Pre-announcement of audit parameters: FBR opposed to USAID tax advisor's proposal

The Federal Board of Revenue (FBR) has not agreed to a proposal of the Tax Administration Advisors of the United States Agency for International Development (USAID) to pre-announce audit parameters for the registered taxpayers. Sources told Business Recorder here on Thursday that the Competitiveness Support Fund (CSF) Advisors have submitted a report on audit to the FBR.
The CSF is a joint initiative of the Ministry of Finance and the United States Agency for International Development (USAID) established to reposition the Pakistan's economy on a more global competitive footing. The CSF Tax Administration Advisors are assisting the FBR in smooth implementation of tax administration reforms in Pakistan. The CSF advisors are also preparing different reports for the FBR on reforms in the key areas including audit.
According to the report of the Tax Administration Advisors, it has been recommended that the pre-announcement of audit parameter, however, the FBR has not approved the proposal as a policy matter. The pre-announcement of income tax and sales tax audit parameter is not admissible under the tax laws. On the other hand, the FBR has agreed to announce following parameters in addition to any other parameters to be applied for ensuring better compliance: One, in-complete declarations; two declarations not furnished by the due data and declarations not furnished by the taxpayers.
As per memorandum of meeting between the FBR and the CSF advisors, the pre-announcement of audit parameters was not approved as a policy matter of the FBR. The report of the CSF Advisors on audit revealed that in all developed countries, the selection of cases for audit is based on risk assessment, which in turn is possible due to the factors, including use of common identifier in all economic transactions; completeness of taxpayer's profile; information sought from taxpayers in the declarations (to be used for risk assessment); completeness of the tax declarations; availability of third party information and business/trade/industry benchmarks. However, in addition, the concept of randomly selecting cases for audit is also practised to keep a check on cases which escape the risk assessment for any reason.
To start with, it is not an easy job for any tax administration. Even the criterions used by one tax administration could not be used blindly by another. In fact, each tax administration has to develop its own set of such criterions based over input of the results of audits conducted keeping in view their own legislations and the prevalent tax culture among the masses. In Pakistan, the selection of cases based on risk assessment has not yielded the desired results for want of the pre-requisites for risk assessment listed above and in particular deficient income tax return forms (which do not provide much information to carry out risk assessment) coupled with furnishing of in-complete tax declarations by the taxpayers. Further, the stress always has been on the taxpayers deriving Income from Business, thus ignoring all other category of taxpayers for the purposes of audit.
Under the given circumstances, where all necessary tools for selecting a right case based on risk assessment are not available with the tax administration coupled with the prevailing negative perception of audit, to start with it is desirable to find other means of conducting audit, which not only results into a positive perception building about taxpayers' audit but also improve the level of compliance. Accordingly, it is proposed to make a random selection of cases for audit from all categories of taxpayers deriving income from any source. The Commissioner to conduct audit of cases, where the declared income appears to be highly understated or previous audit results indicate that the taxpayer is habitually a non-compliant person or legal issues are involved resulting into misclassification of income or incorrectly applying the provisions of law and select cases for desk audit based on risk assessment on certain specific issues and if warranted for further detailed audit. The cases can be selected for desk audit based on trade/industry/sector bench marks and selection of cases for desk audit on certain specific issues.
The selection of cases for desk audit on certain specific issues will not create any hue and cry by the taxpayers as it would be very specific and restricted to an enquiry as to verification of certain claims. In many cases, estimated to be about 50 percent, the desk audit may not result into any amended assessment, which will send a positive message that taxpayer's desk audit is no more an harassment, report of the CSF Advisors on audit added.