After its inability to settle about 310,000 tax audit cases through proper scrutiny, the Federal Board of Revenue (FBR) has started disposing of the cases that has remained pending for up to six years in haste, which could cause losses to the exchequer.
The FBR’s field formations remained open on Saturday and Sunday to dispose of those audit cases which the government had decided to close in April this year to clear the backlog, according to the FBR’s internal correspondence and sources in the tax machinery.
About 310,000 audit cases had remained pending for the last three to six years due to lack of human resources capacity. In order to clear this backlog, the FBR decided to close all the cases on the basis of certain parameters instead of conducting a comprehensive audit.
Sources said the tax audit cases of some high-profile people and their companies were also closed at the weekend under the now defunct Section 214D of the Income Tax Ordinance 2001.
The FBR’s official version was awaited on whether all the laid-down procedures were followed while closing the high-profile cases, particularly in Karachi. “The FBR has decided not to close about 17,500 cases where it has some information about the taxpayers,” said a member of the FBR.
In April this year, the Pakistan Tehreek-e-Insaf (PTI) government had decided to close over 310,000 tax audit cases that had been automatically selected from 2014 to 2017 due to the failure of taxpayers to timely file tax returns and pay due taxes.
The FBR had a chance to get these people netted but it opted to close the cases. For tax year 2020, the FBR has so far received less than 1.1 million income tax returns, which are 36% less than the comparative period of previous year. These are also 63% less than the 2.94 million returns filed in tax year 2019.
The extended deadline to file the returns is December 8, which the FBR has said would not be extended further.
Individuals, associations of persons, and companies are beneficiaries of the FBR’s decision to close the audit cases that is rooted in its incapacity to go after hundreds of thousands of people.
An April 2020 notification stated, “If all values in the parameters, as per the system, are matched with the declaration in income tax returns and/or wealth statement or otherwise, their values are returned nil and the field office does not have any third-party information that audit may be concluded by accepting the declared version.”
These audit cases had automatically been selected under Section 214D of the Income Tax Ordinance 2001. In 2015, the Pakistan Muslim League-Nawaz (PML-N) government had introduced Section 214D in the ordinance to automatically select those persons and companies for audit that did not file income tax returns within due or extended dates or did not pay taxes.
However, the then government did not build the FBR’s capacity, resulting in hundreds of thousands of pending cases.
Subsequently, the government abolished Section 214D through the Finance Act 2018.
Only those cases are supposed to be closed where there are no withholding tax transactions, no purchase of properties, vehicles, utility expenses, rent expenses, and no bank information is available.
But the FBR’s field formations could not make progress on the 310,000 cases and as of end-October roughly 270,000 cases remained unattended, according to the sources.
Sources said that the unusual haste in closing the cases at the weekend could result in loss of revenue where there were disparities in data and withholding tax transactions had also been carried out.
But a senior FBR official said that the FBR could still reopen the closed cases by invoking Section 122(5), if it found any evidence.
Some of the taxpayers had challenged the FBR’s decision to conduct their audit under Section 214D in the Lahore High Court. The petitioners questioned the FBR’s decision to send them audit notices after deletion of Section 214D of the law.
The LHC single-judge bench, in its November 13 judgement, wrote that “no notices subsequent to the date of repeal of Section 214D of the Ordinance 2001 could have been issued to the petitioner since no such power vested in the officer who has issued the notices”.
More importantly, the FBR’s lawyer did not contest this in the court, which was evident from the court judgement.
“This preposition has not been rebutted by the counsel for the respondents as undoubtedly through the Finance Act 2018 Section 214D was omitted and hence the power was not available to be exercised by the officers subsequent to the omission,” said the court order.
In addition to 270,000 outstanding audit cases under Section 214D, the FBR is also conducting audit of about 41,000 cases selected either through computer balloting or by the commissioners inland revenue on the basis of information.
Under Section 214C, the FBR has the legal mandate to select cases for audit of income tax affairs through computer and random balloting. But the FBR keeps the parameters confidential.
Published in The Express Tribune, December 2nd, 2020.
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