Selection of Cases for Audit on Parametric Basis through Computer Ballot Tax Year-2011

SELECTION OF CASES FOR AUDIT ON PARAMETRIC SELECTION OF CASES FOR AUDIT ON PARAMETRIC BASIS THROUGH COMPUTOR BALLOT TAX YEAR-2011 By Tahir Mahmood Butt, Advocate, High Court, Vice-President, Pakistan Tax Bar, Association The selection of cases for audit under the Income Tax Law is not a new concept. It has always been there in the relevant statutes. Under the Income Tax Ordinance, 1979 the C.B.R. by exercising its powers as provided under section 59 of the late Ordinance had been issuing the self assessment scheme with complete mode of selection of cases for audit. The mode, method or procedure for selection of cases for audit had never created any controversy or source of litigation. After introduction and enforcement of Income Tax Ordinance, 2001 from 1st of July, 2002 till to date the issue regarding mode & procedure for selection of cases for audit could not be settled for the very reason that the FBR officials are not interested to act in accordance with true spirit of Law rather they are intended to act as per their own intent and not as per intent of the legislation. Fortunately or unfortunately whenever the FBR officials. tried to select the cases for audit, the procedure adopted by them could not be appreciated by the High Courts. The Apex Court of the Country however, time and again provided opportunity to the FBR to remove the deficiency in the method of selection of cases for audit. However, all the time, the FBR instead of following the guidelines issued by the Apex Court prefer to make changes in the Law. Now once again the FBR has selected the cases for audit of income tax affairs, sales tax affairs and Federal Excise affairs of the tax payers vide PARAMETRIC COMPUTER BALLOTING held in FBR (HQ) Islamabad on 13th of November, 2012. The mode, manner and procedure adopted in this regard is once again not in accordance with true spirit of law for the following amongst other reasons: The balloting has been made on NTN basis whereby through single balloting Income Tax, Sales Tax and Federal Excise affairs of 1,217 corporate taxpayers and 8,523 non corporate tax payers have been selected. Admittedly vide section 214C of the Income Tax Ordinance, 2001, section 72B of the Sales Tax Act, 1990 and vide section 42B of the Federal Excise Act, 2005, the Federal Board of Revenue is empowered to select tax affairs of any tax payer/registered person for audit of specific tax year or period. The Law provides two modes of selection of cases for audit through computer ballot by FBR one is on random basis and the other is on parametric basis as FBR may deem fit. However, the sequence of the words used in the statute is of immense importance. The law maker has used the words RANDOM OR PARAMETRIC and not PARAMETRIC OR RANDOM. From the sequenee of words it can easily be understood that priority is to be given to RANDOM balloting and only under special circumstances PARAMETRIC selection is to be made. The words "random" and "parametric" as used in the above said provisions have not been defined in the said statutes and as such in accordance with the settled principle of law the normal dictionary meanings would be applied in respect thereof. Under various dictionaries the word "random" has been defined as chance, accidental, casual, haphazard, unsystematic etc. On the other hand the word "parametric" has been taken from the word "parameter" which as per dictionary means "coefficients". The term "coefficients" has been defined as "the percentage of variation in the return of an asset explained by the market portfolio return" and "A measure of investment risk that defines risk as the standard deviation per unit of expected return". In case of selection to be made through computer on random basis the FBR is free to do it as and when required after submission of return within a reasonable period of time and there is no obligation or formality to be fulfilled. However, if, FBR has to make selection through computer on parametric basis, then the universally accepted principle of natural justice requires certain obligations to be meet with by the FBR well before certain stages. For tax year-2011, the selection has been made for audit on parametric basis backed by consolidated risk factor criteria fixed by the FBR which was published in the Daily Business Recorder in September, 2012 as stated by the FBR's Member Audit. It would not be out of place to mention here that the risk factor criteria fixed for selection of cases for audit regarding period from 1-7-2010 to 30-6-2011 relevant to tax year-2011 have admittedly been prepared, issued and publicized in September, 2012 whereas the same should have been issued before 1-7-2010 for Sales Tax & F.E.D affairs and before submission of Income Tax Returns for tax year-2011 separately. The consolidated criteria fixed by the FBR for parametric selection of cases for audit consists of near about sixteen clauses which were not in the knowledge of the tax payer/registered person while submission of returns under relevant law at material time. Mere publication of the criteria in a news paper is also not sufficient, rather it should have published in the Gazette and made available to the tax payers/registered persons. The action on the part of the FBR is not only against the fundamental right provided under Article 10A of the Constitution but also clear cut violation of the law laid down by the Higher Courts of the country that any statutory criteria for selection of cases for audit should have been in the knowledge of the tax payer before submission of return. The parametric selection of cases for audit is also not justified from the angle that for parametric selection the FBR was required to first make a complete list of those cases which falls in any of the clause of parameters fixed by the FBR and then out of all those cases the selection could have been made. As against it the FBR it self has admitted that total 21,7.10 corporate cases returns were filed and out of those 1,217 cases have been selected. In non corporate cases total 426,602 returns were filed and out of which 8,523 cases have been selected. The above referred treatment depicts that as per FBR the criteria fixed was applicable on all the corporate and non corporate returns submitted for tax year-2011 which cannot be held as possible. It is important to note that salary income cases & PTR cases