Tax practitioners have called for a significant reform in the income tax audit process, urging that the Federal Board of Revenue (FBR) alone should have the authority to select income tax returns for audit, withdrawing this power from the commissioners.
In a proposal submitted for the budget of 2020/2021, the Pakistan Tax Bar Association (PTBA) recommended that the selection of income tax returns for audit be solely under the jurisdiction of the FBR, as stipulated in Section 214C of the Income Tax Ordinance. This change is aimed at preventing undue harassment of taxpayers and ensuring a more consistent and transparent audit process.
The PTBA emphasized the need to clarify the terms “erroneous” and “prejudicial to the interest of revenue” in Section 122(5A) of the Ordinance. This clarification is crucial to protect taxpayers from being unfairly targeted under ambiguous interpretations of these terms. The association argued that any error of law or fact justifying an audit must be clearly evident from the existing records.
Furthermore, the PTBA suggested reducing the time limit for amending assessments under Section 122(4) of the Ordinance from the current duration to two years. This reduction would provide greater certainty and reduce the prolonged periods during which taxpayers can be subjected to revisions of their assessments.
Another key recommendation from the PTBA is that once a commissioner amends an original order, they should not have the authority to make further amendments multiple times at their discretion. This measure aims to limit the potential for repeated and arbitrary changes to tax laws, which can create an unpredictable and burdensome environment for taxpayers.
To streamline the audit process and reduce the administrative burden on taxpayers, the PTBA also proposed a combined audit approach. This would encompass income tax, sales tax, and the monitoring of withholding taxes in a single, unified audit. Such an approach would alleviate the need for taxpayers to repeatedly produce the same records for different audits, thereby reducing the cost of compliance and making the overall process more efficient.
These recommendations by the PTBA highlight the need for reforms that can enhance the transparency, fairness, and efficiency of the tax audit system in Pakistan. By centralizing the audit selection authority with the FBR and implementing the suggested changes, the government can foster a more taxpayer-friendly environment, encouraging greater compliance and trust in the tax system.
