By Muhammad Rehan Sarwar, Advocate High Court, Founder, The Nomologists Law Firm
Much of the friction between anti-money-laundering enforcement and ordinary tax administration in Pakistan begins at the same point: the decision to select a taxpayer for scrutiny. When that decision depends on unchecked human discretion, an ordinary tax question can too easily become the starting point for a much broader investigation.
Income Tax Circular No. 1 of 2026 addresses that problem at its source. Effective September 1, 2026, it restrains Inland Revenue field formations from selecting cases for income tax assessment unless the case has first been generated and assigned through FBR's Compliance Risk Management System. Issued under the Income Tax Ordinance, the circular states its purpose plainly: to bring transparency, uniformity, and objectivity to a process long vulnerable to the opposite. A field officer can no longer decide, on personal discretion alone, whose file will be opened.
That change matters because of the pattern examined throughout this series. Anti-Money Laundering Act powers, framed around suspicion of illicit proceeds, have sometimes been used as a parallel route to reach taxpayers and records already governed by the ordinary assessment process. Where the initial selection of a tax case rests entirely with an officer, there is a greater risk that a routine tax inquiry will be escalated into an AMLA referral—whether to increase pressure, sidestep objections under section 216 concerning confidentiality, or widen the investigation.
A system-generated, risk-based selection process will not remove that risk altogether. It does, however, require a documented and auditable explanation of why a taxpayer was flagged in the first place. That is a meaningful safeguard because it replaces an invisible decision with a record that can later be examined.
For taxpayers and practitioners defending an AMLA referral that grew out of a tax matter, the circular therefore opens a new line of inquiry: was the underlying tax case selected through the Compliance Risk Management System, as the circular now requires, or did it begin with unrecorded discretion and acquire the label of money laundering only afterward?
The circular does not regulate AMLA referrals directly. Its importance lies in narrowing the space in which an unjustified referral can be manufactured. If the originating tax file must show a system-generated basis for its existence, the route from routine assessment to criminal suspicion becomes easier to trace and test.
The broader direction is now clear. Faceless assessment, algorithmic settlement, and system-generated case selection are converging on a common objective: replacing personal discretion with a documented, reviewable process at every stage at which a taxpayer's file may be opened, escalated, or referred elsewhere.
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