To build confidence between taxpayers and tax collectors, CBR has to ensure the implementation of audit policy in its true spirit. Naved A Andarabi, Advocate Supreme Court of Pakistan and President All Pakistan Income Tax Bar Association said this at a seminar on "Audit and Amended Assessment Under the Income Tax Ordinance, 2001" here on Saturday.
He said that the effective way to audit by covering area by adopting one of the types ie high risk areas, non-filers, no income tax filers, non-disclosure of income and cross verification of data and income source. The paradigm shift from assessment by the tax officer to assessment by the taxpayer himself requires effective audit techniques and policy. This was one of the key requirement of the tax reforms programme.
The provisions of section 177 of the ordinance do not specify any particular type of audit but as per audit manual titled as 'Income Tax Audit Handbook' published in March 2004 there may be various types like: refund audits, issue oriented audits, comprehensive audits, tax fraud investigations and withholding audits.
The cases selected for audit, so far, can easily be categorised assessment audits. The audit proceedings have also introduced the terms like information/document request and primary narrative reports but only to replace the notice under section 61 and 62 of the repealed Income Tax Ordinance, 1979.
The tax department has initiated proceedings under section 161/205 of the ordinance by applying provisions of section 176 of the ordinance, which by no means can be termed as an audit. Similarly, the evidence of tax deduction is verified at the time of issuance refund but by no means can be called an audit. The tax department introduced with a 180-degree change but for an effective implementation of mindset also has to be changed.
The provisions of section 177 of the ordinance govern the audit procedure and process of a taxpayer. The section was amended thrice before being substituted by Finance Act 2004. The Finance Act 2005 was also amended the substituted section thrice, Andarabi said.
It is clear that section 177 of the ordinance confers wide-worded, which are open to excessive use and abuse of discretionary powers by the commissioner. The general principal is that where wide-worded powers are bestowed on an authority there remains always a need to structure discretion. Andarabi quoted that the Supreme of Pakistan in 1977 SCMR 1804 provided the following guidelines where discretionary powers are to be exercised:
"The seven instruments that are most useful in the structuring of discretionary powers are open plans, open policy statements, open rules, open findings, open reasons, open precedents and fair formal procedure." Thus, the selection for audit may be made by applying, integrated database, high risk based on definite evidence, without arbitrariness and skilled auditors within the department.
He said that the Income Tax Ordinance 2001 couldn't operate for any period prior to July 1, 2002, the date from which it became operative, unless there is a saving provision in the law itself. He said that the taxpayers should minimise the risk of selection for audit.
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