Pakistan Introduces Investigative Audits to Combat Tax Fraud in Sales Tax

Pakistan’s Finance Bill 2024 introduces a significant change aimed at tackling tax fraud: the concept of “investigative audits.” This new measure is expected to bring more transparency and accountability to tax investigations.

Previous System’s Shortcomings:

  • The Sales Tax Act 1990 lacked a clear definition of “investigation” and “inquiry” related to tax matters.
  • The selection process for cases and investigation procedures were not clearly defined, leading to legal challenges and court cases being quashed due to a lack of clarity.
  • Taxpayers faced harassment due to the absence of proper legal guidelines.
  • Raids and arrests could occur without a strong basis for suspecting tax fraud.

Introducing Investigative Audits:

  • The new section empowers the Federal Board of Revenue (FBR) to conduct investigative audits based on a “balance of probabilities” suspicion of tax fraud.
  • Prior written approval from the Commissioner is mandatory for initiating an investigative audit.
  • The FBR must have evidence to support their suspicion, which will be subject to judicial scrutiny.

New Procedures and Time Limits:

  • The new section outlines the investigative audit process and sets a 90-day timeframe for completion, preventing taxpayers from being held indefinitely.
  • The definition of “tax fraud” as a pre-condition for initiating an audit has been revised.

Additional Changes:

  • Section 25, dealing with sales tax record audits, has been replaced to eliminate legal ambiguities and enhance audit effectiveness.
  • A detailed procedure for conducting and concluding audits is provided for the first time.
  • Section 11, concerning assessment orders, has been split for better clarity and linkage with regular and investigative audits.

Overall Impact:

The introduction of investigative audits aims to streamline tax investigations in Pakistan. By establishing clear procedures and safeguards, the new system is expected to:

  • Reduce harassment of taxpayers.
  • Strengthen legal grounds for tax fraud investigations.
  • Increase efficiency and effectiveness in combating tax evasion.

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