are not included for selection. The action of not selecting salary. income & PTR cases may be justified in the eye of FBR officials but it is against the fundamental right of equality of citizen as provided vide Article 25 of the Constitution. Vide single parametric computer balloting, the FBR has selected Income Tax, Sales Tax & Federal Excise duty affairs on N.T.N basis which action is also not in accordance with true spirit of law. All the three statute are independent and separate. The requirement for registration, submission of return, chargeability of tax etc. are totally independent and separate: Mere one mode of selection under all the three enactments is not sufficient for the FBR to justify single balloting. In this regard it would be fruitful to refer case decided by the Sindh High Court reported as 2011 PTD 1558 where in the Court has held that: "The Board cannot simply therefore apply the provisions of one law to the other, and direct that the taxpayer selected for audit under the 2001 Ordinance by way of computer ballot shall also be called for a sales tax audit or vice versa. This last point also has another aspect. Even assuming for the moment that a computer ballot could be held under both laws for selecting persons for audit, a combined selection under one ballot would still be unlawful." (para 23 page 1582) Composite selection of cases through single balloting is even otherwise not justified as under the scheme of three statutes audit can be made of the record/declaration or information already provided by the tax payer/registered person in the shape of relevant returns. If any person is registered for income tax and neither required nor registered for Sales Tax and Federal Excise, then how he can be asked to appear for sales tax or federal excise audit particularly when FBR selects his case on parametric basis. For the purpose of selection of cases for audit on parametric basis the FBR issued the following risk based parameters for tax year-2011. For corporate taxpayer:--- 1. Imports in Customs differ/ from declared Imports in Sales Tax and/or Income Tax. 2. Output Tax is different from 16% & 21% (as the case may be) of Taxable Supplies. 3. Input Tax is different from 16% & 21% (as the case may be) of Taxable Purchases . 4. Total Output Tax minus Input Tax differs from Net Payment by 5 percent. 5. Output tax/ Input tax Ratio differs with Sectors Output tax/Input tax Ratio by 5 percentile points. 6. Gross Profit to Sales Ratio (Income Tax) differs with Sector ratio (Cases where gross profit growth is less by 2 percentile points as compared to Sectoral growth rate). 7. Net profit to Sales (Income Tax) declared ratio differs with sector ratio (Cases where net profit growth is less by 2 percentile points as compared to Sectoral growth rate). 8. Decline in Sales (Income Tax) is more than 10% as of last year. 9. Decline in Supplies (Sales Tax) is more than 10% as of last year. 10. Claim of 'overruled amount of refund under STARR related checks is more than 50% of the claim or Rs. 2 million or above overruling pertaining to following STARR related checks i.e., Bill of Entry, Invoices, Returns, Shipping Bills, Supplier Status. 11. Claim of refund of Rs.2 million or above in Income Tax 12. Persistent decrease in gross profit over last-three years. 13. Persistent decrease in net profit over last three years. 14. Consistent decrease in output tax/input tax ratio over last three years. 15. Decrease in proportion of taxable supplies to total supplies in last three years by 10 percent in each year. 16. Continuously declaring dined income for the last three years. For non-corporate cases including individuals & AOP:-- 1. Opening Balance not matching with closing balance of previous year. 2. Cost of Sales is more, than 80% of total sales. 3. Cost of sales is less than 60% of total sales. 4. Net profit to sales ratio differs from sector ratio by 10%. 5. Percentage of expense to gross profit differs 'from sector ratio by 10 percent. 6. Gross profit to total 'sales ratio differs from sector ratio by 10 percent. 7. Total sales on Income Tax Returns differ from total sales from Sales Tax return by 10 percent, 8????????? Total sales declared in Sales Tax Return differs from total Sales declared in Income Tax Return by 10 percent. 9. Continuously declaring loss for the last two years. 10. Continuously declaring declined income for the last two years. 11. Total supplies are less than previous year by 10%. 12. Output tax is less than the previous year by 5%. 13. Input tax is more than the previous year by 5% 14. Output tax is different from 15% of taxable supplies. 15. Input tax is different from 15% of taxable purchases. 16. Output tax minus input tax differs from net payment by 5%. 17. Percentage of input/output ratio differs with sectors ratio by 10 -percent. 18. Refund claim is 5 percent more than previous year. 19. Export sales differ from value of export in customs data by 5 percent. 20. Import purchase differs from value of import in customs data by 5 percent. It would be important to note that most of the clauses of the criteria are against the fundamental right of freedom of trade as provided vide Article 18 of the Constitution. The same are even otherwise against the basic principle of self assessment as provided vide relevant tax statute. Difference of declared results in Income Tax and Sales Tax clearly amounts to concealment for which specific provisions are available in the relevant statute and there is no need to first select them for audit and then to take any action. Most of the clauses talks about the difference with sector ratio. In this regard at least I am at a loss to understand that: (a) What is sector ratio. (b) Who can and has fixed the same. (c) How a citizen of Pakistan being a business man can be bound to earn or not to earn profit less or more than the sector ratio fixed by any tax authority. Under the Income Tax Ordinance, 2001, Sales Tax Act, 1990 or Federal Excise Act, 2005, various provisions are there providing compulsory deduction of tax and the tax payer/registered person is bound for the deduction. If on the basis of such provisions any refund becomes due to the tax payer/registered person, how FBR can justify itself to fix it as a criteria for selection of case for audit. In the backdrop of above submissions it appears that the parametric selection made by the FBR through computer ballot would also not stand the test of litigation.