ISLAMABAD (December 18 2009): It is strange coincidence that Federal Board of Revenue (FBR) has selected over 900 corporate and Associations of Persons (AOPs) for composite audit through computerised random balloting whereas, Regional Tax Office (RTO), Islamabad at the same time issued notices of sales tax audit to registered taxpayers including computer industry on behalf of Directorate of Revenue Receipt Audit (DRRA).

Tax experts told Business Recorder here on Wednesday that the RTO, Inland Revenue Islamabad has issued dozens of notices to the taxpayers without quoting relevant section of the Sales Tax Act, 1990. Two types of audits of the registered units have simultaneously been initiated by the tax department.

The issuance of sales tax audit notices by external auditors may hamper FBR's genuine exercise for carrying out composite audit in a transparent manner. This is evident from the timing of the notices issued by the RTO Islamabad, which has nothing to do with the units selected through computerised random balloting.

One such notice said that the audit of the registered person for the year 2008-2009 which is to be audited by the 'external audit' is underway. It is accordingly requested the sales tax record including annual accounts may be arranged and produced on December 23, 2009 so that the audit may be conducted by the relevant quarters expeditiously. The non-production of record may attract penal action under section 25 read with section 33 of the Sales Tax Act, 1990, the notice added.

Similar notices have been issued to dozens of other taxpayers particularly computer vendors industry falling within the territorial jurisdiction of the RTO Islamabad. The registered units, who have received notices, have appealed to FBR Chairman Sohail Ahmed to immediately intervene into the matter and direct the RTO Islamabad to submit legal position of such hundreds of notices issued to the registered units for external audit.

Tax experts have raised several questions on the legality of the notices issued to the registered units by the RTO Islamabad. Firstly, how the RTO Islamabad can issued audit notices on the behalf of an external audit agency ie DRRA. Secondly, what are the legal provisions of the Sales Tax Act to allow RTO for issuing notices on the behalf of external auditors?

Thirdly, whether it is legally allowed to call record including returns, annual accounts and stock registers etc from the taxpayers on the behalf of other government departments? Fourth, if the external audit does not mean DRRA than why the RTO has specified production of record for relevant external quarters.

Fifth, whether the RTO is legally empowered to take penal action including imposition of penalty on non-production of record to the external auditors? Sixth, what is meant by external audit as specified in the RTO notices? Seventhly, whether the Sales Tax Act allows the tax officials to use their department for providing record to external auditors of the DRRA?

Tax experts were of the view that the DRRA, a subsidiary of Auditor General of Pakistan (AG) is not legally empowered to directly access taxpayers' record for carrying out sales tax/federal excise audit. The external auditors are only legally empowered to carryout audit of government organisations and corporations under provisions of the section 169 and section 169A of the Constitution of Pakistan.

The section 169 of the Constitution is related to the functions and powers of AG office. It can perform functions in relation to accounts of the federation and provinces and accounts of any authority or body established by the federation/province under Act of Parliament or Order of the President.

Analyst opined that the auditors of AG office are not legally empowered to conduct sales tax audit of taxpayers. The auditors of AG office can check the government revenue involved in government organisations and corporations. The AG office can check the FBR performance but they cannot directly access to the taxpayers record. Sources said that the section 12 of the AG Act has also restricted their auditors to audit the expenditures and receipts of government organisations whether correct assessment has been made for deduction of tax.

The tax audit is a specialised area and when an FBR auditor raise demand of income tax or order-in-original in case of sales tax/excise, the taxpayers have four legal forums like collector, appeals to challenge the findings of the auditors. Thus, only FBR auditors are being permitted to scrutinise taxpayers' records.

The FBR is the only authority to conduct such audit of the registered units. The DRRA could check the sales tax working to verify whether refunds were correctly issued or other such matters. They have no powers to operate as sales tax or federal excise officials for checking of taxpayer's record on their own.

Sources said that the audit team is the staff of DRRA, which is a branch of Auditor General of Pakistan and is not defined as an officer of sales tax. The staff of DRRA is non-existent authority under the Sales Tax Act, 1990. A non-existent authority cannot access the books of account and other sales tax record under section 25 read with section 37 and section 38 of the Sales Tax Act, 1990 either directly or indirectly. This is the statutory position till the law amended up to date.

They said under section 30 of the Sales Tax Act, 1990, the only authority which can appoint an officer of sales tax for the purpose of the Act, 1990 is FBR. No fiscal statue (including Sales Tax Act, 1990) allows the external auditors to conduct the audit of a private party or a taxpayer.

Therefore, the access to the record of the registered person, preparation of audit observation and initiating legal proceedings is an arbitrary exercise. Legally, staff of DRRA does not enjoy any power to summon presence or to inspect or directly or indirectly require producing the taxpayer's books of account and sales tax record for inspection, analysts added.