Audit, Inquiry, & Investigation
under Sales Tax Act 1990
Adnan Mufti
10 November 2015
Karachi Tax Bar Association
1
Overview

Basic Scheme of Audit

Inquiry, Investigation, & Audit Defined

Access to records, documents [Section 25]

Adjudication / Assessment without Audit, Inquiry or Investigation.

Independence of Section 25 from Section 72B

Powers of the Directorate General of Intelligence & Investigation [DGII]

Manual Selection of Cases for Audit

FBR’s Performance on Audit Proceedings

Audit Policy 2015
2
Overview (cont…)

Access to Stocks & Records placed at Business Premises [Section 38]

Powers to Summon Persons [Section 37]
3
Basic Scheme of Audit
 Sales tax is a value-added tax, grounded in un-supervised self-assessment
scheme. The taxpayer assesses his tax and deposits it alongwith the sales tax
return.
 The tax regulators monitor this self-assessment system through neutral and
impartial tool of audit under Section 72B and Section 25.
 Once the case of a taxpayer is selected for audit under Section 72B or Section
25, the return is closely scrutinized. On completion of audit, an assessment order
is passed against the taxpayer if any of the grounds under section 11 are
attracted in the case.
4
Inquiry, Investigation, & Audit Defined
Audit – a tool for deterrence and not for revenue generation
“A formal examination of an individual's or organization's accounting records,
financial situation, or compliance with some other set of standards.”
[Black Law Dictionary – 9th Edition]
“Audit is a tool which strategically monitors the regime of sales tax and primarily
geared to decipher tax evasion from amongst the pool of taxpayers. It is a
departmental surveillance tool for sniffing out tax that has gone unpaid.”
[LHC judgment reported as PTCL 2014 CL 726]
5
Inquiry, Investigation, & Audit Defined
Inquiry
“Inquiry is the aiming at or discovery of truth by question, either formal, verbal
interrogation, or a recourse to the proper means and sources of knowledge
when the object has been shaped into a question or problem for solution.”
[Advanced Law Lexicon Book 2, 3rd Edition 2005]
6
Inquiry, Investigation, & Audit Defined
Investigation
“Investigation means search for material and fact in order to find out whether or
not an offence has been committed.”
“Investigation is not used of any physical tracking, but of the patient inquiry into
matters of science or knowledge along a strict path, and as it were, step by step.
The subject of investigation, like that of examination, and unlike that of search,
is never absolutely unknown, but it is always partially so.”
[Advanced Law Lexicon Book 2, 3rd Edition 2005]
7
Access to records, documents [Section 25]
Step One
 The Commissioner can only call for any records maintained under the STA or any
other law, for e.g., Income Tax Ordinance 2001 or Companies Ordinance 1984
lying either under possession of the taxpayer or his agent.
The scope of Section 25 was broadened in the Year 1999. Provincial ST laws
have identically copied the broadened scope.
 In case where such records are maintained electronically, the Commissioner will
authorize the officer of the Inland Revenue to have access to such electronically
maintained record.
8
Access to records, documents [Section 25]
Step Two
 The authorized officer IR can conduct audit, once in a year, for the particular tax
period on the basis of the records obtained under Section 25(1) of the STA.
 In exceptional circumstances and under the specific instructions in writing by the
Commissioner, a particular registered person can be re-audited for that financial
year or within that financial year.
 Selection of case for audit is not allowed in second year consecutively. [STGO
3/2014]
 Atleast 15 days notice should be given to the taxpayer before conducting audit.
 Audit should be completed within 3-4 days unless more time is granted by
Assistant Commissioner with reasons for extension.
9
Access to records, documents [Section 25]
Step Three
 After completion of the audit, the authorized officer IR obtains the explanation
from registered person on the issues raised in the audit through show cause
notice.
 An order under Section 11 of STA is passed.
10
Adjudication / Assessment without Audit, Inquiry or Investigation
 In a recent decision, the Lahore High Court has held that the investigation
made into the case of the registered person can only be carried out
through the process prescribed under Section 25, 38 and 72B of the
Sales Tax Act, 1990.
 According to the above dictum, there is no other mechanism under the
Act to pick a case for adjudication under Section 11 of the Act.
 In other words, show cause notice issued without audit having been
conducted would not stand in the eyes of law.
11
Independence of Section 25 from Section 72B
- During last few years, intense litigation was witnessed by the taxpayers whereby
manual selection of audit by Commissioners was challenged before the Court of
law.


Taxpayers viewpoint !

In the case of Chenone Stores vs. FBR, the Lahore High Court held that only FBR
can select audit cases through balloting and Commissioner cannot select cases
on his choice.

