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FBR: audit closure, capacity & legality

Huzaima Bukhari & Dr. Ikramul Haq

According to a Press report the Government of Pakistan Tehreek-i-Insaf (PTI) “has quietly closed over 310,000 tax audit cases that had been automatically selected from 2015 to 2017 due to the failure of taxpayers to timely file tax returns and pay due taxes”. This is a blatant violation of law. The Federal Board of Revenue (FBR) has no authority for en bloc closure of audit cases without following the command of law, section 214E(2) & (3) of the Income Tax Ordinance, 2001, inserted first through Tax Laws (Second Amendment) Ordinance, 2019, promulgated on December 26, 2019. After passage by National Assembly, it was published in official gazette on March 31, 2020 as Tax Laws (Amendment) Act, 2020 on receiving assent of the President on March 27, 2020.  

The report says that the “Federal Board of Revenue (FBR) has closed over 310,000 or more than half of the total opened 600,000 audit cases”. It further reveals that “individuals, associations of persons, and companies are beneficiaries of the FBR’s decision that is rooted in its incapacity to go after hundreds of thousands of people. The FBR lacks human resources to effectively audit 600,000 cases”. It adds that “to conclude audit of the pending cases selected under Section 214D for the tax year 2015, 2016 and 2017, a procedure has been framed for three classes of persons, individuals, associations of persons and companies whereby all field formations will conclude audit cases accordingly”.

According to the report, “scrutiny will take place based on withholding tax transactions, purchase of properties, vehicles, utility expenses, rent expenses, bank information if available, and application of any audit selection parameter as per audit policy and if all values in the parameters, as per the system, are matched with the declaration in income tax returns and/or wealth statement or otherwise, their values are returned nil and field office does not have any third-party information that audit may be concluded by accepting the declared version,” said the FBR notification”.

The report failed to notice that no notification was issued but instructions were given through FBR’s Letter C.No.1(1)SS(TPA-II)/2020 dated April 24, 2020, which is patently against the law. Notification is always through statutory regulatory order (SRO). It is interesting to note that the letter issued by Audit Wing in the first paragraph says: “The existing provision of Section 214E of the Ordinance has been amended vide Tax Laws (Second Amendment) Ordinance, 2019”. When this letter was issued on April 24, 2020, the Ordinance had already become an Act of Parliament on March 27, 2020 on receiving assent of the President. This exposes the alertness and level of competence of FBR!    

Allegedly, among the beneficiaries of the closure of audit are some elected members of the Parliament and a number of rich persons. The closure of such a huge number of cases sadly reflects on the capacity and capability of FBR. There may be massive underreporting and/or non-reporting in many cases. Many may contemplate that it is done on the command of political masters, as it appears an astonishing hush-up. Firstly, the law was amended through a Presidential Ordinance and then was passed without any meaningful/thorough debate in the National Assembly. Resultantly, the media and public were kept in dark. Secondly, the closure through a letter violates the clear language of law! It is now imperative for FBR to make public whether beneficiaries include public office-holders and divulge the names of the rich and mighty. It is fundamental right of people of Pakistan under Article 19A of the Constitution of Islamic Republic of Pakistan.

After giving two amnesties since assuming power in August 2018, this act of PTI Government confirms that following in the footsteps of its predecessors it has no respect for rule of law and no desire to enforce tax obligations. The tall claims during election rallies and promises in election manifesto of 2018 to ensure justice for all and uphold the supremacy of law on the part of head of the PTI, after becoming Prime Minister, are proving to be a mere farce. 

The FBR issued a simple letter for closure of cases whereas the law says:

Section 214E

(2) Notwithstanding anything contained in sub-section (1), the Board may prescribe procedure for conclusion of audit of income tax affairs of a person automatically selected for audit under omitted section 214D.

(3) The prescribed procedure under sub-section (2) may include acceptance of declared income of a taxpayer for a tax year subject to conditions specified therein.

 [underlined by us for emphasis]

The word “prescribed”, as used in section 214E(2) of the Income Tax Ordinance, 2001 or elsewhere, is defined in section 2(44) of the Income Tax Ordinance, 2001 as: “prescribed” means prescribed by rules made under this Ordinance”. As clear from the plain reading of section 2(44), ‘prescribed’ means ‘by rules’ whereas no rule was made by FBR but it issued just a letter. As regards, the word “may”, it has to be read as “shall” as obligation is imposed by Legislature and it is settled law that in such a situation as provided in section 24A of the General Clauses Act, 1897, the authorities have to perform the assigned function/duty—in this case by framing rules as per procedure laid down in section 237 of the Income Tax Ordinance, 2001. The FBR has violated this principle settled in a number of cases by Supreme Court [Abu Bakar Siddique & others v Collector of Customs Lahore & another 2004 PTD 2187 (Supreme Court)] committing breach of Article 189 of the Constitution as well. This makes the entire exercise blatantly illegal and without any lawful authority. It calls for attention of competent authority not only to start disciplinary proceedings but also refers a case to National Accountability Bureau (NAB) for abuse of powers by a public functionary.  

