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Pakistan: New Audit Plan to Cover Entire Services Sector - Introduction of VAT from July 1
Source: brecorder.com
Source Date: Thursday, May 20, 2010
Focus: Citizen Engagement
Country: Pakistan
Created: May 24, 2010

The new National Audit Plan (2010-11) would cover the entire services sector for audit and scrutiny of records pertaining to service providers and professionals after bringing the sector into the Value Added Tax regime from next fiscal year. Sources told Business Recorder here on Wednesday that the board had dispatched the draft of the National Audit Plan to the field formations for comments. The plan would cover new areas such as services sector and exempted sectors to be brought into the VAT net under the Federal VAT Act 2010. The plan would cover all those sectors, which are presently exempted under the Sales Tax Act 1990, but would be subjected to VAT from 2010-11. About the ongoing exercise of composite audit, sources said that the board will receive the results of the composite audit of sales tax and income tax of units picked through computerised random balloting for the Tax Year 2008 by the end of current month to review quality of audits being conducted by auditors and chartered accountants. The board had selected a total of 921 corporate entities and Associations of Persons (AOPs) through computerised random balloting for composite audit of sales tax and income tax for the Tax Year 2008. This random balloting was done irrespective of the risk-based indicators. In this regard, the FBR is expected to receive audit reports from the field formations by the end of May 2010. There is a possibility that no misdeclaration or discrepancies would be detected in certain cases selected for audit through random balloting. On the other hand, audit reports may also detect serious irregularities in the tax affairs of the taxpayers. As far as corporate audit is concerned, the audit reports of the chartered accountants would be thoroughly analysed. It would be a quality review of the audit reports being submitted by the Institute of Chartered Accountant of Pakistan (ICAP). The ICAP is conducting audit of the corporate entities on the basis of the 'taxpayer audit framework' drafted by the institute.

In the light of some audit reports of the chartered accountants, the FBR would be in a better position to check whether outsourcing audit to chartered accountants was a good decision, sources said. The World Bank review mission has observed that the FBR should conduct evaluation of the outsourcing of the audits to check whether audit by external chartered accountants should be continued in future. Secondly, the National Audit Plan 2010-11 should include new types of audits and redesigning some of the current ones (desk, single issue, composite and investigative). The post-refund audit should also be included in the new National Audit Plan, World Bank review mission added. When contacted, experts stated that taxpayers including some corporate entities and Associations of Persons (AOPs) have strongly contested selection of cases for audit through random balloting and section 177 of the Income Tax Ordinance 2001. Some of the units selected for audit have taken the plea that the Income Tax Ordinance 2001 does not provide specific provision for random balloting for composite audit of income tax and sales tax. There is nowhere written in the income tax law that audit could be done on the basis of random balloting. Moreover, the selection of sales tax cases for audit could not be done under the income tax law. The board has selected cases for composite audit of sales tax as well as income tax, which has been challenged by certain units at the level of High Courts. The FBR needs to provide specific provision in the Income Tax Ordinance 2001 for selection of cases for audit using random balloting. Tax practitioners and Chartered accountants have further requested the FBR to pinpoint the exact provision of the Income Tax Ordinance 2001, which empowers the tax authorities to select corporate/AOPs cases for audit through 'computer based random balloting'.

The FBR should clarify the basis and percentage for selection of cases for audit. In this regard, a uniform criteria should be applied for case selection procedure. Under the repealed Income Tax Ordinance 1979, random selection of self assessment cases for audit was done every year. It was specified in the law that the FBR has the power to select cases for audit on random basis. Ever year a scheme of self assessment was announced by the board through an income tax circular. On the basis of this scheme, the random ballot was conducted for selection of cases for total audit. In past, random selection of cases for audit was named as total audit, detailed scrutiny and random balloting. Although there is no exclusive provision in the Income Tax Ordinance 2001 or the new Finance (Amendment) Ordinance, 2009 to select the cases through random balloting. However, to avoid the controversy or litigation regarding the subjective selection of cases by the commissioner, the FBR probably have thought it as a better option to select the cases through random ballot to provide a uniform treatment for all the taxpayers whose cases would be selected. Since computer balloting does not involve any human element therefore, it was assumed that the taxpayers whose cases would be selected might not challenge the selection. They said that some registered taxpayers have also contested cases for audit selected under amended section 177 of the Income Tax Ordinance 2001 through Finance Amendment Ordinance. The section 177 deals with the procedure for selection of cases for audit. The department was of the view that the cases could be selected retrospectively under section 177 of the Finance Amendment Ordinance. The department has opined that the application of tax laws could be done retrospectively for selection of cases for audit for the past tax years. On the other hand, legal experts have contested that the cases could only be selected prospectively under amended section 177of the Finance Amendment Ordinance. They observed that the amendment in section 177 through Finance Amendment Ordinance is not a procedural amendment, but a substantive amendment. Recently, Senate Standing Committee on Finance has directed the Federal Board of Revenue to obtain legal backing for carrying out income tax audit of registered taxpayers through random balloting or parameters by introducing a major amendment in the Income Tax Ordinance 2001.

A new section ie 214C (Selection for audit by the Board) in the Income Tax Ordinance has been proposed in the Ordinance 2001. According to the proposed section, the Board may select taxpayers or classes of taxpayers for audit of income tax affairs through computer ballot which may be random or parametric as the Board may deem fit. When contacted, official sources explained that the board can exercise the provisions of section 214 of the Income Tax Ordinance 2001 for random selection of cases for audit. The corresponding provisions are available in the Sales Tax Act and Federal Excise Act. Under section 214, all income tax authorities and other persons employed in the execution of this Ordinance 2001 shall observe and follow the orders, instructions and directions issued by the Board. The administrative instructions could be used for implementation of the random audit of the selected persons. The board's instructions have ample powers to direct the concerned officials for implementation of audit. The board's directives are binding upon the field formations except adjudication process and such instructions could be used for audit purposes. The administrative instructions of the FBR have overriding effect and board can issue any kind of instructions to the field office for composite audit of sales tax and income tax. Sources said the main feature of the computerised random balloting was that 5 percent cases of corporate and AOPs were selected randomly without any criteria and parameters. Only those cases were selected for random balloting, who have filed both the income tax and sales tax returns. Out of 921 selected units, 468 cases falls within the category of companies, whereas 453 cases of AOPs were selected for audit for Tax year 2008. Under the random balloting, taxpayers were selected for audit in two different categories of corporate cases and AOPs (Association of Persons). Presently, a total number of 42148 companies were registered both for income tax and 9871 companies for sales tax purposes. Because of the composite audit, only those companies were included draw, which are registered both for Income and sales taxes. The number of these companies come to 9365 and 5 percent of these companies were selected by the computer balloting. Similarly, 146594 AOPs are registered in income tax. Following the same pattern of composite audit, 9034 AOPs paying both income tax and sales tax are included for 5 percent computerised selection of audit. The total number of companies and AOPs were selected for audit will remain less than one thousand out of the total taxpayers of 2.75 million (NTN holders). Thus the audit will cover only less than 0.04 percent of total taxpayers of the country.
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