Finance Bill 2024 Empowers FBR to Probe Tax Fraud Suspects

Finance Bill 2024 has empowered Inland Revenue officials to conduct an investigative audit of persons suspected to be involved in tax fraud.

A former member of the Federal Board of Revenue (FBR) told ProPakistani that a major change having far-reaching consequences proposed in the Finance Bill 2024 is the introduction of the concept of Investigative Audit by insertion of a new section in the Sales Tax Act 1990.

Previously, the law did not contain such a concept. A general and vague concept of Investigation and inquiry was included in Section 25 concerning audit. However, the terms were neither defined in the law nor it was explained how this inquiry and investigation was to be initiated and conducted. There was no clarity regarding the selection of a case for investigation and how these investigations are to be carried out.

As a result, proceedings in all cases involving tax fraud by the Intelligence & Investigation department and the field offices of FBR were challenged in courts, and due to lack of clarity in the law, an overwhelming majority of the cases were quashed. This lack of clarity and the absence of comprehensive legal guidelines was also a source of harassment for the taxpayers.

Without fulfilling the requirements of the existence of any reasonable grounds for suspecting fraud, the taxpayers were raided and even arrested and coerced to make payments that were neither due nor determined through a valid judicial order.

Official further explained that on the incorporation of the proposed section in the law, this situation will change altogether. Now, the department will be empowered to conduct investigative audits, if, on the balance of probabilities, it suspects that a taxpayer is involved in tax fraud.

Prior approval of the Commissioner in writing, will be mandatory for initiating an investigative audit against such a person. The department for invoking these provisions will therefore have to be in possession of evidence leading to the suspicion of tax fraud and the evidence and the resulting suspicion will also be subject to scrutiny by the courts.

The procedure for conduct of investigative audit has also been specified in the new section and a time period of ninety days has also been specified for completing the proceedings rather than leaving the taxpayers at the mercy of the department for indefinite time. The definition of tax fraud existence of which is the pre-condition for the start of an investigative audit has also been revamped.

Finance Bill proposed to enhance the scope of tax fraud in case of intentional tax evasion or obtaining an undue refund and specifying incidences that may lead to tax fraud including suppression of taxable sales/receipts; false claim of input tax; supply of taxable goods without tax invoice and issuance of tax invoice without actual supply of goods leading to an inadmissible claim of input tax /refund.

At the same time, Section 25 which dealt with audit of sales tax record has also been substituted. till now the conduct of audit was subject to substantial litigation in the High Courts due to some ambiguities in the law. The entire section has been substituted in an attempt to eliminate such legal controversies and to make sales tax audits really effective. He detailed procedure for carrying out an audit and how the audit will conclude has also been provided for the first time.

Additionally, Section 11 providing for passing of assessment orders has also been split into several sections to provide clarity and their linkage with audit and investigative audit. ProPakistani has learnt that the proposed changes have been drafted by a consultant hired by the Asian Development Bank to streamline, simplify, and harmonize Pakistan’s tax laws and were made part of the Finance Bill on the directions of Chairman FBR despite considerable resistance from within the FBR.