The lame excuse on the part of FBR that it lacks capacity to audit so many people is untenable under the law. Section 177(8) of the Income Tax Ordinance, 2001 authorises FBR and Commissioner to outsource the audit. It reads as under:

“The Board or the Commissioner may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961) or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966)], to conduct an audit of the income tax affairs of any person or classes of persons and the scope of such audit shall be as determined by the Board or the Commissioner on a case to case basis.

It may be recalled that in a Press report,Parliamentarians, Imran, tax expert raises questions about outcome of audit’ [Business Recorder, October 27, 2018] a vital question was raised:

“What was the result of the audit of parliamentarians including Prime Minister Imran Khan whose case was selected for audit in the past? Parliamentarians were selected for audit for Tax Year 2015 & 16 by the FBR by employing a parametric selection mechanism through a computer ballot. If audit has been completed, whether assessment orders of the parliamentarians have been issued and served?”

For Tax Years 2015 and 2016, cases of many parliamentarians were selected for audit through computer ballot on the basis of parametric selection through computer software, but FBR allegedly failed to probe their cases or at least never divulged the details of how much extra tax was collected by conducting the audit. FBR is totally politicised and muzzled by men with money power and having track record of inefficiency and corruption as well as accommodating the government of the day and victimizing its political adversaries. It has proved totally incapable of nabbing tax evaders and avoiders.

The latest action of closure of audit on the pretext of lack of capacity, whereas it could have been outsourced, may be insinuated by many being politically motivated and aimed at protecting some influential figures, who failed to file returns within time. FBR has been sleeping over cases of audit, selected through balloting or by Commissioners or those landed in audit automatically under erstwhile section 214D of the Income Tax Ordinance, 2001 for the last so many years and certainly there were/are some cases of men in power or having money power! Even otherwise, it shows lack of willingness to get the cases audited using section 177(8) of the Income Tax Ordinance, 2001 as discussed above.

These audit cases were automatically selected under section 214D of the Income Tax Ordinance 2001 that was inserted in 2015 by the Government of PMLN and later repealed in 2018. However, the PMLN was never serious in building the FBR’s capacity to audit all such cases and also did not bother to outsource the task under section 177(8) of the Income Tax Ordinance, 2001. While omitting section 214D, criteria for closure included recovering 25% additional tax, which is now waived by PTI in the latest move as FRB’s letter says that where no third-party information is available and data is matching with previous declarations, such cases will be closed accepting the declared version.

The real dilemma of the system is non-scrutiny of declaration of legislators so they extend unprecedented amnesties immunities and waivers to tax delinquents as well and the PTI is no exception. Thorough scrutiny of legislators’ declarations by any competent person can lead to the disqualification of a majority of them for making misrepresentations under oath as most of them cannot justify their standard of living vis-à-vis disclosure of meagre incomes, in most of the case only emoluments as officeholders received from the State being the only source of income. Their standard of living belies the claim of just living on paltry emoluments received from the State.

Unfortunately, all agencies like, NAB, Federal Investigation Agency (FIA), FBR and ECP have so far failed to discharge their duties, especially that of investigating the financial/tax affairs of legislators in an effective manner. The same is true for other powerful segments of society—generals, judges and high-ranking civil servants. They claim they have strong internal systems of check and balances but record shows hardly any punitive actions when many live beyond their declared means to the FBR and even many availed amnesties that is an admission for a public office holder or a state functionary of committing corrupt practices and getting monetary benefits in cash or kind.

The Supreme Court of Pakistan in CIR Sialkot v. Messers Allah Din Steel & Rolling Mills and Others (2019) 119 TAX 27 (S.C. Pak)) held as under:

“The Board is expected to enhance and improve qualitative and quantitative aspects of its officers for the purpose of audit who are well versed with the processes, mechanisms and tools required for conducting audits effectively, efficiently and expeditiously.

The closure of audit cases is not only unlawful for want of framing rules that is command of law but also amounts to utter violation of instructions of the Supreme Court of Pakistan. The failure of FBR is on two counts; firstly, it has failed to collect taxes from where these are actually due thus paving the way for enormous black economy and secondly, it could not persuade the people towards voluntary tax compliance. This has created a malevolent social malady i.e. social injustice where the rich and mighty are enjoying life whereas the overwhelming majority is being pushed below poverty line. These are the wages of such policies that we are now witnessing in their ugliest form in the wake of Covid-19 outbreak and lockdown with an empty kitty incapable of paying even minimum amount to the daily wage earners unable to work due to lockdown.

Losses worth billions of rupees have been caused to the national exchequer by granting amnesties [Retrieving untaxed/ill-gotten assets, Business Recorder, February 21 & 26, 2020] and now through unlawful closure of audit of 310,000 cases. While the poor and unemployed, living in sub-human conditions, are crying for food and basic necessities like healthcare, clean drinking water etc, our rulers are busy extending unlawful waivers to those having money power using FBR as their handmaid. Obviously, FBR’s head could not have passed such an order of closure of audit of 310,000 cases without the approval of Dr. Abdul Hafeez Shaikh, Adviser to the Prime Minister on Finance and Revenue.   


The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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