KP Rs40B Scandal: Tax Compliance Risks for Businesses

The Rs40 billion financial scandal in Khyber Pakhtunkhwa has escalated, with the Director General (DG) Audit exposing Rs21 billion in irregular payments during the 2023-24 fiscal year, a revelation with serious tax implications for implicated entities. Our tax law firm warns clients of the compliance risks stemming from such financial mismanagement, particularly in the public sector.

The audit, conducted via the SAP system, revealed that Rs21.37 billion under Object Head G10113—intended for earnest money and retention money deposits by contractors in the Communications and Works (C&W) Division, Upper Kohistan—was unrecorded in official ledgers and absent from the regular cheque list. Shockingly, fake cheque books may have been used, rendering these payments doubtful and unverified, as per the audit report. This negligence by staff, flagged in February 2025, violates established guidelines requiring earnest money to be held until the liability period expires and retention money to be refunded in two phases. The C&W Department’s vague response—“a reply will be provided later”—raises serious concerns about transparency, especially given broader investigations by the National Accountability Bureau (NAB), which has frozen 50 accounts and identified Rs7 billion in suspicious transactions linked to a fake construction firm, as reported across multiple sources.

From a tax law perspective, this scandal could lead to tax reassessments by the Federal Board of Revenue (FBR) for contractors and entities involved, as unverified payments may trigger disallowance of deductions under Section 21 of the Income Tax Ordinance for lack of proper documentation. Businesses linked to these transactions must prepare for potential FBR audits, ensuring compliance with withholding tax (WHT) obligations on payments to contractors, typically at 4-10%, depending on their filer status. The misuse of funds may also impact input tax credits for sales tax, requiring meticulous record reconciliation to avoid penalties, which can include 5% default surcharges or Rs10,000 per instance, based on historical FBR enforcement patterns.

Critically, the establishment narrative of “negligence” may underplay systemic corruption, as NAB’s broader probe suggests involvement of powerful politicians and senior officials, with a dumper driver holding Rs4.5 billion in a fake account—a pattern echoing past financial irregularities in Khyber Pakhtunkhwa, such as the Rs152.1 billion misappropriations in 2022-23. Clients must remain vigilant for retroactive tax liabilities and legal disputes arising from this scandal.

Our firm advises clients to review contractor payments, secure tax documentation, and brace for FBR scrutiny, mitigating risks in this corruption-laden crisis.