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Assessment & Audit under Income Tax & Sales Tax Laws BY ANWAR KASHIF MUMTAZ ADVOCATE HIGH COURT SAIDUDDIN & CO.

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Presentation on theme: "Assessment & Audit under Income Tax & Sales Tax Laws BY ANWAR KASHIF MUMTAZ ADVOCATE HIGH COURT SAIDUDDIN & CO."— Presentation transcript:

1 Assessment & Audit under Income Tax & Sales Tax Laws BY ANWAR KASHIF MUMTAZ ADVOCATE HIGH COURT SAIDUDDIN & CO.

2 Assessment & Audit under Income Tax Ordinance

3 3 ASSESSMENT Section 2(5) “Assessment” includes provisional assignment, re-assessment and amended assessment and the cognate expression shall be construed accordingly

4 4 TYPE OF ASSESSMENT Deemed AssessmentSections 120(1), 169(3) Best Judgment AssessmentSection 121 Amended Assessment Section 122 Amended assessment on account of revision of return by the taxpayer. Section 122 (3) Amended assessment On the basis of definite information acquired from as audit or otherwiseSection 122 (5) If the assessment order is considered as erroneous and prejudicial in the interest of revenue. Section 122 (5A) Provisional Assessment Section 122 C Provisional AssessmentSection 123 Consequential AssessmentSection 124 (1) New AssessmentSection 124 (2) Modification Assessment Section 124A Assessment in case of disputed propertySection 125

5 5 DEEMED ASSESSMENT Original and complete return shall constitute an assessment order on the day the return is furnished. If the return is not complete, the Commissioner shall issue notice pointing out the deficiencies. Section 120 (3) In case of non compliance of the notice the return shall be treated as invalid Meaning thereby – no deemed order. Section 120 (4). Section 120(1) If a taxpayer have no other income except the income on which is subject to final taxation, assessment shall be treated to have been made under Section 120 Section 169(3)

6 6 BEST JUDGEMENT ASSESSMENT Section 121(1) In case of non-furnishing of return, in response to Notice u/s 114(3) or 114(4), non-furnishing of statement in compliance of notice u/s 115(5) or 143, 144 or 116 or failing to produce accounts, documents and records required to be maintaining u/s 174, the Commissioner may make assessment to the best of his judgment based on information or material on record. Limitation to make such order as provided u/s 121(3) is within five years after the end of the Tax Year or the income year to which it relates. For making best judgment:- a. History should be followed 2009 PTD 638 Trib b. There must be a speaking order 99 TAX 329 Trib c. Should not be passed for single default29 TAX 192, 1987 PTD 39 default. d. Should be proper, fair and not dishonest1959 PTD 180 H.C. e. In the presence of deemed order u/s 120(1) best judgment order can’t be passed2005 PTD 1652 Trib.

7 7 PROVISIONAL ASSESSMENT Section 122 c In case of non-furnishing of return, in response to Notice u/s 114(3) or 114(4), the Commissioner may make provisional assessment to the best of his judgment based on information or material on record. The provisional assessment order passed by the Commissioner under section 122C(1) shall be treated as the final assessment order after the expiry of 45 days, however if return has been filed during the period of 45 days provisional assessment order stands vacated.

8 8 PROVISIONAL ASSESSMENT Section 123 If any concealed assets which in the opinion of the Commissioner was acquired by a person from any income subject to Income Tax, the Commissioner before issuing order u/s 121 or 122 can finalize provisional assessment order. from the above it can be observed that provincial order be passed even if the order passed u/s 120 is already in field.

9 9 CONSEQUENTIAL ORDER AFTER APPEAL Section 124(1) To give effect to the order passed by CIT (Appeal) Tribunal, High Court or Supreme Court. The Commissioner is bound to issue amended order within 2 years from the end of the financial year in which the said order was served on him.

10 10 CONSEQUENTIAL ORDER AFTER APPEAL Section 124(2) If against the remand order passed by CIT (Appeal), Tribunal or High Court if no further appeal has been filed the Commissioner is obliged to pass new order within one year from the end of the financial year in which such order was served

11 11 MODIFIED ORDER Section 124 A In case any question of law has been decided in favor of the taxpayer by High Court or Tribunal the Commissioner may follow the said order irrespective of the fact that any further appeal or reference has been filed by the Commissioner against the said order. The said order shall be subjected to reversal if the question of law so decided is reversed or modified.

