How FBR Selects Cases for Sales Tax Audit

How FBR Selects Cases for Sales Tax Audit

Islamabad, January 28, 2025 – The Federal Board of Revenue (FBR) has officially issued the criteria for selecting cases for audit under the Sales Tax laws. These guidelines are outlined in Rule 44A of the Sales Tax Rules, 2006, which details the methodology and procedures for audit selection and conduct.

Key Provisions Under Rule 44A

1. Scope and Applicability: Rule 44A applies to the selection of cases for audit conducted by the FBR under Section 72B of the Sales Tax Act, 1990. It specifies the steps for selecting cases through a computer-based ballot, using both random and parametric selection methods for tax periods under review.

2. Steps for Audit Selection: The process of selecting cases for audit involves several critical steps:

o Data Utilization: The audit selection process incorporates data from all tax returns, whether filed electronically or manually.

o Exclusions from Audit: The FBR identifies specific persons or classes of persons to be excluded from the audit process each year. These exclusions are announced via the FBR’s web portal before the balloting process.

o Balloting Process: Cases excluded from the audit are removed from the dataset, and the remaining cases are subjected to computer-based balloting.

o Audit Percentage: For each tax period, a predetermined percentage of cases is selected for audit. This percentage is publicized annually through the FBR’s web portal prior to balloting.

o Publication of Results: Lists of selected cases are generated immediately after the computer ballot and uploaded to the FBR’s web portal.

o Audit Basis: The selection is based on the NTNs (National Tax Numbers) or CNICs (Computerized National Identity Cards) of taxpayers.

o Risk Parameters: For parametric audits, risk parameters—such as financial ratios, industry benchmarks, refund thresholds, and compliance history—are determined by the Board to identify high-risk cases.

3. Transparency Measures: The balloting process is conducted in the presence of representatives from Chambers of Commerce and Industry as well as Tax Bar Associations to ensure transparency.

4. Procedure for Selected Cases: Once cases are selected, the concerned Commissioner of Inland Revenue issues an intimation letter to taxpayers. The letter includes:

o The section under which the selection is made.

o The tax period(s) under audit.

o Whether the selection was random or parametric.

o Compliance requirements, such as providing books of accounts, supporting documents, computerized data, or attested hard copies.

5. Audit Examination and Reporting: After reviewing the taxpayer’s books, records, and data, discrepancies (if any) are shared with the taxpayer in the form of an audit report. Taxpayers are required to provide explanations for these discrepancies.

6. Final Assessment: If the taxpayer’s explanations are deemed unsatisfactory, the FBR issues a notice under Section 11(5) of the Sales Tax Act, 1990. This notice outlines the rationale for the assessment of tax. Subsequently, a tax assessment order is issued, ensuring the taxpayer is afforded an opportunity for a hearing before finalization.

Implications for Taxpayers

The updated audit criteria reinforce the FBR’s commitment to enhancing transparency and accountability in the tax system. By leveraging data-driven parameters and ensuring stakeholder involvement in the audit process, the FBR aims to foster compliance while addressing tax evasion.

Taxpayers are advised to maintain accurate records, comply with the prescribed documentation requirements, and respond promptly to audit-related notices. The clarity and predictability in audit selection under Rule 44A should also reduce uncertainties and promote trust in the system.

For further details, taxpayers can access the complete guidelines and announcements on the FBR’s official web portal.