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Audit Policy 2018 FBR to adopt parametric selection method

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M Jahangir Hayat

LAHORE: The Federal Board of Revenue (FBR) will adopt parametric
selection method this year for Audit Policy 2018, where data analytics
would be run on available population based upon identified risk
parameters.

The tax policies formulated by the Federal Board of Revenue underline
the need of voluntary compliance of filing of returns and place great
emphasis on facilitation of tax payers. To meet these goals, the
universal self-assessment scheme has been introduced by FBR in which
all declarations of a taxpayer are deemed to be true.

However, to ensure compliance of tax laws, promote tax culture and
discourage the practice of giving false declarations with impunity,
selecting tax payers for audit becomes an essential practice. In line
with the earlier practice, this year for Audit Policy 2018, the FBR
would do a parametric selection. Data analytics would be run on
available population based upon identified risk parameters. This
strategy would ensure that only noncompliant taxpayers are selected
for audit and minimizes the chance of selection of compliant tax
payers, preventing squandering of scarce human resource of the
department on cases where there is no potential. The FBR would conduct
computer ballot on parametric basis for selection of 2.3% of cases for
audit out of the total filers after exclusions in Income Tax for Tax
Year 2017. For Sales Tax and FED, the FBR would select 2.5% and 7.7%
cases for audit respectively out of the total filers after exclusions
for tax periods corresponding to accounting period adopted for the
purpose of return of income for TY 2017 under the Income Tax Ordinance
2001. For Audit Policy 2018, the FBR would select an overall 2.3% of
total cases available after exclusions for Audit in Income Tax, Sales
Tax, and FED. 2. Exclusions The following exclusions have been
identified and approved by the Board under relevant rules where
selection for audit by the Board is not required. 2.1 Income Tax i.
All cases already selected for audit by the Commissioners Inland
Revenue or Director I&I (IR) under section 177 of the Income Tax
Ordinance for any of the preceding three Tax Years i.e 2014, 2015,
2016 ii. All cases already selected for audit under section 214D of
the Income Tax Ordinance, 2001, for any of the preceding three Tax
Years i.e 2014, 2015, 2016 iii.

All cases where income is chargeable to tax under the head salary
exceed 50% of taxable income, except cases having business income.

Directors of companies do not qualify for this exclusion. iv. All
cases where entire income is covered under Final Tax Regime (FTR) 2.2
Sales Tax i. All cases already selected under section 25 and 38 of
Sales Tax Act, 1990 by the Commissioner Inland Revenue or Director I&I
(IR) for tax periods corresponding to the accounting period adopted
for the purpose of return of income under the Income Tax Ordinance,
2001 for Tax Year 2016 Provided that where only a part of the said
accounting period had been audited already, the relevant authority may
select the remaining period for audit. ii. All cases already selected
for audit under section 72B through computer ballot held under
Taxpayers’ Audit Policy, 2017 iii.

All cases of Steel Melters and Steel Re-rollers who are paying sales
tax under the Sales Tax Special Procedure Rules, 2007. iv. Federal,
Provincial and Local Government Departments. 2.3 Federal Excise i. All
cases already selected under section 46 of the Federal Excise Act,
2005 by the Commissioner Inland Revenue or Director I&I (IR) for tax
periods corresponding to the accounting period adopted for the purpose
of return of income under the Income Tax Ordinance, 2001 for tax year
2016 Provided that where only a part of the said accounting period had
been audited already, the relevant authority may select the remaining
period for audit. ii. All cases already selected for audit under
section 42B through computer ballot held under Taxpayers’ Audit
Policy, 2017 iii. Federal, Provincial and Local Government Department
3 Risk Parameters: 3.1 Income Tax: The risk parameters would not be
disclosed in accordance with section 214 C (1A) of Income Tax
Ordinance, 2001. 3.2 Sales Tax: The following risk parameters have
been determined by the Board for selection of cases for audit under
clause (i) of the sub-rule (2) of rule 44A of the Sales Tax Rules,
2006: i. Decline in value of supplies as compared to corresponding
months of previous year ii. Consistent increase in input tax/output
tax ratio over corresponding months of previous three years iii.
Decrease in taxable supplies to total supplies ratio as compared to
corresponding months of previous year iv. Difference in declared value
of sales as compared to declared turnover in Income Tax Return v.
Persons declaring reduced rate sales vi. Manufactures showing
inadequate value addition. vii. Declared sales are less than imports
viii. Decrease in payment of tax as compared to corresponding months
of previous year ix. Increase in refund claimed as compared to
corresponding months of previous year x. Unclaimed purchase to
declared purchases ratio is high xi. Utilities to sales ratio is high
xii. Discrepancy identified by CREST 3.3 Federal Excise Duty: The
following risk parameters have been determined by the Board for
selection of cases for audit under clause (i) of sub-rule (2) of rule
73A of the Federal Excise Rules, 2005: i. Decrease in payment as
compared to corresponding months of previous year ii. Decline in value
of supplies as compared to corresponding months of previous year iii.
Consistent increase in input tax/output tax ratio over corresponding
months of previous three years iv. Decrease in taxable supplies to
total supplies ratio as compared to corresponding months of previous
year v. Difference in declared value of sales with declared turnover
in Income Tax Return vi. Persons declaring reduced rate sales vii.

Manufactures showing inadequate value addition viii. Declared sales
are less than imports ix. Decrease in payment as compared to
corresponding months of previous year x. Increase in refund claimed as
compared to corresponding months of previous year xi. Unclaimed
purchase to declared purchases ratio is high xii. Utilities to sales
ratio is high.

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