1 Audit, Inquiry, & Investigation under Sales Tax Act 1990 Adnan Mufti 10 November 2015 Karachi Tax Bar Association

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Audit, Inquiry, & Investigation under Sales Tax Act 1990

Adnan Mufti

10 November 2015

Karachi Tax Bar Association

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Overview Basic Scheme of Audit

Inquiry, Investigation, & Audit Defined

Access to records, documents [Section 25]

Adjudication / Assessment without Audit, Inquiry or Investigation.

Independence of Section 25 from Section 72B

Powers of the Directorate General of Intelligence & Investigation [DGII]

Manual Selection of Cases for Audit

FBR’s Performance on Audit Proceedings

Audit Policy 2015

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Overview (cont…) Access to Stocks & Records placed at Business Premises [Section 38]

Powers to Summon Persons [Section 37]

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Basic Scheme of Audit

Sales tax is a value-added tax, grounded in un-supervised self-assessment scheme. The taxpayer assesses his tax and deposits it alongwith the sales tax return.

The tax regulators monitor this self-assessment system through neutral and impartial tool of audit under Section 72B and Section 25.

Once the case of a taxpayer is selected for audit under Section 72B or Section 25, the return is closely scrutinized. On completion of audit, an assessment order is passed against the taxpayer if any of the grounds under section 11 are attracted in the case.

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Audit – a tool for deterrence and not for revenue generation

“A formal examination of an individual's or organization's accounting records, financial situation, or compliance with some other set of standards.”

[Black Law Dictionary – 9th Edition] “Audit is a tool which strategically monitors the regime of sales tax and primarily geared to decipher tax evasion from amongst the pool of taxpayers. It is a departmental surveillance tool for sniffing out tax that has gone unpaid.”

[LHC judgment reported as PTCL 2014 CL 726]

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Inquiry

“Inquiry is the aiming at or discovery of truth by question, either formal, verbal interrogation, or a recourse to the proper means and sources of knowledge when the object has been shaped into a question or problem for solution.”

[Advanced Law Lexicon Book 2, 3rd Edition 2005]

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Investigation

“Investigation means search for material and fact in order to find out whether or not an offence has been committed.”

“Investigation is not used of any physical tracking, but of the patient inquiry into matters of science or knowledge along a strict path, and as it were, step by step. The subject of investigation, like that of examination, and unlike that of search, is never absolutely unknown, but it is always partially so.”

[Advanced Law Lexicon Book 2, 3rd Edition 2005]

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Step One

The Commissioner can only call for any records maintained under the STA or any other law, for e.g., Income Tax Ordinance 2001 or Companies Ordinance 1984 lying either under possession of the taxpayer or his agent.

The scope of Section 25 was broadened in the Year 1999. Provincial ST laws have identically copied the broadened scope.

In case where such records are maintained electronically, the Commissioner will authorize the officer of the Inland Revenue to have access to such electronically maintained record.

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Access to records, documents [Section 25]Step Two

The authorized officer IR can conduct audit, once in a year, for the particular tax period on the basis of the records obtained under Section 25(1) of the STA.

In exceptional circumstances and under the specific instructions in writing by the Commissioner, a particular registered person can be re-audited for that financial year or within that financial year.

Selection of case for audit is not allowed in second year consecutively. [STGO 3/2014]

Atleast 15 days notice should be given to the taxpayer before conducting audit.

Audit should be completed within 3-4 days unless more time is granted by Assistant Commissioner with reasons for extension.

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Step Three

After completion of the audit, the authorized officer IR obtains the explanation from registered person on the issues raised in the audit through show cause notice.

An order under Section 11 of STA is passed.

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Adjudication / Assessment without Audit, Inquiry or Investigation

In a recent decision, the Lahore High Court has held that the investigation made into the case of the registered person can only be carried out through the process prescribed under Section 25, 38 and 72B of the Sales Tax Act, 1990.

According to the above dictum, there is no other mechanism under the Act to pick a case for adjudication under Section 11 of the Act.

In other words, show cause notice issued without audit having been conducted would not stand in the eyes of law.

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Independence of Section 25 from Section 72B During last few years, intense litigation was witnessed by the taxpayers whereby

manual selection of audit by Commissioners was challenged before the Court of law.

Taxpayers viewpoint !

In the case of Chenone Stores vs. FBR, the Lahore High Court held that only FBR can select audit cases through balloting and Commissioner cannot select cases on his choice.

In the case of Warid Telecom vs. Commissioner IRS, the Islamabad High Court held that Section 25 and Section 72B were independent provisions and the Commissioner IRS can exercise his authority independently.

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Manual Selection of Cases for Audit

In General, Commissioner can select audit upto 10% of cases fall under its jurisdiction. [STGO 3/2004]

For the tax periods July 2013 to June 2014, the Commissioners are also allowed to select cases for audit between range from 5% to 10% of cases falling under its jurisdiction on the basis of desk audits or risk profiling or both.

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Powers of the Directorate General Of Intelligence & Investigation [DGII]

DGII cannot undertake any audit of any registered persons except under specific written authorization by FBR

In case of tax evasion, DGII can pass on the information to the concerned Commissioner who will conduct the audit. During such audit, staff of DGII can participate.

