Selection of cases under Annual Audit Plan 2012-13: tax lawyers raise objections to risk-based parameters
Tax lawyers have raised serious objections to the risk-based parameters for selection of cases for audit under the proposed Annual Audit Plan 2012-13. Giving a detailed analysis of the Annual Audit Plan 2012-13, Waheed Shahzad Butt a prominent Lahore based-tax lawyer told Business Recorder here on Tuesday that the risk-based parameters for selection of cases for audit under the Annual Audit Plan 2012-13 as announced by the FBR needs to be looked into by considering the relevant tax-related issues.
Copyright Business Recorder, 2012
It included preceding tax years records/history including the past years assessment/order-in- original/order-in-appeal and their final outcome from higher appellate forums; financial Statements and other information filed along with the tax returns and details of payment of taxes including advance taxes and its crucial analyses.
The FBR should also take into account the general information about the tax affairs of the taxpayers; accounting policies and methodology (cash and/or accrual); Profit and Loss Account analyses and Balance Sheet trends, ratios and critical analysis.
Other areas need to be analysed included related/third party transactions; reconciliation of all fiscal statutes tax returns and review, analysis and comparison of industry information such as Industry surveys, rankings, statistics, ratios, forecasts, major industry issues, key performance indicators, Products, process and technology structure, profitability trend, taxable income to accounting profits, taxpayer's compliance history/trend, Routine transactions and non-routine transactions. The FBR has devised the following Risk based selection parameters for audit for corporate cases and non-corporate taxpayers:
For corporate taxpayer:
1. Imports in Customs differ/ from declared Imports in Sales Tax and/or Income Tax.
2. Output Tax is different from 16% & 21% (as the case may be) of Taxable Supplies.
3. Input Tax is different from 16% & 21% (as the case may be) of Taxable Purchases.
4. Total Output Tax minus Input Tax differs from Net Payment by 5 percent.
5. Output tax/ Input tax Ratio differs with Sector's Output tax/Input tax Ratio by 5 percentile points.
6. Gross Profit to Sales Ratio (Income Tax) differs with Sector ratio (Cases where gross profit growth is less by 2 percentile points as compared to Sectoral growth rate).
7. Net profit to Sales (Income Tax) declared ratio differs with sector ratio (Cases where net profit growth is less by 2 percentile points as compared to Sectoral growth rate).
8. Decline in Sales (Income Tax) is more than 10% as of last year.
9. Decline in Supplies (Sales Tax) is more than 10% as of last year.
10. Claim of overruled amount of refund under STARR related checks is more than 50% of the claim or Rs 2 million or above - overruling pertaining to following STARR related checks ie, Bill of Entry, Invoices, Returns, Shipping Bills, Supplier Status.
11. Claim of refund of Rs 2 million or above in Income Tax.
12. Persistent decrease in gross profit over last three years.
13. Persistent decrease in net profit over last three years.
14. Consistent decrease in output tax/input tax ratio over last three years.
15. Decrease in proportion of taxable supplies to total supplies in last three years by 10 percent in each year.
16. Continuously declaring declined income for the last three years.
FOR NON-CORPORATE CASES INCLUDING INDIVIDUALS & AOP:
1. Opening Balance not matching with closing balance of previous year.
2. Cost of Sales is more than 80% of total sales.
3. Cost of sales is less than 60% of total sales.
4. Net profit to sales ratio differs from sector ratio by 10%.
5. Percentage of expense to gross profit differs from sector ratio by 10 percent.
6. Gross profit to total sales ratio differs from sector ratio by 10 percent.
7. Total sales on Income Tax Returns differ from total sales from Sales Tax return by 10 percent.
8. Total sales declared in 'Sales Tax Return' differs from total Sales declared in Income Tax Return by 10 percent.
9. Continuously declaring loss for the last two years.
10. Continuously declaring declined income for the last two years.
11. Total supplies are less than previous year by 10%.
12. Output tax is less than the previous year by 5%.
13. Input tax is more than the previous year by 5%.
14. Output tax is different from 15% of taxable supplies.
15. Input tax is different from 15% of taxable purchases.
16. Output tax minus input tax differs from net payment by 5%.
17. Percentage of input/output ratio differs with sectors' ratio by 10 percent.
18. Refund claim is 5 percent more than previous year.
19. Export sales differ from value of export in customs data by 5 percent.
20. Import purchase differs from value of import in customs data by 5 percent.
He further suggested that to prevent huge revenue leakages through fake/flying sales tax invoices and the issuance of bogus refunds, detailed audit of new taxpayers, who disclosed heavy business transactions, at the start of their business. A lack of sufficient pre-registration checks is a critical reason why criminal/fraud elements have been able to get so many dummy business entities registered with relative ease.
Presently, sales tax is payable under the value-added tax (VAT) mode, whereby a taxpayer has to adjust sales tax input, which has paid to his supplier based on the invoice raised by his supplier, against the sales tax output payable on the supplies made by him to his customers. As online registration is the first step for a participant in the automated sales tax system, it is only reasonable to expect that due attention is paid to build effective checks in the system. Pakistan Revenue Automation Limited (PRAL) does not appear to have learned lessons from the ease with which dummy entities have been set up in the past, Waheed Shahzad Butt added.
The main objective behind the Audit Plan is to establish an effective tax audit system that will create deterrence to mis-declarations in the tax returns. Such a system is expected to contribute in developing a culture of compliance with tax laws over time that will help in improving the tax collections as well as improve the tax to GDP ratio.
Under the existing fiscal laws of Pakistan ie, Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005, there is a system of Universal Self Assessment that enables all the taxpayers to determine their tax liabilities by applying the relevant provisions of Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 on business transactions conducted by them. Under the present system of taxation, reliance is placed on the taxpayers to file accurate and reliable tax return without hiding any information or mis-declaration etc.
The purpose of tax audit is to ensure that declarations made by the taxpayers are accurate and reliable. Main objective of the tax audit is to create deterrence for under or incorrect declarations by the taxpayers. In order to ensure taxpayer's confidence on this system, the selection of tax payers to be audited will be done in a transparent and fair manner, using specially designed software, that ensure objectivity in the selection process. Such a process will also be adequately publicized and communicated to the taxpayers well before filing of annual tax returns rather than informing them after the completion of process of return filing. Ethically and professionally announcing audit plan for tax year 2011 after the complete of process of tax returns is not a fair move at the part of FBR, tax expert added.