Production monitoring mechanism: IHC reserves judgment on pleas of industrial units
ISLAMABAD: The Islamabad High Court (IHC) has reserved its judgment in a series of constitutional petitions challenging the Federal Board of Revenue’s (FBR) electronic production monitoring system at industrial premises.
A Division Bench of the IHC, comprising Justice Khadim Hussain Soomro and Justice Umair Malik, heard petitions filed by more than 300 industrial units from across the country, including those operating in the ghee and cooking oil, beverages, spinning and textile, packaged milk, food processing, packaging and other manufacturing sectors.
The petitioners have challenged the legality, constitutional validity, and implementation of the production monitoring mechanism under Section 40C of the Sales Tax Act, 1990. They questioned the FBR’s authority to install electronic monitoring equipment at industrial premises, raised objections to the financial burden associated with the equipment and contended that the mechanism interferes with their business operations.
Hafiz Ehsaan Ahmad Khokhar, representing the Secretary Revenue Division and the Federal Board of Revenue, defended the legislative competence, statutory authority and constitutional validity of Section 40C of the Sales Tax Act, 1990.
Khokhar submitted that Section 40C was introduced in 2013 as a legislative instrument to strengthen electronic monitoring and tracking of industrial production, sales, clearances and stocks, prevent concealment of actual production and combat sales tax evasion. He explained that the provision had subsequently undergone legislative amendments and regulatory developments to accommodate technological advancements and extend monitoring to additional industrial sectors.
He specifically relied on Section 40C (1) of the Sales Tax Act, 1990, which empowers the FBR to notify registered persons, classes of persons, goods or classes of goods for electronic or other monitoring and tracking of production, sales, clearances and stocks. He also referred to subsections (2), (3) and (4), which deal with prescribed tax stamps, banderoles, stickers, labels and monitoring equipment, their acquisition through FBR-appointed licensees and the application of Section 83C of the Customs Act, 1969, mutatis mutandis. He further highlighted Section 40C (6), which provides for enforcement measures, including seizure and confiscation in cases of non-compliance with prescribed monitoring requirements.
Referring to Chapter XIV-BA of the Sales Tax Rules, 2006, particularly Rules 150ZQR, 150ZQS, 150ZQT and 150ZQU, the FBR counsel explained that these rules provide a detailed regulatory framework for electronic production monitoring, video surveillance, video analytics, digital-eye technology, real-time production capture, electronic transmission and preservation of production data, production analysis, and approved monitoring equipment and vendors.
Highlighting the historical implementation of the system, Khokhar submitted that production monitoring had already been introduced in major industrial sectors, including tobacco, sugar, cement and fertiliser, under earlier Track and Trace and electronic monitoring arrangements. He maintained that neither Section 40C nor the monitoring framework introduced under it had previously been struck down by a competent court. He argued that the subsequent extension of the mechanism to additional sectors was a continuation of the same legislative policy and did not constitute an arbitrary or discriminatory exercise.
Khokhar referred to the extension of monitoring to the textile and spinning, beverages, packaged milk, ghee and cooking oil, iron and steel, food processing, packaged juices, bottled water, aerated water and other manufacturing sectors. He submitted that these additional sectors had been brought within the monitoring framework to ensure that actual production could be independently verified, undocumented supplies identified, and opportunities for sales tax evasion or suppression of production eliminated.
He maintained that Section 40C did not impose any new sales tax liability but provided an effective mechanism to verify actual production, document taxable supplies, identify discrepancies between declared and actual production, and prevent under-invoicing, concealment of sales and revenue leakage. He argued that electronic monitoring promoted transparency, ensured a level playing field for compliant taxpayers and strengthened enforcement of existing tax obligations.
Khokhar also submitted that similar electronic production monitoring systems, video analytics and real-time surveillance mechanisms were operating in numerous countries as recognised instruments of modern tax administration. He argued that the selection of industrial sectors, introduction of monitoring technology and implementation of fiscal policy fell primarily within the legislative and executive domains.
He prayed that, in view of the clear legislative mandate under Section 40C of the Sales Tax Act, 1990, read with the relevant provisions of the Sales Tax Rules, 2006, the progressive implementation of electronic monitoring across various industrial sectors and the absence of any demonstrated constitutional infirmity, the court should exercise judicial restraint and dismiss the petitions as misconceived, non-maintainable and devoid of legal merit.
The bench reserved its judgment after hearing detailed arguments from the counsel.
Copyright Business Recorder, 2026