12 12 ASSESSMENT IN CASE OF DISPUTED PROPERTY Section 125 If the property from which income derives is in dispute in any Civil Court in Pakistan, the amended assessment order is to be issued within one year from the decision of the Civil Court.

13 13 AMENDMENT OF ASSESSMENT Section 122 (9) Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121, or issued under section 122C. No order shall be amended by the Commissioner after the expiry of five years from the end of the financial year in which the Commissioner has issued or treated to have issued the assessment order to the taxpayer. No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard Section 122(2) Section 122(1)

14 14 AMENDMENT OF ASSESSMENT ON ACCOUNT OF REVISION OF RETURN Section 122 (3) Where a taxpayer furnishes a revised return under sub-section (6)or (6A)of section 114 — (a)the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and (b)the taxpayer’s revised return shall be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished.

15 15 AMENDMENT OF ASSESSMENT ON THE BASIS OF DEFINITE INFORMATION Section 122 (5) An assessment order in respect of tax year, or an assessment year, shall only be amended under sub-section (1) and an amended assessment for that year shall only be further amended under sub- section (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that — (i) any income chargeable to tax has escaped assessment; or (ii) total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or (iii) any amount under a head of income has been mis-classified.]

16 16 AMENDMENT OF ASSESSMENT WHERE ASSESSMENT IS CONSIDERED AS ERRONEOUS & PREJUDICIAL TO THE INTEREST OF REVENUE. Section 122 (5A) Subject to sub-section (9), the Commissioner may, after making, or causing to be made, such enquiries as he deems necessary, amend, or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue.

17 17 Record Section 174 (1) Unless otherwise authorised by the Commissioner, every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed. (2)The Commissioner may disallow [or reduce] a taxpayer’s claim for a deduction if the taxpayer is unable, without reasonable [cause], to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction. (3)The accounts and documents required to be maintained under this section shall be maintained for [six]years after the end of the tax year to which they relate[:] [Provided that where any proceeding is pending before any authority or court the taxpayer shall maintain the record till final decision of the proceedings.]

18 18 Record Section 174 [Explanation.— Pending proceedings include proceedings for assessment or amendment of assessment, appeal, revision, reference, petition or prosecution and any proceedings before an Alternative Dispute Resolution Committee”.] [(4)For the purpose of this section, the expression “deduction” means any amount debited to trading account, manufacturing account, receipts and expenses account or profit and loss account.] [(5) The Commissioner may require any person to install and use an Electronic Tax Register of such type and description as may be prescribed for the purpose of storing and accessing information regarding any transaction that has a bearing on the tax liability of such person.]

19 19 Notice to obtain information or evidence Section 176 (1) The Commissioner may, by notice in writing, require any person, whether or not liable for tax under this Ordinance – (a)to furnish to the Commissioner or an authorised officer, any information relevant to any tax [leviable] under this Ordinance as specified in the notice; or (b)to attend at the time and place designated in the notice for the purpose of being examined on oath by the Commissioner or an authorised officer concerning the tax affairs of that person or any other person and, for that purpose, the Commissioner or authorised officer may require the person examined to produce any accounts, documents, or computer-stored information in the control of the person[; “or”]

20 20 Notice to obtain information or evidence Section 176 [(c) the firm of chartered accountants, as appointed by the [Board or the Commissioner], to conduct audit under section 177, for any tax year, may with the prior approval of the Commissioner concerned, enter the business premises of a taxpayer, [ ] to obtain any information, require production of any record, on which the required information is stored and examine it within such premises; and such firm may if specifically delegated by the Commissioner, also exercise the powers as provided in sub-section (4).] (2)The Commissioner may impound any accounts or documents produced under sub-section (1) and retain them for so long as may be necessary for examination or for the purposes of prosecution.

