Karachi, November 9, 2024 – Pakistan’s Income Tax Ordinance, 2001, have set a definitive limit on how long the Commissioner Inland Revenue (CIR) may demand audit records from taxpayers. As per the latest update for the tax year 2024-25, Section 177 stipulates that the CIR may only request records for audit within six years from the end of the relevant tax year.
In an effort to streamline and bring clarity to the audit process, Section 177 was revised to address the conduct of audits, outlining specific limitations and procedural requirements that the CIR must follow. The updated legislation explicitly states that the CIR is not allowed to demand audit records after a six-year period, effectively putting a timeframe on the audit authority’s power to investigate past returns.
Under the provisions, the CIR has the authority to request any relevant records or documents from taxpayers within the six-year window. The law specifies that this may include books of accounts maintained electronically, in which case the taxpayer must provide the CIR or authorized officers with full access to the electronic system on which such data is stored. The CIR may also require hard copies of pertinent information for examination. This streamlined access requirement aims to facilitate efficient auditing within the stipulated timeframe.
According to the ordinance, CIR powers to access records and initiate audits are subject to two primary conditions: firstly, the CIR must document the reasons for requesting taxpayer records in writing, and secondly, these reasons must be communicated to the taxpayer. These clauses were incorporated to enhance transparency and ensure taxpayers understand the basis for an audit. CIR is therefore obligated to act within a framework of documented justification when calling records.
Additionally, should a taxpayer fail to provide the necessary documents or offer an incomplete record, the CIR is empowered to assess taxable income using “sectoral benchmark ratios,” which are standard ratios based on comparable cases within the industry. This provision was designed to ensure that the CIR can determine an approximate income even in cases where full records are not accessible. The CIR may calculate income by using these benchmarks when records are insufficient or explanations lack detail.
In the course of conducting audits, the CIR is also authorized to use electronic means, including video links, as outlined in subsection 2A of Section 177. This flexibility supports the modernization of audit processes, making remote audits feasible. This amendment enables the CIR to complete audits efficiently by leveraging digital tools.
Once an audit is complete, the CIR must compile a comprehensive audit report, incorporating any explanations provided by the taxpayer in response to issues identified during the audit. The report should present observations, findings, and any necessary adjustments to the assessment. However, before making any amendments to the assessment, the CIR must offer the taxpayer an opportunity to respond, thus ensuring fair treatment.
Moreover, the amendments clarify that a prior audit in a given tax year does not exempt a taxpayer from further audits in subsequent years if justified by reasonable grounds. This implies that CIR can continue to monitor taxpayers in the future as long as there is a legitimate reason.
The Federal Board of Revenue (FBR) also retains the right to assign external audit firms to assist in audits, including those specializing in cost management or forensic audits, which may delve deeper into financial records to detect irregularities. Such appointments can be made by the CIR on a case-by-case basis, allowing the CIR access to expert insights when needed.
Another key update to Section 177 is the formation of special audit panels, which may consist of Inland Revenue officers, chartered accountants, cost management experts, and international specialists appointed under agreements with the FBR. These special panels allow the CIR to conduct forensic audits or complex audits involving foreign expertise. The presence of a special panel with diverse expertise provides the CIR with additional resources to conduct more detailed audits.
To address any procedural gaps, the law specifies that if any member of the special audit panel is absent, the audit process can still proceed under the chairman’s oversight. This continuity clause ensures that an audit’s validity remains unaffected by the absence of a single panel member.
The law underscores that the CIR has independent authority under Section 177, free from constraints under Section 214C, further reinforcing that the CIR’s ability to conduct audits is comprehensive within the six-year limit. By establishing these boundaries, the ordinance seeks to balance the CIR’s power to ensure compliance with taxpayer protections against indefinite audit demands.
In conclusion, the amendment to the Income Tax Ordinance represents a significant move toward a more defined and accountable audit framework, limiting CIR authority to six years. By clarifying the procedures and introducing measures to safeguard taxpayer rights, the FBR and CIR aim to foster a transparent tax system with balanced powers and responsibilities.
