Audit

The Audit Policy 2018 pertaining to Tax Year 2017 has been approved by the Federal Board of Revenue and a computer ballot was held at FBR (HQ). State Minister for Revenue Muhammad Hammad Azhar and Chairman FBR Mohammad Jehanzeb Khan announced the Audit Policy-2018 and inaugurated the balloting process, says a press release issued here on Friday.

The selection of cases this year has been done on parametric basis. Advanced data analytics have been used to design parameters to make sure that only non-compliant tax payers are selected. As a result, this year only 2.3% of total cases available for audit for Income Tax, Sales Tax, and FED have been selected compared with 7.5% cases selected in last year’s ballot.

For facilitation of taxpayers, this year the Tax Periods for Sales Tax and FED audit would be the corresponding accounting period adopted for the purpose of return of income under the Income Tax Ordinance 2001. In previous years, financial year was selected as Tax Period for all taxpayers, which caused undue hardship to those who had opted Special Tax Year for accounting purposes. Furthermore, the FBR has decided that taxpayers who have been audited in Income Tax in any of the preceding three Tax Years i.e. 2016, 15, and 14 and salaried individuals have been excluded from this year’s ballot. The Audit Policy 2018 and National Tax Numbers/CNIC of cases selected for audit have been placed on FBR’s website at www.fbr.gov.pk-PR

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Audit

The Federal Board of Revenue (FBR) has approved the Audit Policy-2017 pertaining to Tax Year 2016 under which computer ballot would be conducted on parametric basis for selection of 7.5 percent cases for audit out of the total filers, after exclusions of certain categories, from income tax, sales tax and Federal Excise Duty (FED) returns.

According to the details of the audit policy issued by the FBR here on Tuesday, audit Policy for 2017 pertaining to Tax Year 2016 has been approved by the FBR. Criteria for selection of cases (for all taxes) for TY 2016 would be parametric. It has been decided by the Board that in order to provide ease and facilitate the tax payers case of a tax payer once selected for audit though ballot shall not be selected for audit for next (consecutive) two tax years under section 214C of the Income Tax Ordinance 2001, under section 72B of the Sales Tax Act 1990 and 42B of the Federal Excise Act 2005 respectively. For such purposes base year would be TY 2015 for Income Tax & Tax Periods July 2014 to June 2015 for Sales Tax & Federal Excise Duty.

The audit policy 2017 was placed before the Board in Council and Members and Chairman of the Board in Council approved the said policy. The balloting on the basis of such policy would be held shortly.

The FBR shall conduct computer ballot on parametric basis for selection of 7.5% cases for audit out of the total filers after exclusions in Income Tax, Sales Tax and FED returns filed for Tax Year 2016 and Tax Periods ie July 2015 to June 2016. Following exclusions have been identified and approved by the Board under relevant rules which pertain to cases where selection for audit by the Board is not required for the year.

Income Tax: All cases already selected for audit by the Commissioners Inland Revenue under section 177 of the Income Tax Ordinance for Tax Year, 2016; all cases already selected for audit by the Director I&I (IR) under section 177 of the Income Tax Ordinance for Tax Year, 2016. All cases already selected for audit under section 214D of the Income Tax Ordinance, 2001, for the Tax Year, 2016. All cases selected for audit u/s 214C for Tax Year 2015.

Income tax exclusions also cover all cases of Income from Salary where the salary exceeds 50% of taxable income except cases having business income. ases under Voluntary Tax Compliance Scheme (VTCS) for tradeRs All cases falling under Final Tax Regime (FTR).

Sales Tax exclusions from audit: All cases already taken up for audit for Tax Period(s) July 201 5 to June, 201 6 under section 25, and 38 of the Sales Tax Act, 1990 by the Commissioners Inland Revenue; cases already taken up for audit/Investigation for Tax Period(s) July 2015 to June, 2016 u/s 25/38 of the Sales Tax Act 1990 by the Directorate of I&I (IR) and all cases selected for audit u/s72B for Tax Periods July 2014 to June 2015.