21 21 Notice to obtain information or evidence Section 176 (3)[The person from whom information is required, may at his option, furnish the same electronically in any computer readable media.] Where a hard copy or computer disk of information stored on a computer is not made available as required under sub-section (1), the Commissioner may require production of the computer on which the information is stored, and impound and retain the computer for as long as is necessary to copy the information required. (4)For the purposes of this section, the Commissioner shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908 (Act V of 1908), in respect of the following matters, namely: —

22 22 Notice to obtain information or evidence Section 176 (a)enforcing the attendance of any person and examining the person on oath or affirmation; (b)compelling the production of any accounts, records, computer-stored information, or computer; (c)receiving evidence on affidavit; or (d)issuing commissions for the examination of witnesses. (5)This section shall have effect notwithstanding any [law or rules] relating to privilege or the public interest in relation to the production of accounts, documents, or computer-stored information or the giving of information.

23 23 Audit

24 24 HISTORICAL PERSPECTIVE Income Tax Act, 1922 Section 23 (1) Section 23 (3) Section 23 (4) Income Tax Ordinance, 1979 Section 62 & to Detailed scrutiny through Pick & Choose. 2. Random ballot through Computer. 3. Total Audit. 4. Upto 5% of total returns filed.

25 25 AUDIT Section 177 The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person

26 26 AUDIT Section 177 Provided that— (a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and (b)the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall not call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate. (2)After obtaining the record of a person under sub-section (1) or where necessary record is not maintained, the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person or any other person and may call for such other information and documents as he may deem appropriate.

27 27 AUDIT (6) After completion of the audit, the Commissioner may, if considered necessary, after obtaining taxpayer’s explanation on all the issues raised in the audit, amend the assessment under sub-section (1) or sub-section (4) of section 122, as the case may be. (7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits. (8) The Board 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)], 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.

28 28 AUDIT (9) Any person employed by a firm referred to in sub-section (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that sub-section.] (10) Notwithstanding anything contained in sub-sections (2) and (6) where a person fails to produce before the Commissioner or a firm of Chartered Accountants or a firm of Cost and Management Accountants appointed by the Board or the Commissioner under sub-section (8) to conduct an audit, any accounts, documents and records, required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine or any other evidence that may be required by the Commissioner or the firm of Chartered Accountants or the firm of Cost and Management Accountants for the purpose of audit or determination of income and tax due thereon, the Commissioner may proceed to make best judgment assessment under section 121 of this Ordinance and the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.]

29 29 SELECTION FOR AUDIT BY THE BOARD.— (1) The Board may select persons or classes of persons for audit of Income Tax affairs through computer ballot which may be random or parametric as the Board may deem fit. [(1A) Notwithstanding anything contained in this Ordinance or any other law, for the time being in force, the Board shall keep the parameters confidential.] (2) Audit of Income Tax affairs of persons selected under sub-section (1) shall be conducted as per procedure given in section 177 and all the Added by the Finance Act, Provisions of the Ordinance, except the first proviso to sub-section (1) of section 177, shall apply accordingly. (3) For the removal of doubt it is hereby declared that Board shall be deemed always to have had the power to select any persons or classes of persons for audit of Income Tax affairs.] Section 214 C

30 30 OFFENCES AND PENALTIES— Section Any person who fails to maintain records required under this Ordinance or the rules made thereunder. Such person shall pay a penalty of ten thousand rupees or five per cent of the amount of tax on income whichever is higher. 174 S. No. OffencesPenaltiesSection of the Ordinance to which offence has reference 8.Where a taxpayer who, without any reasonable cause, in non-compliance with provisions of section 177— 177 (a)fails to produce the record of documents on receipt of first notice. Such person shall pay a penalty of [twenty-five] thousand rupees; (b) fails to produce the record or documents on receipt ofsecond notice; and such person shall pay a penalty of [fifty] thousand rupees; and (c)Fails to produce the record or documents on receipt of third notice. such person shall pay a penalty of [one hundred] thousand rupees.

