Karachi Tax Bar Association (KTBA) has flayed the issuance of audit notices by tax offices to taxpayers, who already selected once for audit in past four years.
In a letter sent to Afaque Ahmed Qureshi, Member Inland Revenue (IR) – Policy on Friday, the tax bar informed that an unwarranted practice being undertaken by certain a Commissionerates in Karachi jurisdiction whereby they are sending audit notices, despite the legal position that Income Tax Audit cannot be carried out if it has already been carried out in the last four years.
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The provisions are contained under clause 105A, Part-IV, Second Schedule of the Income Tax Ordinance 2001, wherein the taxpayer has been made eligible to claimexemption from Income Tax Audit both under Sections 177 and 214C of the Ordinance.
The tax bar further stated that Clause 105A, Part-IV, Second Schedule to the Ordinance was inserted through the latest Finance Act, 2022 and provides for restriction on frequent audit proceedings undertaken by the department.
The clause 105A of the Ordinance is read as: “The provisions of section 177 and 214C shall not apply to a person whose income tax affairs have been audited in any of the preceding four tax years:
“Provided that the Commissioner may select a person under section 177 for audit with approval of the Board.”
A bare reading of the above plainly suggests that Income Tax Audit under the Ordinance shall be conducted only for once in five (5) years. This has been provided for in very clear words completely unconditionally without and any exception.
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There are, however, certain field formations in Karachi where the Commissioner Audit do not subscribe to the above and have carved out an exception that audit carried out under Section 214E is not covered under the above clause 105A of the Ordinance.
The KTBA further informed the Member FBR towards Section 214E of the Ordinance, which was inserted through Finance Supplementary (Amendment) Act, 2018 that provided two distinct mechanisms for closure of audit selected under the deleted Section 214D of the Ordinance.
It is important here to recall that the delated Section 214D of the Ordinance provided for compulsory Income Tax Audit in the event of, among other reasons, late filing of tax returns.
A plain reading of the section provided that owing to two (2) non-obstante clauses used within a single Section, two (2) separate schemes of closure have been introduced for audits selected under Section 214D of the Ordinance.
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The first scheme provides amnesty from audit exclusively on the condition of payment of 25 per cent higher income tax than what was paid with the annual return or on payment of turnover tax at the rate of 2 per cent of the turnover where no tax was payable otherwise.
The second scheme provides closure of audit by examining taxpayer records based on parameters/benchmarks given by FBR.
The tax bar further stated that Clause 105A, it is important to learn that it does not differentiate between closure / conclusion of audit under any section of the Ordinance and simply provides exemption to any one whose case has already been audited in the last four (4) years.
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Needless to mention that had the intention of the legislature been to exclude the closure of audit under Section 214E of the Ordinance from the purview of clause 105A of the Ordinance then the legislature would have explicitly excluded it from its purview, which it has very consciously not done so.
The tax bar urged the Member FBR to direct the field formations in Karachi jurisdiction on the matter that since every taxpayer is eligible to claim exclusion from the purview of Section s177 and 214C in term of clause 105A, Part-IV, Second Schedule to the Ordinance, once its income tax audit of previous year has been concluded under any provisions of the Ordinance including the provisions covered under the second scheme of section 214E of the Ordinance, no income tax audit can be undertaken in the next four years.
