical and operational issues in the redesigned return, including discrepancies in imported data relating to immovable properties, incomplete withholding tax information and practical difficulties arising from the revised filing format. It said immovable property data was appearing with error flags, while tax practitioners were struggling to locate and verify withholding tax details within the auto-populated return.

The PTBA further criticised the FBR for introducing the revised return without sufficient consultation with tax professionals, arguing that broader stakeholder engagement could have resolved operational issues before implementation. It maintained that the PRAL team had not conducted meaningful consultations and that the significantly altered return format was creating substantial practical difficulties, making timely and accurate filing increasingly challenging.

Referring to SRO 1166(I)/2026, the PTBA also questioned the legal validity of the Fixed Tax Scheme for Small Traders, arguing that Annex-I cannot legally replace the statutory Return of Total Income under the Income Tax Ordinance, 2001, without explicit legislative authority. It said the scheme raised concerns over whether Annex-I possesses sufficient legal backing to function as a valid return capable of resulting in a deemed assessment under Section 120(1) of the Ordinance.

The Association also sought clarification regarding eligibility criteria for retailers and shopkeepers, treatment of taxpayers with multiple income sources, audit protection, withholding tax obligations, penalties for non-compliance, and exemptions from Point-of-Sale (POS) integration and digital invoicing. It urged the FBR to review both the revised return and the Fixed Tax Scheme in consultation with stakeholders to remove ambiguities and ensure legal certainty before full implementation.