Willful tax defaulters, non-filers: New policy to lay down third-party audit mechanism

ISLAMABAD: The new Audit Policy 2021 of the Federal Board of Revenue (FBR) will lay down a mechanism for third-party audit of willful tax defaulters, non-filers, and cases of concealment of income through chartered accountant firms.

Sources told Business Recorder here on Tuesday that the FBR is in the process of finalising the new audit policy.

Presently, there is no detailed mechanism available in the law for third-party audit of non-filers of income tax returns or major cases of concealment of income.

The existing audit policy lacks procedure for third-party audit by the chartered accountant firms.

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By September 2021, the new Audit Policy 2021 is expected to be released and the mechanism of third-party audit would be made part of the new audit policy.

The major cases of concealment of income would be referred for third-party audit for which detailed mechanism/system needs to be chalked out by the tax department. Moreover, there is no procedure for third-party audit of the non-filers of returns having huge expenditure and un-declared income and assets.

Under the Finance Act 2021, a committee comprising the finance minister, the chairman Federal Board of Revenue (FBR) and the FBR’s senior most member would decide about arresting willful tax defaulters involved in concealment of income, i.e., non-payment of tax of Rs25 million and above, in case of non-filer, and Rs100 million in case of a filer. Where the offence of concealment of income, which has resulted in non-payment of tax of Rs100 million and above in case of a filer and Rs25 million or above in case of non-filer, the procedure provided in Section 203B shall be applicable.

Presently, the FBR’s annual audit policy talks about the selection of cases of income tax, sales tax, and Federal Excise Duty (FED) for audit on the basis of risk-based parameters through computer balloting. The FBR conducts computer ballot by applying Risk-Based Parameters for selection of smaller percentage of cases for audit out of the total filers.

Under Finance Act 2011, the prosecution for concealment of income law already provides for prosecution mechanism under sections 201 to 203A of the Income Tax Ordinance, whereby, prosecution can be carried out for offences enumerated in sections 191 to 200.

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Under the Finance Act, 2021, a new mechanism has been introduced whereby the concealment of income has been made a cognizable offence by introduction of sections 203B to 230I.

In order to attract new mechanism, the amount of concealed tax should be Rs100 million or above in case of filer, and Rs25 million or above in case of non-filers.

Moreover, this concealment should be established through an assessment or amended assessment under section 121 or 122 of the Ordinance consequent upon third-party audit under section 177 or214C of the Ordinance.

The accused can be arrested, only after the written approval of committee consisting of finance minister, chairman and senior most member of the board.

The post arrest procedure to be followed has been laid down in newly-inserted sections 203B to 203I.

This procedure is harmonised with the procedure laid down in Sales Tax Act, 1990.

In order to streamline actions referred above, the act of concealment has been defined under the newly-inserted clause (13AA) in section 2 of the Ordinance.

In order for an act to constitute concealment, it must be willful.

Mere disallowance of an expense or rejection of an exemption claim cannot be construed as concealment, if the taxpayer has taken a reasonably arguable position.

Furthermore, where notice for amendment of assessment has been issued confronting taxpayer regarding concealment of income, no separate notice will be required to be issued under Section 111(5) of the Ordinance, as statute does not provide for any such notice, the FBR added.

Copyright Business Recorder, 2021