Finance Bill 2024 Revamps Sales Tax Audit

Finance Bill 2024 Revamps Sales Tax Audit

In a significant overhaul of the sales tax audit process, the Finance Bill 2024 proposes a complete revamp of Section 25 of the Sales Tax Act 1990.

This amendment aims to enhance the efficiency and effectiveness of tax audits, addressing existing legal interpretations and expanding the powers of tax authorities.

Currently, Section 25 primarily deals with the access of tax authorities to records and authorizes Inland Revenue officers to conduct audits based on records obtained from registered persons by the Commissioner. The Constitutional Courts have ruled that a registered person’s case cannot be selected for audit without first obtaining their records. To counteract these rulings, the Finance Bill proposes to remove the requirement to call for records before selecting a case for audit. The Commissioner will now be authorized to direct an Inland Revenue officer, not below the rank of Assistant Commissioner, to carry out an audit based on recorded reasons.

Key Changes in Audit Selection and Conduct

Selection for Audit

The proposed changes stipulate that when the Commissioner selects a registered person for audit, the following protocols must be observed:

1. Communication of Reasons: The Commissioner must communicate the reasons for selection to the registered person.

2. Basis of Selection: The reasons should be based on a thorough scrutiny of records, including sales tax and federal excise returns, income tax returns, withholding statements, financial statements, or third-party records.

3. Risk-Based Selection: Selection should not be based solely on verifying input tax, output tax, refund claims, and compliance without identifying specific risk factors.

4. No Right to Hearing: The Commissioner is not legally obligated to provide the registered person an opportunity to be heard before directing the audit.

Conduct of the Audit

The proposed amendments outline the following procedures for conducting audits:

1. Record Requests: The audit officer can call for any records or documents from the registered person, including those maintained under the Act, related rules, or any other applicable laws.

2. Third-Party Inquiries: The officer is authorized to conduct inquiries from third parties to obtain necessary information or documents.

3. Six-Year Limit: Records cannot be requisitioned after six years from the end of the financial year they pertain to.

Additionally, the current provision limiting audits to once a year is set to be removed, allowing for more frequent audits if deemed necessary.

Investigative Audits and Tax Fraud

The new section authorizes audit officers to conduct investigative audits under Section 25AB of the Act, with the Commissioner’s approval, if there is suspicion of tax fraud. The definition and scope of tax fraud are proposed to be significantly broadened.

Assessment and Penalties

After completing an audit, the audit officer may issue an order for the assessment of unpaid or underpaid tax or erroneously refunded amounts as per Section 11E of the Act. If the registered person fails to produce the requested records, the officer can make a “best judgement assessment” under the newly proposed Section 11D.

Despite these extensive changes, the provisions for voluntary deposit of short-paid sales tax before and during audit proceedings, along with related relief in penalties, remain unchanged.

The proposed revamp aims to strengthen the audit framework, ensuring more robust compliance and reducing opportunities for tax evasion. This comprehensive restructuring reflects the government’s commitment to enhancing fiscal discipline and improving revenue collection mechanisms.