STGO 03/2004

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FBR performance on Audit Proceedings

Federal Board Revenue recovers tax of Rs.47,585 per audit case selected for Tax Year 2013 [Rs. 2,125 in Year 2012] – [FBR Review Issue 32]

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Audit Policy 2015FBR has issued Audit Policy 2015 applicable to taxpayers falling, inter alia, under Sales Tax and Federal Excise Duty for affairs for the tax periods from July 2013 to June 2014.

7.5% cases were selected by FBR for audit through random computer ballots

Commissioners are also allowed to select cases for audit between range from 5% to 10% of cases falls under its jurisdiction on the basis of desk audits or risk profiling or both. In this regard, FBR has defined the term ‘risk profiling’ as follows:

“A strategy for audit selection based on identification of taxpayers who are the most likely to be non compliant, through risk scoring techniques, data mining, extrapolating trends, matching of data acquired and developed from information and intelligence from third party sources and other such

methods.”

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Audit Policy 2015

All notices, letters and orders issued to the taxpayers will contain specific bar codes. Any notice issued or communication made otherwise shall not be construed as valid.

Tax department will communicate to the taxpayer the discrepancies found in the audit for his explanation before finalizing the audit

Cases selected during a financial year would be disposed of during the same year.

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Audit Policy 2015

The following cases will be excluded from selection of audit:

Null Return Filers

All cases of Steel Melters, and Steel Re-rollers who are paying sales tax under the Sales Tax Special Procedure Rules, 2007

All cases of Commercial importers conducting no business other than commercial import business and who are paying 3% Value Addition Tax

All cases already taken up for audit for Tax Period(s) July 2013 to June 2014

All cases already selected for audit for Tax Period(s) July 2012 to June 2013

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Audit Policy 2015Issues

After reviewing the above audit policy, we understand the following issues may arise:

The Audit Policy does not discuss the issues faced by the Commissioner Inland Revenue in the past in cases where companies such as insurance, banking, sugar, non-resident etc. followed special year but tax authorities conducted audit in the light of selection, i.e., on the basis of financial year.

In contrary to past years, FBR has specified that balloting for selection of case may be conducted more than once in a year, whenever required by FBR. This may end up selection of a case twice in a financial year.

In the past, Commissioner merely informed the taxpayers about case selection for audit. However, Commissioner will now inform taxpayer about the basis / reasons for such selection. This needs to be implemented in letter and spirit.

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Access to Stocks & Records placed at Business Premises [Section 38]

The authorized officer IR can conduct any inquiry or investigation under Section 38 of STA on the basis of the records obtained under Section 25(1) of the STA where tax fraud or tax evasion occurred.

Such records may be required for any inquiry or investigation in any tax fraud committed by him or his agent or any other person.

The authorized officer can freely access to stocks and records (belonging to any registered person or a person liable for registration) for inspection and can take such records into custody.

The registered person, his agent, or any other person are bound to answer any question or furnish such information or explanation.

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Issues

•Is it necessary to inform person whose premises are being visited?

The basis for the visit need not be shared with the person whose premises are to be visited but must be on the department’s files for production in proceedings that may be instituted by the said person.

•Is department required to produce any authorization before conducting any such inspection?

The officer designated to conduct the visit must be authorised in that regard by the Board or the Commissioner and must produce a copy of the authorization before commencing the inspection.

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Issues

•Can department request any record or information during such inspection?

The officer has no power in plain sight or that has not been voluntarily made available. No special requirement of a particular document may be made during such inspection.

•Can tax official take into custody any record during such inspection?

The record and document taken into custody must be against a receipt signed by the officer.

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Powers to Summon [Section 37](1) Any officer of Inland Revenue shall have powers to summon any person whose

attendance he considers necessary either to tender evidence or to produce documents or any other thing in any inquiry which such officer is making for any of the purposes of this Act.

(2) Any person summoned under sub-section (1) shall be bound to attend either in person or by an authorised agent, as the officer of Inland Revenue may direct;

Provided that a person who is exempted from personal appearance in a court under section 132 and 133 of the Code of Civil Procedure (Act V of 1908), shall not be required to appear in person.

(3) Any inquiry before an officer of Inland Revenue shall be deemed to be a judicial proceeding within the meaning of section 193 and 228 of the Pakistan Penal Code (Act XLV of 1860).

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Is there any difference between Sections 38 & 40?

Section 38 Section 40Authority from Board or Commissioner MagistratePlace Premises where records and

stocks are placed. Any place

Purpose Whether proceedings is pending or not.

OR To check the records are maintained are in accordance with STA. To verify the stocks declared with tax department.

For pending proceedings only.

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Is there any difference between Sections 38 & 40?

Section 38 Section 40Binding on Registered person or Person

liable to register or their agents Department of direct or indirect taxes, any other Government Department, local bodies, autonomous bodies, corporations or such other institutions

Every person

Mandatory Requirements No as such In accordance with the relevant provisions of the Code of Criminal Procedure, 1898.

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1 Audit, Inquiry, & Investigation under Sales Tax Act 1990 Adnan Mufti 10 November 2015 Karachi Tax Bar Association