Incomplete risk parameters: LHC suspends FBR’s audit policy on transparency concerns
Haphazard selection of companies for audit creates unmanageable backlog
The court set aside the tax audit notice that the FBR had served on Treet Corporation. However, it did not declare the Audit Policy 2016 unconstitutional. PHOTO: FILE
ISLAMABAD:
As the number of pending audit cases increases to an unprecedented 925,000 due to low priority, the Lahore High Court (LHC) has barred the federal government from enforcing the new audit policy because of transparency concerns in the selection of cases.
The LHC’s judgement in the case of Treet Corporation Limited - the manufacturers of razors, blades and holders of high stakes in pharmaceuticals -once again highlights the administrative challenges that have rendered the taxpayers’ audit ineffective.
The audit arguably remains the weakest area of the Federal Board of Revenue (FBR), which has also undermined the drive aimed at broadening the tax base.
“The (audit) policy cannot be put into effect until the FBR frames risk parameters on the basis of which the selection of audit is to be made,” said a March 21 judgement of the LHC.
The court also set aside the tax audit notice that the FBR had served on Treet Corporation. However, the court did not declare the Audit Policy 2016 unconstitutional.
The judgement suggests that the FBR’s ‘paradigm shift in policy’ could not withstand the court’s scrutiny due to lack of transparency in the selection of audit cases.
The FBR had claimed that unlike the past, the 2016 policy would focus on parametric selection and a risk-based approach. In January last year, the FBR had selected Treet for a sales tax audit for tax year 2015 on the basis of Audit Policy 2016. The company had been picked for audit due to “more than 30% sales to unregistered persons”.
The petitioner pleaded before the LHC that the FBR did not pay heed to the concerns raised by various courts over the selection of audit cases.
The company pointed out that since no risk parameters had been provided by the FBR, it would give unbridled and unstructured powers to the FBR officers.
“The FBR cannot proceed with the selection of audit and a computer ballot until risk parameters have been laid down so as to form an integral part of the Audit Policy 2016,” the petitioner argued.
State of audit affairs
Presently, about 925,000 audit cases involving billions of rupees worth of tax demand are pending before the FBR, said sources in the tax machinery.
Owing to this backlog, the FBR could not hold balloting to select audit cases for tax year 2016, the sources added. The balloting was planned for November last year.
Sources said from July to January of the current fiscal year, the FBR could settle only 27,000 cases, generating Rs35 billion in tax demand.
However, every month 20,000 to 25,000 new audit cases are added to the backlog.
To handle that, there is no permanent member audit in the FBR. After retirement of Rehmatullah Wazir earlier this month, the FBR has given additional charge of member taxpayer audit to the member information technology.
Audit cases are selected under three sections of the Income Tax Ordinance 2001 -177, 214C and 214D.
One of the reasons for the large number of pending cases is the automatic selection of a case for audit if a taxpayer does not file his income tax return. In order to address this issue, the audit wing had proposed to delete Section 214D in the last budget. But the government did not agree.
In 2016, the FBR’s field units were able to finalise about 39,000 cases whereas this number dropped to about 27,000 cases by January this year. This puts a question mark on its strategy to handle the audit function.
Income tax and sales tax return filers are complaining about harassment by field units while conducting the audit where the officers “request for every piece of information”, according to people having knowledge of the matter.
Published in The Express Tribune, March 25th, 2018.
As the number of pending audit cases increases to an unprecedented 925,000 due to low priority, the Lahore High Court (LHC) has barred the federal government from enforcing the new audit policy because of transparency concerns in the selection of cases.
The LHC’s judgement in the case of Treet Corporation Limited - the manufacturers of razors, blades and holders of high stakes in pharmaceuticals -once again highlights the administrative challenges that have rendered the taxpayers’ audit ineffective.
The audit arguably remains the weakest area of the Federal Board of Revenue (FBR), which has also undermined the drive aimed at broadening the tax base.
“The (audit) policy cannot be put into effect until the FBR frames risk parameters on the basis of which the selection of audit is to be made,” said a March 21 judgement of the LHC.
The court also set aside the tax audit notice that the FBR had served on Treet Corporation. However, the court did not declare the Audit Policy 2016 unconstitutional.
The judgement suggests that the FBR’s ‘paradigm shift in policy’ could not withstand the court’s scrutiny due to lack of transparency in the selection of audit cases.
The FBR had claimed that unlike the past, the 2016 policy would focus on parametric selection and a risk-based approach. In January last year, the FBR had selected Treet for a sales tax audit for tax year 2015 on the basis of Audit Policy 2016. The company had been picked for audit due to “more than 30% sales to unregistered persons”.
The petitioner pleaded before the LHC that the FBR did not pay heed to the concerns raised by various courts over the selection of audit cases.
The company pointed out that since no risk parameters had been provided by the FBR, it would give unbridled and unstructured powers to the FBR officers.
“The FBR cannot proceed with the selection of audit and a computer ballot until risk parameters have been laid down so as to form an integral part of the Audit Policy 2016,” the petitioner argued.
State of audit affairs
Presently, about 925,000 audit cases involving billions of rupees worth of tax demand are pending before the FBR, said sources in the tax machinery.
Owing to this backlog, the FBR could not hold balloting to select audit cases for tax year 2016, the sources added. The balloting was planned for November last year.
Sources said from July to January of the current fiscal year, the FBR could settle only 27,000 cases, generating Rs35 billion in tax demand.
However, every month 20,000 to 25,000 new audit cases are added to the backlog.
To handle that, there is no permanent member audit in the FBR. After retirement of Rehmatullah Wazir earlier this month, the FBR has given additional charge of member taxpayer audit to the member information technology.
Audit cases are selected under three sections of the Income Tax Ordinance 2001 -177, 214C and 214D.
One of the reasons for the large number of pending cases is the automatic selection of a case for audit if a taxpayer does not file his income tax return. In order to address this issue, the audit wing had proposed to delete Section 214D in the last budget. But the government did not agree.
In 2016, the FBR’s field units were able to finalise about 39,000 cases whereas this number dropped to about 27,000 cases by January this year. This puts a question mark on its strategy to handle the audit function.
Income tax and sales tax return filers are complaining about harassment by field units while conducting the audit where the officers “request for every piece of information”, according to people having knowledge of the matter.
Published in The Express Tribune, March 25th, 2018.