Tax Dispute Resolution in Pakistan 2026, Income Tax Ordinance (third Amendment) & Trade Dispute Resolution Rules

Last reviewed: 3 May 2026

Two pieces of legislation enacted in the first quarter of 2026 have fundamentally re-shaped how businesses resolve tax disputes with the Federal Board of Revenue (FBR): the Income Tax Ordinance (Third Amendment) Act, 2026, passed on 23 January 2026, and the Trade Dispute Resolution Rules 2026 notified through SRO‑552 on 2 April 2026. Together, these instruments overhaul ADR committee composition, revise eligibility thresholds, tighten procedural timelines and introduce a parallel trade-specific resolution route, creating the most significant change to tax dispute resolution in Pakistan 2026 has seen since Section 134A was first inserted into the Income Tax Ordinance, 2001.

For in‑house counsel, tax directors and CFOs, the immediate question is no longer whether ADR is viable but which route to choose, and how quickly a filing strategy must be assembled to comply with the new statutory windows.

Executive Summary: What Changed in 2026 and What Businesses Must Do Now

The 2026 legislative package demands prompt action from every business with an open or anticipated tax dispute before the FBR. The core changes can be distilled into three categories.

• Revised ADR framework under Section 134A. The Income Tax Ordinance (Third Amendment) Act, 2026 substitutes the existing ADR provisions with a restructured Section 134A. The amendment redefines committee composition, introduces a fixed statutory timeline for completion of ADR proceedings, adjusts the monetary threshold for eligibility and includes transitional provisions affecting disputes already pending before appellate tribunals and High Courts.
• Parallel trade-specific resolution route. The Trade Dispute Resolution Rules 2026 (SRO‑552) establish a Trade Dispute Resolution Commission with jurisdiction over trade and commerce claims, including customs-linked disputes that may overlap with income-tax assessments on import-related transactions. Businesses must now determine upfront whether their dispute falls within the income-tax ADR regime, the trade rules regime, or both.
• Immediate compliance actions. Tax directors should audit every pending dispute against the new eligibility criteria, recalculate filing deadlines under the shortened statutory windows and prepare an internal ADR readiness kit, including evidence bundles, witness briefs and settlement-mandate documents, before the first round of reconstituted ADR committees begin hearing cases.

The Legislative Changes, How the Income Tax Ordinance (Third Amendment) 2026 Changes Tax Dispute Resolution

The Income Tax Ordinance (Third Amendment) Act, 2026 received presidential assent on 23 January 2026 and was uploaded to the National Assembly records on 26–27 January 2026. Its central objective is to make the ADR mechanism under Section 134A of the Income Tax Ordinance, 2001 more accessible, time-bound and structurally independent from the same officers who issued the original tax assessments.

Key New Clauses

The Amendment substitutes the existing text of Section 134A and inserts several new operative provisions. The most consequential changes include:

• Committee reconstitution. The ADR committee is no longer drawn exclusively from FBR’s own officer cadre. The substituted section requires a panel that includes an independent chartered accountant or cost and management accountant, a representative nominated by the relevant chamber of commerce and industry, and a senior FBR officer of a prescribed grade, ensuring that at least two of the three members are not part of the assessing hierarchy.
• Revised eligibility threshold. The previous monetary floor of PKR 50 million in disputed tax demand for ADR eligibility has been revised. Industry observers expect the practical effect to be a broader intake of mid-market disputes, opening the ADR route to a wider pool of corporate and individual taxpayers than before.
• Statutory completion timeline. The Amendment introduces a fixed window, measured from the date of constitution of the committee, within which the ADR process must conclude. If the committee fails to issue a decision or facilitate a settlement within this window, the dispute reverts to the appellate track automatically, and the taxpayer’s right to appeal is preserved without prejudice.
• Freeze on recovery during ADR. While proceedings are pending before the ADR committee, recovery action by the tax authority is stayed, provided the taxpayer has filed a valid application and paid any undisputed portion of the demand.