31 31 OFFENCES AND PENALTIES— S. No. OffencesPenaltiesSection of the Ordinance to which offence has reference 9.Any person who fails to furnish the information required or to comply with any other term of the notice served under section 176. Such person shall pay a penalty of [twenty-five] thousand rupees for the first default and [fifty] thousand rupees for each subsequent default Any person who denies or obstructs the access of the Commissioner or any officer authorized by the Commissioner to the premises, place, accounts, documents, computers or stocks. Such person shall pay a penalty of twenty five thousand rupees or one hundred per cent of the amount of tax involved, whichever, is higher. 175 and 177

32 32 OFFENCES AND PENALTIES— S. No. OffencesPenaltiesSection of the Ordinance to which offence has reference 10 Any person who— (a)makes a false or misleading statement to an Inland Revenue Authority either in writing or orally or electronically including a statement in an application, certificate, declaration, notification, return, objection or other document including books of accounts made, prepared, given, filed or furnished under this Ordinance; (b)furnishes or files a false or mis-leading information or document or statement to an Income Tax Authority either in writing or orally or electronically (c)omits from a statement made or information furnished to an Income Tax Authority any matter or thing without which the statement or the information is false or misleading in a material particular Such person shall pay a penalty of twenty five thousand rupees or 100% of the amount of tax shortfall whichever is higher: Provided that in case of an assessment order deemed under section 120, no penalty shall be imposed to the extent of the tax shortfall occurring as a result of the taxpayer taking a reasonably arguable position on the application of this Ordinance to the taxpayers’ position. 114, 115, 116, 174, 176, 177 and general

33 33 Default Surcharge.— A person who fails to pay – [(a) any tax, excluding the advance tax under section 147 and [default surcharge]under this section;] (b)any penalty; or (c)any amount referred to in section 140 or 141, on or before the due date for payment shall be liable for [default surcharge]at a rate equal to[18 per cent per annum] on the tax, penalty or other amount unpaid computed for the period commencing on the date on which the tax, penalty or other amount was due and ending on the date on which it was paid Section 205

34 Audit & Assessment under Sales Tax Laws 34

35 Assessment of Tax 35

36 Assessment of Tax Four situations are separately dealt u/s 11 of STA If return is not filed and short-payment is due to any miscalculation. Non-payment or short payment of tax or claim of inadmissible refund for reasons other than miscalculation. If tax shortfall or claim of inadmissible refund is due to some collusion or deliberate act. If tax shortfall or claim of inadmissible is by reason of any inadvertence, error or misconstruction. Show cause is mandatory in all above situations, which can be issued within 5 years of relevant date i.e. the time of payment of tax or when the refund was issued 36 The Sales Tax Act, Section 11 The Sindh Sales Tax on Services Act 2011 Section 23 & 47 The Punjab Sales Tax on Services Act 2012 Section 24 & 52 The Khyber Pakhtunkhwa Finance Act 2013 Section 40 & 68

37 Assessment of Tax Taxpayer must be awarded an opportunity of being heard. Order-in-Original must be issued within 120 days, extendable by CIR upto 90 days, excluding the time lapsed due to stay proceedings or ADRC or adjournment applied by the taxpayer [not beyond 60 days]. If taxpayer fails to file a return, the tax officer is empowered to determine the tax liability of the registered person. Procedure for determination of minimum tax liability described under Sales Tax General Order No.3 of 2004, dated 12 June Sales Tax Act 1990 –Section 11

38 Assessment of Tax Taxpayer must be awarded an opportunity of being heard. Order-in-Original must be issued within 120 days, extendable by CIR upto 90 days, excluding the time lapsed due to stay proceedings or ADRC or adjournment applied by the taxpayer [not beyond 60 days]. If taxpayer fails to file a return, the tax officer is empowered to determine the tax liability of the registered person. Procedure for determination of minimum tax liability described under Sales Tax General Order No.3 of 2004, dated 12 June Sales Tax Act 1990 –Section 11

39 Audit 39

40 Types of Audit Routine audit of records - Section 25 of STA Pre or Post Refund Audit – Chapter-III of Sales Tax Rules, 2006 Investigation/Enquiry under Section-38 & 38B of STA Special Audit under Section 32A of STA – By Qualified Accountants 40

41 Types of Audit Routine Audit CIR or his authorized Tax Officer can requisition statutory records or access the records / computers. On the basis of records, audit can be conducted once in a year. Records can be re-audited, if audited previously by Auditor General of Pakistan. Order to be passed under Section 11 after completion of audit. 41 The Sales Tax Act 1990 –Section 25

