Filing of income tax return: DG IAIR challenges legality of section 114

An analysis by the Directorate-General of Internal Audit Inland Revenue (IAIR) has challenged the legality of section 114 (filing of income tax return) of the Income Tax Ordinance 2001, which has not specifically prescribed the exact documents, annexures and statements to be filed with the returns.
Another astonishing fact has been brought up in the report that many companies have changed their status to association of persons (AoP) to avoid heavy maintenance of record. Sources told Business Recorder here on Tuesday that the sub-section (2) of section 114 of the Income Tax Ordinance, 2001 provides that a return (of income tax) shall be in prescribed form and shall be accompanied by such annexures, statements or documents as may be prescribed.
But it is the plights of the FBR that such documents have not so far been comprehensively prescribed in the relevant provisions of the Ordinance 2001. At the same time, the department has not yet been able to conduct 100 percent returns desk-audited for issuance of notices under section 120(3) of the Ordinance 2001 to taxpayers whose returns are incomplete within prescribed time limit. A huge departmental action of statutory audit has become unreliable, as the department does not have means to assess the correct volume of business.
On the other hand, a large number of private limited companies have gone under liquidation and reduced status to association of persons (AoPs) to avoid the hassle of record maintenance and the duty as a withholding agent.
The report said that the mindset has not changed, as the taxpayers'' confidence in the system is non-existent. It is very easy to conceal the business as unless the taxpayer himself chooses to get enrolled to tax, state does not have the means to detect. A few years ago, it was made compulsory for banks to provide information in respect of certain cases involving major transactions, but the efforts failed due to lack of proper homework before drafting the law.
The study said that the FBR has never been able to get spot-verification of an ongoing business due to obvious reason of pressure from business groups. This led to winding up of very important checks and balances. With the advent of Tax Administration Reforms and re-writing of taxing statutes, things have gone even worse. Corresponding increase in voluntary compliance has not come up. In the current decade, economies throughout the world have grown sharply but unfortunately boom in information technology has delivered very little in comparative terms. Secondly, the tax collection as a percentage of GDP continues to show a dismal position in the region. The crux of tax reforms showed that audit of very few cases has been conducted which not only has resulted in minimal detection of loss of revenue but also has tarnished the concept of deterrence. Secondly, jurisdictional changes are frequent. Thirdly, access to records became exceedingly difficult. Fourthly, the manual work in tax departments still continues. Fifthly, access to data base is not available to various users of the tax department. Sixthly, taxing statutes have become more complex, and require amendments. Seventhly, office procedures have become complicated, instead of becoming simpler. Eighth, office accommodation is inadequate and other logistic issues have not been resolved.