Karachi, August 8, 2024: In a bid to enhance tax compliance, the Federal Board of Revenue (FBR) has introduced significant changes to the sales tax audit process. The new measures, outlined in Sales Tax Circular No. 3, aim to make audits more targeted and effective.
The FBR has revamped Section 25 of the Sales Tax Act, 1990, granting Commissioners broader authority to initiate audits. Going forward, the decision to audit a taxpayer will be based on a comprehensive analysis of records, including sales tax and Federal Excise Duty returns, income tax filings, withholding statements, financial statements, and third-party information. This strategic approach is intended to ensure that audits are conducted based on solid evidence rather than arbitrary selection.
A key departure from previous practices is the requirement for Commissioners to provide clear and specific reasons for selecting a taxpayer for audit. Mere verification of input tax, output tax, refund claims, or compliance with legal provisions will no longer suffice. Instead, the FBR will focus on identifying specific risk factors that warrant closer scrutiny. This move aims to enhance transparency and fairness in the audit selection process, ensuring that only those taxpayers who exhibit suspicious activity are subject to audits.
The tax authorities have also clarified that the Commissioner’s power to order an audit is independent of the Board’s authority under Section 72B of the Sales Tax Act. This means that the FBR can initiate audits without relying solely on the provisions of Section 72B. This dual mechanism is expected to streamline the audit process and reduce delays caused by bureaucratic hurdles.
Once an audit is initiated, the officer conducting the audit will have the power to examine all relevant records and documents. If necessary, the officer can issue an order under Section 11E after providing the taxpayer an opportunity to be heard. This ensures that taxpayers have a chance to present their case and address any discrepancies identified during the audit. In cases where taxpayers fail to cooperate by providing required information or documents, the officer can resort to best judgment assessments. This provision acts as a deterrent against non-compliance and encourages taxpayers to be forthcoming with their records.
The FBR’s move is seen as a strong signal of its intent to crack down on tax evasion. By introducing these measures, the tax authority aims to improve tax collection and ensure a level playing field for all taxpayers. The targeted audit approach is expected to enhance voluntary compliance as taxpayers become more aware of the increased scrutiny.
Overall, the FBR’s new audit measures represent a significant step towards strengthening Pakistan’s tax infrastructure, with the dual goals of enhancing revenue collection and promoting compliance among taxpayers.