Sales Tax exclusions also included all cases of Steel Melters, Steel Re-rollers who are paying sales tax under the Sales Tax Special Procedure Rules, 2007 and Federal, Provincial and Local Government Departments.

Federal Excise exclusions from audit: All cases already taken up for audit for Tax Periods July 2015 to June, 2016, by the Commissioners Inland Revenue; cases already taken up for audit/Investigation for Tax Periods July 2015 to June, 2016 u/s 46 of the Federal Excise Act, 2005, by the Directorate General of I&I (IR) and federal, provincial and local government departments and all cases of audit selected u/s 42B for the Tax Periods July 2014 to June 2015.

The Parameters for selection of cases for audit in the aforementioned Audit Policy are as follows:

The FBR Audit Policy said that the since 2001 voluntary compliance for filing of returns has been the primary focus of Federal Board of Revenue (FBR). Self Assessment and Amnesty Schemes were introduced by FBR from time to time. FBR has always trusted tax payers for their declarations. Universal self assessment scheme has however necessitated effective tax audit based on risk management strategies in order to promote tax culture and compliance to tax laws. To achieve this end many audit policies were launched by FBR in the past.

For the purpose of audit, selection of cases was mostly made through random ballot in the past. The ”Audit Policy” 2016 for Tax Year 2015, however, introduced a paradigm shift from the past. Its focus was realigned from random to parametric selection and from general to risk based approach. This approach minimized chances of selection of compliant tax payers resulting in saving the scarce resources and building the confidence of the tax payers in the Audit System. This new practice in taxpayers” audit has promoted compliance with the existing tax laws. The Audit Policy, 2017 for Tax Year 2016, has been prepared on similar lines to ensure sustainability of the risk based audit selection by the FBR. The purpose of such audit is to create deterrence against non-compliance with tax Laws through systematic examination & inspection of accounting record of the taxpayer. However, in order to facilitate the tax payers, it has been decided by the Board that the case of the tax payer once selected for audit will not be selected for audit for next (consecutive) two tax years under section 214C of the Income Tax Ordinance, 2001, under section 72B of the Sales Tax Act, 1990 and 42B of the Federal Excise Act, 2005 respectively. For such purpose base year would be Tax Year 2015 for Income Tax & Tax Periods July 2014 to June 2015 for Sales Tax & Federal Excise Duty.

TABLE: Cases for TY16 

1. Income Tax: According to section 214C (1A) of Income Tax Ordinance, 2001 the Board shall keep the parameters confidential.

2. Sales Tax: Following risk parameters have been determined by the Board for selection of cases for audit under Sales Tax:

i. Decline in value of supplies is greater than 10% over last year;

ii. Consistent decrease in output tax/input tax ratio over last three years;

iii. Decrease in ratio of taxable supplies to total supplies by 10% or more as compared to previous year;

iv. Non-filer, nil-filer or null-filer for more than 6 months in the year in case the Registered Person is showing any turnover in income tax return of the corresponding period;

v. Manufacturers showing value addition of less than 10%;

vi. Where more than 30% purchases are from “unregistered persons”.

vii. Where more than 30% sales are to “unregistered persons”.

viii. Increase in carry forward of input tax and reduction in sales by margin of 10%.

3. Federal Excise

Following risk parameters have been determined by the Board for selection of cases for audit under Federal Excise:

i. Decline in value of supplies is greater than 10% over last year;

ii. Consistent decrease in output tax/input tax ratio over last three years;

iii. Decrease in proportion of taxable supplies to total supplies by 10% as compared to previous year;

iv. Non-filer, nil-filer or null-filer for more than 6 months in the year, in case the Registered Person is showing any turnover in income tax return of the corresponding period;

v. Manufacturers showing value addition of less than 10%;

vi. Where more than 30% purchases are from “unregistered persons”;

vii. Where more than 30% sales are to “unregistered persons”;

viii. Increase in carry forward of input tax and reduction in sales by margin of 10%.

Audit

The Federal Board of Revenue has selected 15 multinational companies, including foreign airlines, banks, petroleum companies and media houses for withholding audit for the 2016-17 tax year; it was learnt. According to informed sources, the revenue authority under withholding monitoring and audit strategy for financial 2017-18 has selected the 15 companies. These companies have been included for the third quarter’s audit plan.