In the case of Warid Telecom vs. Commissioner IRS, the Islamabad High Court
held that Section 25 and Section 72B were independent provisions and the
Commissioner IRS can exercise his authority independently.
12
Manual Selection of Cases for Audit
 In General, Commissioner can select audit upto 10% of cases fall under its
jurisdiction. [STGO 3/2004]
 For the tax periods July 2013 to June 2014, the Commissioners are also allowed
to select cases for audit between range from 5% to 10% of cases falling under its
jurisdiction on the basis of desk audits or risk profiling or both.
13
Powers of the Directorate General Of Intelligence & Investigation [DGII]
 DGII cannot undertake any audit of any registered persons except under specific
written authorization by FBR
 In case of tax evasion, DGII can pass on the information to the concerned
Commissioner who will conduct the audit. During such audit, staff of DGII can
participate.
STGO 03/2004
14
FBR performance on Audit Proceedings
Federal Board Revenue recovers tax of Rs.47,585 per audit case selected for Tax
Year 2013 [Rs. 2,125 in Year 2012] – [FBR Review Issue 32]
15
Audit Policy 2015
FBR has issued Audit Policy 2015 applicable to taxpayers falling, inter alia, under Sales
Tax and Federal Excise Duty for affairs for the tax periods from July 2013 to June 2014.
 7.5% cases were selected by FBR for audit through random computer ballots
 Commissioners are also allowed to select cases for audit between range from 5% to
10% of cases falls under its jurisdiction on the basis of desk audits or risk profiling or
both. In this regard, FBR has defined the term ‘risk profiling’ as follows:
“A strategy for audit selection based on identification of taxpayers who are
the most likely to be non compliant, through risk scoring techniques, data
mining, extrapolating trends, matching of data acquired and developed from
information and intelligence from third party sources and other such
methods.”
16
Audit Policy 2015
 All notices, letters and orders issued to the taxpayers will contain specific bar
codes. Any notice issued or communication made otherwise shall not be
construed as valid.
 Tax department will communicate to the taxpayer the discrepancies found in the
audit for his explanation before finalizing the audit
 Cases selected during a financial year would be disposed of during the same
year.
17
Audit Policy 2015
 The following cases will be excluded from selection of audit:
 Null Return Filers
 All cases of Steel Melters, and Steel Re-rollers who are paying sales tax
under the Sales Tax Special Procedure Rules, 2007
 All cases of Commercial importers conducting no business other than
commercial import business and who are paying 3% Value Addition Tax
 All cases already taken up for audit for Tax Period(s) July 2013 to June 2014
 All cases already selected for audit for Tax Period(s) July 2012 to June 2013
18
Audit Policy 2015
Issues
After reviewing the above audit policy, we understand the following issues may arise:
 The Audit Policy does not discuss the issues faced by the Commissioner Inland
Revenue in the past in cases where companies such as insurance, banking,
sugar, non-resident etc. followed special year but tax authorities conducted audit
in the light of selection, i.e., on the basis of financial year.
 In contrary to past years, FBR has specified that balloting for selection of case
may be conducted more than once in a year, whenever required by FBR. This
may end up selection of a case twice in a financial year.
 In the past, Commissioner merely informed the taxpayers about case selection for
audit. However, Commissioner will now inform taxpayer about the basis / reasons
for such selection. This needs to be implemented in letter and spirit.
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Access to Stocks & Records placed at Business Premises [Section 38]
 The authorized officer IR can conduct any inquiry or investigation under Section
38 of STA on the basis of the records obtained under Section 25(1) of the STA
where tax fraud or tax evasion occurred.
 Such records may be required for any inquiry or investigation in any tax fraud
committed by him or his agent or any other person.
 The authorized officer can freely access to stocks and records (belonging to any
registered person or a person liable for registration) for inspection and can take
such records into custody.
 The registered person, his agent, or any other person are bound to answer any
question or furnish such information or explanation.
20
Access to Stocks & Records placed at Business Premises [Section 38]
Issues
• Is it necessary to inform person whose premises are being visited?
The basis for the visit need not be shared with the person whose premises are to
be visited but must be on the department’s files for production in proceedings that
may be instituted by the said person.
• Is department required to produce any authorization before conducting any
such inspection?
The officer designated to conduct the visit must be authorised in that regard by
the Board or the Commissioner and must produce a copy of the authorization
before commencing the inspection.
21
Access to Stocks & Records placed at Business Premises [Section 38]
Issues
• Can department request any record or information during such inspection?
The officer has no power in plain sight or that has not been voluntarily made
available. No special requirement of a particular document may be made during
such inspection.
• Can tax official take into custody any record during such inspection?
The record and document taken into custody must be against a receipt signed by
the officer.
22
Powers to Summon [Section 37]
(1) Any officer of Inland Revenue shall have powers to summon any person whose
attendance he considers necessary either to tender evidence or to produce
documents or any other thing in any inquiry which such officer is making for any
of the purposes of this Act.
(2) Any person summoned under sub-section (1) shall be bound to attend either in
person or by an authorised agent, as the officer of Inland Revenue may direct;
Provided that a person who is exempted from personal appearance in a court
under section 132 and 133 of the Code of Civil Procedure (Act V of 1908), shall
not be required to appear in person.
(3) Any inquiry before an officer of Inland Revenue shall be deemed to be a judicial
proceeding within the meaning of section 193 and 228 of the Pakistan Penal
Code (Act XLV of 1860).
23
Access to Stocks & Records placed at Business Premises [Section 38]
Is there any difference between Sections 38 & 40?
Authority from
Place
Purpose
Section 38
Section 40
Board or Commissioner
Magistrate
Premises where records and Any place
stocks are placed.
Whether proceedings is pending For pending proceedings only.
or not.
OR
To check the records are
maintained are in accordance
with STA.
To verify the stocks declared with
tax department.
24
Access to Stocks & Records placed at Business Premises [Section 38]
Is there any difference between Sections 38 & 40?
Binding on
Mandatory Requirements
Section 38
Section 40
Registered person or Person Every person
liable to register or their agents
Department of direct or indirect
taxes, any other Government
Department,
local
bodies,
autonomous bodies, corporations
or such other institutions
No as such
In accordance with the relevant
provisions of the Code of
Criminal Procedure, 1898.
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THANK
YOU
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