ISLAMABAD: As the country takes a prickly path to reforms, the government has approved a new audit policy aimed at doubling the number of tax audits under an agreement with the International Monetary Fund (IMF).
The audit policy was approved here on Friday by the Board-in-Council, the highest decision-making body of the Federal Board of Revenue (FBR), which gave the go-ahead to conduct audit on the basis of risk parameters for income tax, sales tax and federal excise duty.
The fresh parameters for selecting audit cases have been finalised following three unsuccessful attempts by the FBR to carry out the audit.
Under a three-year $6.7 billion IMF bailout programme, Pakistan is required to increase the number of risk-based tax audits to 4.2% of declarations submitted by taxpayers from the existing 2.2%. Both income tax and sales tax returns will be subject to the audit parameters.
FBR Chairman Tariq Bajwa confirmed to The Express Tribune that the Board-in-Council gave approval to the new audit policy. A random ballot would be held for selecting audit cases and highest income groups would be targeted, he said.
To a question about IMF’s condition for doubling the number of tax audits, Bajwa said 4.2% was not the final figure and the FBR wanted to achieve even more than that.
This will be the fourth such attempt to conduct the audit of taxpayers. Last time, the FBR had selected over 12,600 cases through a computer ballot. However, the exercise could not bear fruit due to disintegrated work carried out by different departments of the FBR.
There was no mechanism in the FBR where it could cross-check details of expenditures given in income tax returns and details of sales shown in sales tax returns, according to FBR sources.
In the first two months (July-August) of the current fiscal year, the FBR has collected Rs16 billion less than its tax target, coming under pressure from the beginning.
One of the main focuses of the IMF programme is to improve the country’s tax-to-gross domestic product ratio through both administrative and revenue measures.
As a first step, the IMF has asked Pakistan to send notices to at least 100,000 tax evaders this year. The lender has made it a structural benchmark of its loan programme and performance of this indicator will be ascertained during quarterly review meetings between Pakistan and the IMF.
According to the Memorandum of Economic and Financial Policies (MEFP) – a set of policy actions agreed between the IMF and Pakistan – the income tax initiative of sending notices will be complemented by initiatives to enhance revenue administration for sales tax, excise duty and customs duty.
The government has assured the IMF that tax notices will be sent to those having large potential liabilities and will be followed by a provisional assessment, collection procedure, and penal and prosecution proceedings.
In the MEFP, the government has claimed that it has already stopped providing new tax concessions or exemptions including customs tariffs through Statutory Regulatory Orders except for an act of parliament.
It has assured the IMF that FBR’s powers to issue SROs will be withdrawn by the end of December 2015. In order to discourage the practice of giving tax exemptions to the affluent, the IMF has asked Pakistan to publish a detailed list in the budget in future years.
The IMF wants Pakistan to remove loopholes in sales tax laws and make it a modern GST, which should be in line with value-added tax.