They said that the companies, which were under the jurisdiction of the Large Taxpayers Unit in Karachi, were among 100 top withholding agents for the 2016-17 tax year. The sources said that the board had also directed the LTU to identify cases other than the 15 cases and that the list of such cases was being sent to the FBR for further action.

According to them, the FBR, which had to maintain 19 percent growth to achieve its revenue target during the first-half of the current fiscal year, was able to attain no more than 17.5 percent growth during this period. They said that the board has decided to punish over 250 officers (12 officers from each unit), including commissioners, additional commissioners, etc across the country.

Sources also said that the FBR had not only taken its worst performing officers to task but is also striving to generate additional revenue to overcome previous shortfall and achieve the third-quarter revenue target. They termed the withholding audit as one of the effective tools to yield substantial revenue collection.

The sources said that the board believed that there were serious discrepancies in the withholding collection and the tax amount reported by these 15 multinational companies during 2016-17 tax year, which is why these companies have been selected for withholding audit.

They said that they had reported Rs 32.056 billion revenue collection for the period, which was bifurcated as Rs 20.297 billion by two banks, Rs 2.74 billion by a petroleum company, Rs 1.767 billion by a fertilizer company, two Gulf airlines reported Rs 1.98 billion tax amount, a shipping line reported its revenue collection as withholding agent to Rs 1.227 billion.

Around Rs 1.614 billion was reported by two insurance companies, a container terminal collected Rs 412.67 million, a media house reported Rs 485.672 million tax amount and a pharmaceutical company gave Rs 802.857 million as withholding collection.

Audit

ISLAMABAD:
The Supreme Audit Institution (SAI) is keen to work with World Bank (WB) and other stakeholders for introducing and implementing reforms in public financial management and auditing, Auditor General o Pakistan (AGP), Javaid Jahangir said Monday.

“SAI is also ready to explore future opportunities to deepen engagement for strengthening the working of the department,” he said while talking to WB delegation here.

He informed the WB delegation that department of Auditor General of Pakistan (DAGP) was actively pursuing its strategic reforms agenda, which sets out the strategic direction for reforms based on evidential assessment, reforms landscape, and overarching vision of the Charter of Good Governance.

“This Strategy envisages an enabling legal and regulatory framework for the internalization and sustainability of our reform initiatives,” he added He informed the delegation that the AGP led an accountability gave confidence to the public that their resources were rightfully utilized and assets are well guarded.

The donor organizations, countries and international development partners also reposed their trust in the AGP for the accountability of their loans and grants, he added.

He said that DAGP had been striving to introduce modern audit techniques and technologies adding that it had upgraded its audit manuals, field audit and reporting guidelines, and introduced Audit Command Language (ACL).

The procurement of Audit Management Information System (AMIS) was also underway, he added. “These initiatives will radically change the core auditing processes,” he said adding that therefore the entire audit processes would be built around modern techniques and technologies.

The professional capacity of human resource at all levels was also being developed to address current, emerging and future audit challenges, AGP added.

On the occasion, the WB delegates reiterated their commitment towards mutual cooperation with SAI Pakistan for bringing all stakeholders on board upstream and set realistic goals, and work on issues of mutual interest.

Delegates said that the independence of SAI Pakistan needs to be ensured as the aim of SAI was to provide a meaningful check on the Executive.

Delegates further said that the SAI’s budget should be protected from interference by the Executive, both in setting the level of resources required and during the actual disbursement phase.

They were of the view that only independent of executive auditing system could ensure transparent and vibrant public financial management system.

Audit

LAHORE: The audit of public companies in Punjab by the Auditor General of Pakistan’s (AGP’s) provincial office may not be qualitative as most of the auditors do not qualify to perform the job under the law.

On the request of the Punjab government, AGP’s teams have been auditing the companies for the last one and a half months after media reports about alleged corruption in over 50 public sector companies.