Transitional Provisions and Effect on Pending Appeals

A critical practical question is whether disputes already pending before the Appellate Tribunal Inland Revenue (ATIR) or a High Court can be re-routed into the new ADR framework. The Amendment includes transitional clauses that permit, but do not mandate, a taxpayer with a pending appeal to apply for ADR, subject to the consent of the Commissioner and verification that the dispute meets the revised eligibility criteria. Early indications suggest that the FBR intends to encourage migration of suitable pending cases into ADR to reduce the appellate backlog, though taxpayers should weigh the strategic implications carefully before surrendering an appellate position.

Exact Statutory References

Practitioners should consult the following primary instruments when advising clients on tax dispute resolution in Pakistan 2026:

• Income Tax Ordinance (Third Amendment) Act, 2026, Section 134A (substituted), as published by the National Assembly.
• Income Tax Ordinance, 2001, the parent statute, as amended through the Third Amendment Act.
• SRO‑552 (I)/2026, Trade Dispute Resolution Rules 2026, dated 2 April 2026, issued by the Ministry of Commerce.

The Trade Dispute Resolution Rules 2026, A Parallel and Complementary Route

Notified on 2 April 2026, SRO‑552 establishes the Trade Dispute Resolution Rules 2026 under the broader Trade Dispute Resolution Act framework. The Rules create a dedicated Trade Dispute Resolution Commission with its own procedural code, panel-appointment mechanism and enforcement provisions. For a detailed walkthrough of the Rules, see our coverage of the Pakistan Trade Dispute Resolution Rules 2026.

When Trade Rules Apply vs Income Tax ADR

The jurisdictional boundary between the two regimes is defined by the nature of the underlying dispute rather than the quantum of tax at stake. The Trade Dispute Resolution Rules 2026 apply to disputes arising from trade, commerce and customs-related transactions, including anti-dumping determinations, customs-valuation disagreements, regulatory-duty challenges and import-licensing conflicts. Where a single commercial transaction generates both a customs dispute and an income-tax assessment (for example, transfer-pricing adjustments on imported goods), the taxpayer may need to invoke both regimes concurrently or sequentially.

Key distinguishing factors include:

• Subject-matter jurisdiction. Income tax ADR under Section 134A covers disputes arising from assessments, audit adjustments, penalty orders and demand notices issued under the Income Tax Ordinance, 2001. The Trade Rules cover trade and customs disputes under the Trade Dispute Resolution Act and ancillary customs legislation.
• Appointing authority. For income tax ADR, the committee is constituted by the FBR. Under the Trade Rules, the Commission is appointed by the Ministry of Commerce.
• Enforcement mechanism. ADR outcomes under Section 134A are given effect through revised assessment orders issued by the Commissioner. Trade Rules outcomes are enforceable through the Commission’s own orders, subject to judicial review by the designated appellate forum.

Practical Steps for Invoking Trade Rules

Businesses considering the trade route should file a formal application with the Trade Dispute Resolution Commission, specifying the SRO under which the dispute arises, attaching the impugned order or determination, and identifying the requested relief. Because the Trade Rules impose their own procedural timelines, it is critical to diarise these deadlines separately from any parallel income-tax ADR filing.

ADR Committee Composition, Jurisdiction and Timelines Under the 2026 Rules

The restructured ADR committee Pakistan practitioners will encounter under the amended Section 134A is designed to address the longstanding criticism that FBR-dominated panels lacked independence. The following table summarises the key procedural milestones and the statutory deadlines that govern each stage of the ADR process.

The significance of the fixed statutory completion window cannot be overstated. Under the previous regime, ADR proceedings could drag on indefinitely, effectively trapping the taxpayer in a procedural limbo. The 2026 amendment eliminates that risk by mandating automatic reversion to the appellate track if the committee fails to conclude within the prescribed period.

Industry observers expect the reconstituted panel structure, with its mandatory independent and chamber-nominated members, to improve the perceived neutrality of ADR outcomes and encourage greater uptake among mid-market and large corporate taxpayers who previously regarded ADR for tax disputes in Pakistan as structurally biased.

Step-by-Step: How to Initiate ADR Under the Income Tax Ordinance

The following procedural guide consolidates the filing requirements, evidentiary standards and post-ADR steps that counsel should follow when pursuing the ADR route under the amended Section 134A.

