KARACHI: The Appellate Tribunal Inland Revenue (ATIR), Karachi Bench, has ruled that a taxpayer’s sales tax registration cannot be blacklisted merely for failing to submit monthly sales tax returns without establishing a case of tax fraud or fulfilling the legal requirements prescribed under the law.
In an important decision the tribunal set aside a blacklisting order issued by the Commissioner Inland Revenue, Zone-I, Regional Tax Office (RTO) Hyderabad, against a registered taxpayer operating under the name of Diamond Petroleum Services.
The tribunal held that continuous non-filing of sales tax returns, on its own, does not establish tax fraud under Section 21(2) of the Sales Tax Act, 1990. The department must have specific evidence of fake invoices, fraudulent transactions or other activities falling within the scope of tax fraud before taking such a serious action.
The case originated when the Senior Database Administrator of the tax department prepared a list of registered taxpayers who had failed to file their monthly sales tax returns for several consecutive months.
Based on this list, the Commissioner Inland Revenue, Zone-I, RTO Hyderabad, blacklisted the sales tax registration of Diamond Petroleum Services through an order dated November 25, 2025.
The department maintained that the taxpayer’s continued failure to submit monthly returns justified the blacklisting of its registration.
However, the taxpayer challenged the order, arguing that no proper show-cause notice was issued and no opportunity of hearing was provided before the registration was blacklisted. The taxpayer further argued that non-filing of returns could not automatically be treated as tax fraud in the absence of supporting evidence.
Before examining the legality of the blacklisting order, the tribunal also considered the delay in filing the appeal.
The taxpayer’s counsel argued that the blacklisting order had never been legally served upon the taxpayer. The taxpayer only became aware of the blacklisting when he visited the relevant tax office for business-related matters and was informed that his Sales Tax Registration Number (STRN) had been blacklisted.
The taxpayer subsequently obtained a certified copy of the order on October 14, 2026, and filed an appeal before the tribunal.
Importantly, the department also failed to produce evidence establishing that the blacklisting order had been properly served.
The tribunal observed that when the department itself could not establish proper service of the order, the delay in filing the appeal could not be treated as deliberate negligence on the part of the taxpayer.
Accordingly, the tribunal accepted the application for condonation of delay under Section 131(4) of the Income Tax Ordinance, 2001, and proceeded to hear the appeal.
During the proceedings, the taxpayer’s counsel argued that the Commissioner had exercised the powers under Section 21 of the Sales Tax Act, 1990, without fulfilling the mandatory legal requirements.
The main arguments included:
No proper show-cause notice was issued before blacklisting the sales tax registration.
The taxpayer was not provided an opportunity to explain his position or defend himself.
The department relied solely on the non-filing of consecutive monthly sales tax returns.
No specific fake invoices, fraudulent transactions or illegal input tax adjustments were identified.
The department failed to establish any activity that could legally constitute tax fraud.
Non-filing of sales tax returns cannot automatically be treated as evidence of fraudulent conduct.
The counsel further argued that blacklisting is a serious measure that can adversely affect business operations. Therefore, such powers must be exercised only after proper examination of facts and supporting evidence.
The department’s representative defended the Commissioner’s decision, maintaining that the taxpayer had continuously failed to submit monthly sales tax returns.
The department argued that the Commissioner had issued the order after examining the available records and information and that the decision was legally valid and supported by reasons.
It consequently requested the tribunal to dismiss the appeal and maintain the blacklisting order.
After hearing both parties, the tribunal examined Section 21 of the Sales Tax Act, 1990, and Rule 12 of the Sales Tax Rules, 2006.
The tribunal emphasised that the power to suspend or blacklist a sales tax registration must be exercised within the limits prescribed by law.
Under the relevant provisions, the tribunal considered the legal grounds relating to the issuance of fake invoices and the commission of tax fraud.
It clarified that merely failing to file sales tax returns does not, by itself, establish that a registered person has committed tax fraud. The department must identify the specific fraudulent conduct and produce supporting evidence to justify such action.
The department had also relied upon Rule 12(2)(e) of the Sales Tax Rules, 2006, concerning the continuous non-filing of sales tax returns.
The tribunal clarified that although failure to submit returns may provide grounds for the tax department to initiate an inquiry or take appropriate action under the law, it cannot automatically be treated as tax fraud.
The department must still establish the relevant legal grounds and comply with the prescribed procedure before taking the extreme step of blacklisting a taxpayer.
In other words, a taxpayer’s failure to fulfil return-filing obligations and the commission of tax fraud are not automatically interchangeable.
The tribunal observed that blacklisting a sales tax registration is not merely a routine administrative measure. It can seriously affect a taxpayer’s ability to conduct business and carry out commercial transactions.
Therefore, the Commissioner must carefully examine the facts, applicable legal provisions and available evidence before exercising the power of blacklisting.
The tribunal held that preparing a list of taxpayers who have failed to file returns and relying solely on that list is not sufficient to justify blacklisting.
In support of its observations, the tribunal also referred to the judicial precedent in Saeed Ahmed and Others v. Federation of Pakistan and Others (2011 PTD 1813).
Another important aspect of the decision was the violation of the principles of natural justice.
The tribunal emphasised that before taking an adverse action against a taxpayer, the department must inform the taxpayer of the allegations and provide a reasonable opportunity to present a defence.
In the present case, the department failed to establish that the blacklisting order had been properly served or that the taxpayer had been given an effective opportunity to respond to the allegations.
The tribunal therefore found that the proceedings did not satisfy the required legal and procedural standards.
It further observed that the mere existence of statutory powers under Section 21 does not authorise the Commissioner to exercise those powers arbitrarily. Every such action must be supported by relevant evidence and must comply with the procedure prescribed under the law.
After examining the available record, legal provisions and arguments presented by both parties, the Appellate Tribunal Inland Revenue, Karachi Bench, concluded that the blacklisting order could not be legally sustained.
Consequently, through its order dated October 30, 2026, in STA No. 347/K/B/2026, the tribunal:
Set aside the blacklisting order dated November 25, 2025, issued by the Commissioner Inland Revenue, Zone-I, RTO Hyderabad.
Directed the immediate restoration of the taxpayer’s sales tax registration.
Allowed the department to initiate appropriate proceedings in accordance with the law, provided all legal requirements are fulfilled.
Allowed the taxpayer’s appeal and disposed of the stay application as having become infructuous.
The ATIR decision highlights an important distinction between failure to comply with tax return-filing obligations and committing tax fraud.
Although registered persons are legally required to submit their monthly sales tax returns, the department cannot automatically classify every non-filer as a tax fraudster or blacklist their registration without establishing the relevant legal grounds.
The decision also reinforces that taxpayers must be informed of allegations and provided an opportunity of hearing before serious adverse action is taken against them.
For businesses facing blacklisting proceedings, the ruling highlights the importance of examining whether the department has followed the prescribed legal procedure and established the grounds required under Section 21 of the Sales Tax Act, 1990.