Official sources say that a majority of officials conducting the audit are either MBAs or have 16-years of education that are not qualified to audit a company under the law. Under section 247 (Qualification and Disqualification of Auditors) of the Company Act of 2017, an auditor must be a chartered accountant (CA).

“When section 15 (1) of the AGP Ordinance of 2001 is read with clause 247 of the Companies Act of 2017, an auditor must be a CA to conduct the audit of public sector companies whereas, officers of the AGP office are not ACs at all,” an official working in a public sector company told Dawn.

When asked about the downside of getting the audit done by unqualified people, the official said: “It would be devastating and as they are just wasting time and nothing more. They are doing this job under the old Financial Audit Manual & Guidelines of 2005 to conduct audit of companies,” he said.

Official said AGP’s Lahore office had violated the companies act before the start of the audit. First, the AGP directorate general of commercial audit and evaluation wrote letters to the companies to get their affairs audited under section 14 of the Auditor General Ordinance of 2001. This section, however, is for the audit of the federation, the province and the district.

According to one of the audit notices, the office states: “We look forward to full cooperation from your staff and trust that they will make available to the audit team any accounts, books, papers and other documents that deal with, or form the basis of, or are otherwise relevant to the audit, as required under section 14 of the auditor general ordinance.”

The official said the AGP office was told that only section 15 (1), and not the section 14, allowed the auditors to carry out statutory audit, the directorate general withdrew its earlier notices and issued new ones mentioning performance of the audit under section 15.

He said the AGP office always stated that conducting audit of companies was their constitutional obligation, which was not true as section 11 (2) of the AGP Ordinance of 2001 prohibited the AGP from accessing accounts record of authorities & bodies which are made under the law that provides an audit mechanism.

The official claimed that under section 14 or 15 of the ordinance and Article-169 of the Constitution of Pakistan empowered the AGP office to carry out audit of the accounts of the departments, authorities and bodies of the federation, provinces and the districts.

“They (the auditors) are conducting four types of audits – performance, accounts, compliance and certification of the public sector companies – that they cannot do under the law,” he added. Instead of conducting audit in accordance with the relevant audit clauses of companies’ laws, the AGP office was using its age old Financial Audit Manual & Guidelines to conduct the audit of the companies.

He said the article 169(b) of the Constitution of Pakistan limits the powers and functions of the AGP to conduct Audit of the “accounts” only.

“But the officials concerned have been conducting performance audits since 2001 exceeding their constitutional functions and powers. By doing so the auditors spent resources and manpower worth millions of rupees unlawfully over the span of more than 16 years,” he said.

He said the Companies Act of 2017 also required an auditor to conduct audit as per the International Standards on Auditing, whereas, the AGP office still used Financial Audit Manual of April of 2005 that is based on age old INTOSAI Auditing Standards developed by INTOSAI to conduct audit of public sector companies.

“INTOSAI has also adopted ISA standards in 2013, whereas the AGP has yet to do so,” he said.

He said the office of the AGP has recently proposed an amendment to the ordinance-2001 which was under consideration in the Senate Standing Committee on Finance. “They have recommended changes like ‘audit definition’ that totally changed the section 15 to hide their inferior HR strength that do not qualify the requirements of auditor required under clause 247 of the Companies Act 2017, and outdated Audit Manuals & Guidelines that do not conform to Audit standards required under clause 249 of the Companies Act 2017. This amendment was passed by the National Assembly in October 2017 while the Senate committee under the chairmanship of Senator Saleem Mandiwala is currently reviewing it,” he explained.

Audit

ISLAMBAD (Dunya News) – The Securities and Exchange Commission of Pakistan (SECP) has reminded the chief financial officers (CFOs) of listed companies to authenticate financial statements of their companies. This authentication is compulsory under section 232 of the Companies Act, 2017, for the ensuing periods to avoid any punitive action in the future.

During regulatory review of listed companies, a number of instances have been highlighted where CFOs, in violation of the explicit legal requirements, have not authenticated the financial statements for the year ending June 30, 2017. Since, it is a newly introduced requirement for listed companies, therefore, the SECP intends to raise awareness among them for future compliance. Accordingly, boards and management of listed companies must fully comply with the legal requirements of section 232 of the Act in respect of the financial statements for the ensuing periods to avoid any punitive action in future.