Filing Checklist

1. Confirm eligibility. Verify that the disputed amount meets the revised threshold and that the dispute category falls within the scope of substituted Section 134A. Disputes involving fraud findings or criminal tax proceedings are typically excluded.
2. Prepare the application. Draft a formal ADR application addressed to the FBR, identifying the impugned assessment order (date, reference number, issuing officer), the taxpayer’s NTN and the amount in dispute. Attach a concise statement of the factual and legal grounds on which the assessment is contested.
3. Pay any undisputed portion. To benefit from the statutory stay on recovery, ensure that the undisputed portion of the tax demand has been paid or that the taxpayer can demonstrate compliance with any payment-on-account requirements.
4. File within the prescribed window. Submit the application within the time limit specified in the substituted section, measured from the date of service of the assessment or demand order. Late filing may extinguish the right to ADR.
5. Serve a copy on the Commissioner. Provide the assessing Commissioner with a copy of the ADR application to trigger the stay on recovery action and to facilitate the Commissioner’s participation in the committee process.

Evidence and Hearing Preparation

Once the committee is constituted, the taxpayer will be invited to present evidence. Effective preparation requires:

• Evidence bundle. Compile all relevant documents, transfer-pricing studies, financial statements, correspondence with the assessing officer, third-party confirmations, expert reports, in a single indexed bundle.
• Witness briefs. If the committee permits oral testimony, prepare concise witness briefs for the CFO, controller or any external expert who can speak to the disputed transactions.
• Negotiation mandate. Obtain board-level or management-committee approval for a settlement range, including the maximum concession the company is prepared to make. This avoids procedural delays caused by the need to seek additional internal approvals mid-hearing.

Post-ADR Steps and Enforcement

If the ADR committee facilitates a settlement, the Commissioner issues a revised assessment order reflecting the agreed terms. The taxpayer should confirm that the revised order accurately reflects the settlement, withdraw any pending appeal within the prescribed period and ensure that any refund due is claimed promptly. If no settlement is reached, the dispute reverts to the appellate track and the taxpayer must file or reinstate an appeal before the ATIR within the applicable tax appeal timelines in Pakistan.

When to Use ADR vs Litigate, A Decision Framework for Counsel and CFOs

Choosing between ADR and litigation is not a binary decision; it is a multi-factor strategic calculus. The comparison table below provides a structured framework for evaluating the two routes under the 2026 legislative landscape.

In practice, six factors should drive the decision:

1. Amount at stake. ADR is generally more efficient for disputes within or near the eligibility threshold. For very high-value disputes, the cost savings of ADR may be marginal relative to the strategic value of a binding appellate precedent.
2. Precedential importance. If the disputed issue recurs across multiple tax years or group entities, a favourable Tribunal or High Court ruling may deliver significantly greater long-term value than a one-off ADR settlement.
3. Urgency. The fixed ADR timeline provides certainty. Litigation timelines in Pakistan’s appellate system are notoriously unpredictable.
4. Confidentiality. Disputes involving sensitive commercial information, transfer-pricing methodologies, profit margins, intercompany arrangements, benefit from the private nature of ADR.
5. Enforceability and finality. ADR settlements, once reflected in a revised assessment, are difficult to reopen. Court appeals carry the risk of adverse precedent but also the opportunity for a definitive legal ruling.
6. Cost sensitivity. For businesses under cash-flow pressure, the lower cost and faster resolution of ADR may be decisive, particularly when combined with the stay on recovery during proceedings.

For a broader comparison of these two resolution paths, see our guide on key differences between arbitration and litigation.

Tax Arbitration and Enforceability, Awards and Judicial Review Risks

While the primary ADR mechanism for income-tax disputes in Pakistan operates through the statutory committee process under Section 134A, tax arbitration in Pakistan remains a narrower route. Arbitration clauses in commercial contracts may indirectly touch upon tax allocation between contracting parties, but sovereign tax assessments by the FBR are not generally arbitrable under Pakistani law. The state’s taxing power is considered a sovereign function, and courts have consistently held that disputes over the legality of tax assessments fall within the exclusive domain of the statutory appellate hierarchy.

