The government is likely to scrap the former Finance Minister’s project for the engaging of third-party auditors to audit the income tax, sales tax, and federal excise duty cases of companies, Association of Persons (AoPs), and individuals.
Third-Party Audit was Shaukat Tarin’s flagship project for the hiring of chartered accountant firms for audits to end the interaction of the Federal Board of Revenue (FBR) with the registered taxpayers.
Moreover, the FBR’s interference in audits may be limited to the selection of cases under the approved parameters/criteria for companies, the association of persons, and individuals categories of taxpayers.
Sources told ProPakistani that the FBR had almost finalized a third-party audit of income tax, sales tax, and federal excise duty cases. However, the project was not executed due to the higher costs and the amount to be paid to the auditors, and the experience of the third party audit was unsatisfactory.
The new government may terminate the project and select cases through risk-based audit parameters. The selection of audit cases through the risk-based audit parameters is much better than random balloting as random selection many times picks salaried classes and other categories that do not require audited. However, the risk-based audit parameters ensure the selection of cases based on specific parameters and past business trends.
The FBR will select cases through parametric computerized balloting after the new government’s decision to withdraw the policy of the third party audit.
Under Tarin’s plan, the FBR’s field formations, including Inland Revenue Audit officers and other categories of officers, were not required to be assigned audit cases.
He had repeatedly warned previously that the finding of wrongdoing after the audit by the third party would result in the initiation of investigation and punitive actions. He had also asked the Institute of Chartered Accountants of Pakistan (ICAP) to provide 40 to 50 auditors for an independent third-party audit.
According to Tarin, the FBR would not issue notices from 1 July 2021 onward as the taxpayers would carry out self-assessment whereas only four to five percent of the cases would be sent for an audit which will not be conducted by the FBR but by the third party.
Under this mechanism, the FBR had decided to select over 50,000 income tax cases for third-party audits of companies, AOPs, and individuals for the tax year 2019.
Last year, the FBR’s Board-in-Council had proposed the selection of 22,458 income tax audit cases for third-party audit. However, the former Minister for Finance had directed the FBR that 50,249 audit cases of income tax for companies, AOPs, and individuals must be selected for third-party audits to create a national impact and curb tax evasion. It was decided that the procurement of the services of third-party auditors would be done as per the Public Procurement Rules, 2004.
The board may appoint a firm of chartered accountants under the Income Tax Ordinance, 2001, as defined under the Chartered Accountants Ordinance, 1961, or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966, to conduct an audit of the income tax affairs of any person or classes of persons. The scope of such an audit will be determined by the board or the commissioner on a case-to-case basis.