Consistent with the requirements of section 232 of the repealed Companies Ordinance, 1984, the newly enforced Companies Act, 2017, has retained the requirement that the financial statements of companies must be approved by the board of the company and signed on behalf of the board by the chief executive and at least one director of the company. In case of a listed company, the section further requires authentication of financial statements by the CFO. The introduction of this additional requirement intends to make the executive management of a listed company to give more thought and care to the authentication of the financial statements, by making them personally liable for authenticity of information contained therein.

It is to reiterate that one of the main objectives of the Companies Act, 2017, is to align various legal requirements with the best international practices for better protection of interests of members and other stakeholders of companies.

The preparation, authentication and dissemination of financial statements is one of the most important legal requirements of the Companies Act, 2017. Financial statements of companies not only provide the most authentic financial information to the users, but also show management’s stewardship of resources entrusted to them by the shareholders. This becomes even more important in case of listed companies because they have the public’s stake.

Being the corporate sector regulator, the SECP strives to improve financial reporting framework and practices to raise investors’ confidence in capital markets.

Audit

Audit

The Federal Board of Revenue (FBR) has termed confidentiality law or secrecy clause in banking laws as a major impediment to the forensic audit of banks for which State Bank of Pakistan (SBP) can play a pivotal role in negotiations with banks for provision of information for banks audit.

Sources told Business Recorder here on Wednesday that the issue of forensic audit of banks was discussed threadbare during the last meeting of high-powered implementation committee of Tax Reforms Commission (TRC) held at FBR House.

Sources close to TRC informed that the next meeting of the tax reform implementation committee is expected to be held in one to two days at the FBR.

The high-powered implementation committee of Tax Reforms Commission (TRC) has also decided that the Federal Board of Revenue (FBR), State Bank of Pakistan (SBP) and Pakistan Banking Association shall convene a meeting to discuss the issue of disclosure of information by banks and working out modalities for carrying out forensic audit of banks.

It was decided that a meeting of the chairman FBR, governor State Bank of Pakistan, Pakistan Banking Association and members of the TRIC will be convened, preferably in Karachi, to discuss issues relating to disclosure of information by banks and work out modalities for carrying out forensic audit of banks.

The background of the issue revealed that in the Tax Reforms Implementation Committee (TRIC) meeting held on June 8, 2017, it was decided that advertisement for forensic audit of banks/telecom sector be published in local newspapers by 15th June, 2017 followed by an international advertisement on the said subject. The chairman FBR apprised the committee that the Senate had taken up the issue of forensic audit of telecom companies by FBR. However, the main impediment in this respect was that FBR had no mechanism whereby such huge data could be deciphered and evaluated for audit purposes. He stated that Pakistan Revenue Automation Limited (PRAL) has now developed a software in tandem with the telecom companies which will new enable PRAL to receive and evaluate data from telecom companies which they have pledged to start providing by the end of August 2017. He also submitted that so far two telecom companies have provided data which is yet to be evaluated for the purpose of identifying areas of focus for audit.

Tax authorities also apprised the committee regarding the impediments being encountered in the proposed forensic audit of banks mainly on account of their reliance on the confidentiality law. They were also of the opinion that the State Bank of Pakistan would be able to play a pivotal role in negotiations with banks as regards mode and manner of provision of information for audit purposes. Tax authorities also proposed that the nomenclature of “forensic audit” be changed to “specialized audit.” Special Assistant to the Prime Minister on Revenue, Haroon Akhtar Khan, however, opined that no negative connotation was associated with the term “forensic audit.”

Members of the TRIC were of the opinion that reliance placed by banks on the secrecy clause does not provide a mandate for non-adherence to tax laws and procedures and that the department has the legal mandate to conduct detailed audits.

Chairman TRC Masoud Naqvi was of the opinion that withholding audit capabilities should be enhanced. Special Assistant to the Prime Minister on Revenue, Haroon Akhtar Khan, submitted that banks have agreed upon information sharing to a certain degree but greater headway is to be made on this issue. The chairman FBR opined that specialized people shall be required for carrying out audit of telecom companies.