42 Types of Audit Investigation /Enquiry Section 25 itself provides authority of initiating investigation under Section 38 of STA in cases of tax frauds. Wide discretion of authorized officer acting on behalf of the Board or Commissioner to access business premises, stocks, records, etc. Onus lies on FBR / CIR to prove the tax fraud according to definition. Investigations are generally assigned to DG-I&I offices of FBR. Section 38 does not provide authority to adjudicate cases, as such assessment/recovery can be enforced through Section 11 of STA 42 The Sales Tax Act 1990 –Section 38

43 Types of Audit Audit by Special Auditors Audit by Chartered Accountants & Cost Management Accountants Audit will be conducted as per terms of reference Special Auditors may conduct audit of records already examined by the Department 43 The Sales Tax Act 1990 –Section 32A

44 Selection of cases for audit by Board Board is empowered to select cases for audit on random or parametric basis. 44 The Sales Tax Act 1990 –Section 72B

45 Audit Observation Audit observation needs to be responded quite seriously to avoid process of adjudication. Not obligatory upon tax officers to issue audit observation Show cause notice be examined first on technical grounds like time limitation, jurisdiction, etc. and then on merits. Imposition of default surcharge and penalties should be challenged if the malafide intent has not be proven by the tax officer. Show cause notice needs to be replied in a way, which build up a strong case before the appellate / litigation forums. 45

46 Audit under Provincial Laws  Audit by officer not below the rank of an Assistant Commissioner  Investigative audit in case of information regarding tax fraud or evasion of tax by authorized officer by Commissioner  Prior notice for audit requiring to produce records or documents  Records include statutory records under any other law  Audit to be conducted once in a year unless tax fraud is established or special audit initiated  Audit observation pointing out contraventions – 21 days time to respond by registered person  Audit report showing demand of tax/violation of law to be issued by officer 46 Sindh Sales Tax on Services Act 2011 –Section 28 Punjab Sales Tax on Services Act Section 33 The Khyber Pakhtunkhwa Finance Act 2013 Section 50

47 Audit under Provincial Laws  Officer may pass an order under section 23 or section 47 and establish tax demand alongwith default surcharge and penalty. S-23 & 47 requires issue of show cause notice and adjudication Voluntary compliance for payment of tax waives penalty: --Before issue of audit notice, no penalty payable --Before SCN, 20% penalty payable with revision of return --After SCN, 50% penalty with revision of return 47 Sindh Sales Tax on Services Act 2011 –Section 28 Punjab Sales Tax on Services Act Section 33 The Khyber Pakhtunkhwa Finance Act 2013 Section 50

48 Audit under Provincial Laws  Special Audit  Board may appoint Chartered Accountant or Cost & Management Accountant by notification for special Audit.  Special audit of the same period allowed, already audited  Special Auditor empowered as an officer  Scope of special audit in accordance with TOR 48 Sindh Sales Tax on Services Act 2011 –Section 29 Punjab Sales Tax on Services Act Section 34 The Khyber Pakhtunkhwa Finance Act 2013 Section 51

49 Offences, Penalties and Default Surcharge 49

50 Offences & Penalties If a person commits offenses prescribed under various provisions of law, then penalties as provided in the ACT would be enforced. Penalties are waived on voluntary compliance by registered persons However, default surcharge is payable on every late payment of tax due. -Non – Furnishing of return within due date -Non Issuance of invoice when required -Unauthorized issuance of an invoice in which amount of tax specified -Failure to notify material nature changes in the particular of registration -Failure to deposit the amount of tax due or any part thereof -Failure to make application for registration -Failure to maintain the required records -Non compliance with the provisions of the Act & fails to produce records. 50 The Sales Tax Act 1990 –Section 33 Sindh Sales Tax on Services Act 2011 –Section 43 Punjab Sales Tax on Services Act Section 48 The Khyber Pakhtunkhwa Finance Act 2013 Section 64

51 Default surcharge Default Surcharge: Default Surcharge is attracted in case of non payment of tax due within due date whether intentionally or otherwise, as per the following rates: Non payment on account of any reason, other than tax fraud Inter Bank Rate plus 3% per annum of the amount of tax due Non payment on account of tax fraud 2% per month (24% per annum) 51 The Sales Tax Act 1990 –Section 34 Sindh Sales Tax on Services Act 2011 –Section 44 Punjab Sales Tax on Services Act Section 49 The Khyber Pakhtunkhwa Finance Act 2013 Section 65

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