Enforcing ADR Outcomes

ADR outcomes under the amended Section 134A are given legal effect through revised assessment orders, not through arbitral awards. This distinction matters for enforcement: a revised assessment order is a statutory instrument that binds the Commissioner and the taxpayer, and can only be challenged on limited grounds (typically, where the order does not accurately reflect the terms of the settlement or where the committee acted beyond its jurisdiction). For practical guidance on hearing preparation, see our resource on preparation for and conduct of arbitration hearings.

Judicial Review Risks

Both ADR outcomes and Trade Rules commission decisions are subject to judicial review by the High Courts under Article 199 of the Constitution. Grounds for challenge typically include:

• Jurisdictional excess. The committee or commission exceeded its statutory mandate.
• Procedural irregularity. A party was denied a fair hearing or the committee failed to follow mandatory procedural steps.
• Error of law on the face of the record. The decision reflects a manifest misapplication of the law.

Taxpayers and the FBR alike should be aware that High Court intervention, while available, is exercised sparingly. The likely practical effect of the 2026 reforms will be to reduce the volume of judicial review applications by improving the procedural rigour and perceived independence of the ADR process itself.

Practical Risks, Pitfalls and Compliance Checklist for Tax Directors

Even well-prepared businesses can stumble over procedural traps in the new regime. The following compliance checklist highlights the most common pitfalls and the steps to avoid them.

• Missed filing deadlines. The substituted Section 134A imposes strict time limits for filing an ADR application. Diarise the deadline from the date of service of the assessment order, not the date of receipt by the company’s tax adviser.
• Failure to pay the undisputed portion. Non-payment of the undisputed amount may disqualify the application and expose the taxpayer to recovery action despite having filed for ADR.
• Inadequate settlement authority. Entering ADR without board-approved settlement parameters leads to adjournments and, potentially, expiry of the statutory window without resolution.
• Ignoring the parallel Trade Rules route. For disputes with a customs or trade-policy dimension, failing to assess the Trade Dispute Resolution Rules 2026 as an alternative or complementary route may result in suboptimal forum selection.
• Incomplete evidence bundles. ADR committees operate on compressed timelines. Submitting incomplete or disorganised documentation reduces the prospect of a favourable outcome and may not be curable within the statutory window.
• Drafting weak settlement terms. If a settlement is reached, the terms must be drafted with precision. Ambiguous language in the settlement agreement can lead to disputes over the revised assessment order and may even trigger a fresh round of litigation.
• Tax reserve accounting. Finance teams should coordinate with auditors to ensure that adequate tax reserves are maintained while ADR is pending, reflecting the range of possible outcomes. A sudden adverse conclusion without adequate reserves creates a financial-reporting risk under IFRS and local accounting standards.

Consider including the following protective clause in any ADR settlement agreement: “The revised assessment order issued pursuant to this settlement shall be final and binding on both parties, and neither party shall initiate further proceedings in respect of the matters resolved herein, except on grounds of fraud or manifest error.”

Next Steps

The 2026 reforms to tax dispute resolution in Pakistan 2026 present both opportunity and risk. Businesses that move quickly to assess their pending and anticipated disputes against the new eligibility criteria, prepare compliant ADR applications and assemble robust evidence bundles will be best positioned to benefit from the shorter timelines and restructured committees. Those that delay risk missing statutory deadlines and losing access to the ADR route entirely.

For tailored guidance on commercial dispute resolution in Pakistan, including ADR strategy, appellate litigation and trade-dispute proceedings, explore our international commercial litigation guide or connect with a specialist through the Global Law Experts lawyer directory.

Sources

1. National Assembly, Income Tax (Third Amendment) Act, 2026
2. Gazette of Pakistan / NA upload, Income Tax (Amendment) Act, 2026
3. KPMG Pakistan, A Brief on Income Tax Ordinance (Third Amendment) Act, 2026
4. EY, Pakistan implements amendments to tax appeals system
5. Dawn, Coverage of tax dispute resolution developments
6. Business Recorder, Technical release and commentary on ADR changes
7. Riaz Ahmad Saqib Gohar & Co., Memorandum on the amendment
8. Global Law Experts, Pakistan Trade Dispute Resolution Rules 2026