The Member (IR-Ops) submitted that considerable revenue could be unearthed by carrying out forensic audit of banks and telecom companies and also pointed out some challenges faced by the department in this respect. It was decided that advertisement for forensic audit of telecom companies would be kept in abeyance till such time as all the telecom companies start furnishing data on the software developed by PRAL and the utility of such data is ascertained for audit purposes. The CEO PRAL apprised the committee that so far data has been provided by one telecom company.

Audit

Federal Board of Revenue (FBR) has assigned a herculean task to its field formation to dispose of at least 100, 000 pending audit cases by December 31, 2017. According to sources, the decision was made during recent Chief Commissioners Conference that was held in Islamabad where all field formation was directed to finish at least 100, 000 pending audit cases by December 31, 2017.

Sources said that the directives were given in the light of court orders, which restricted FBR to dispose of all income tax pending audit cases by the said date. However, in view of around 0.2 million pending cases, the board directed all the chief commissioners to dispose of at least 50 percent of pending audit cases in their respective jurisdictions by the end of current calendar year.

Replying to a question, sources further said that these cases were selected for audit under sections 177, 214C, 216D and clause 72 and 94 for tax years 2014, 15 and 16. Sources expressed pessimistic views and termed it as herculean task, due to huge pending audit cases.

They said that pending audit cases had reached around 0.2 million for the tax years 2014, 15 and 16 and they had just 75 days excluding all holidays to dispose of at least 50 percent pending audit cases, which they believed an uphill task to achieve within the deadline.

Audit

Thousands of sales tax de-registration applications are pending with the Federal Board of Revenue (FBR) due to strict audit requirements for leaving the sales tax registration system, it is learnt.

According to sources, a large number of sales tax de-registration applications are pending with the FBR under Sales Tax Rules for Registration, Compulsory Registration and De-Registration. The final audit is a mandatory requirement for every person seeking de-registration with the sales tax department. Resultantly, many dormant companies or those which have closed their businesses are reluctant to opt for deregistration. Likewise those who applied for de-registration are also unable to get out of the system due to complicating audit process. These units are still filing ‘nil’ and ‘null’ returns.

Sources said that in the past tax department has also compulsorily registered many units with the tax department but later these units stopped or closed their businesses. These units are appearing in numbers but actually have no contribution in revenue collection Therefore, thousands of units are filing ‘nil’ sales tax return or not filing returns due to delay in completion of audit by the tax department.

Sources said likewise many service providers have obtained sales tax registration, but after 18th amendment their jurisdiction is transferred to provinces. These service providers are also appearing in registration database but actually they have nothing to do with federal sales tax.

To a query whether sales tax de-registration and cancellation are same things, sources said that under rule 11 of the Sales Tax Rules, de-registration and cancellation of registration are entirely two different things. The registered persons have to follow a detailed procedure for obtaining de-registration certificates. Once a person is de-registered, his sales tax registration number (STRN) cannot be restored. In case of cancellation of registration by tax department, the proceedings can be initiated against the individual. The department can also re-activate the sales tax registration in cases of cancellation. Thus, cancellation of sales tax registration and de-registration process cannot be treated as same under the Sales Tax Rules. The de-registration application has been filed by the registered person whereas the cancellation of registration is being done by the tax department. Separate processes have been applied in two different legal situations under the sales tax law.

Thus, the department cannot give similar treatment to the de-registered persons or cancelled registrations.

The Local Registration Office, upon completion of any audit or inquiry which may have been initiated consequent to the application of the registered person for deregistration, shall direct the applicant to discharge any outstanding liability which may have been raised therein by filing a final return. If a registered person fails to file tax return for six consecutive months, the LRO may, without prejudice to any action that may be taken under any other provision of the Act, after issuing a notice in writing and after giving an opportunity of being heard to such person, recommend to the Board for cancellation of the registration after satisfying itself that no tax liability is outstanding against such person, they added.