5 January, 2016 Audit, Assessment, Investigations, Refunds, Withholding Sales Tax, etc. By: Mazhar Saleem Shah, FCMA 04 November 2015.

21 April 2023

Audit, Assessment, Investigations, Refunds, Withholding Sales Tax, etc.

By: Mazhar Saleem Shah, FCMA

04 November 2015

© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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Contents of the Presentation

Audit of Sales Tax Records

Assessment & Adjudication

Investigation

Suspension and Blacklisting

Refunds

Withholding of Sales Tax

Offences, Default Surcharge & Penalties


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Audit of Sales Tax Records – Types of Audits

Routine audit of records – Section 25 of STA

Pre or Post Refund Audit – Chapter-III of Sales Tax Rules, 2006

Investigation/Enquiry under Section-38 & 38B of STA

Audit by Special Audit Panel under Section 32A of STA

Audit / Investigation by Directorate General of Intelligence and Investigation-IR [refer SRO.116(I)/2015, dated 9 February 2015].


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Tax Audit – Section 25 of Sales Tax Act, 1990

CIR or his authorized Tax Officer can requisition statutory records or access the records / computers.

On the basis of records, audit can be conducted once in a year (only once during a financial year except when exceptional circumstances to re-audit prevail).

Records can be re-audited, if audited previously by Auditor General of Pakistan

Order to be passed under Section 11 after completion of audit, as per procedure laid down under Para 39 of STGO No. 3 of 2004, dated 12 June 2004

Waiver of penalty on voluntary discharge of tax liability during the course of audit and adjudication (100%, 75%, no-waiver)

Section 28 in Sindh ST Act is para-materia to S-25 of STA, however waiver of penalties in voluntary compliances at slightly different rates (100%, 80% & 50%)


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What triggers the Sales Tax Audit

Basis of Departmental Audit [under Rule 3 of Audit Rules-PRA]

Irregular or abnormal fluctuations in input tax adjustments including carry forwards;

Non or short payments of tax amounts declared on the monthly returns or other declarations;

Unusual variations in inventories;

Habitual tendency of filing short or misfiled returns;

Sudden or unexpected downward changes in turnover; and

Other cogent factor evident from the taxpayer’s computer profile over doubts of tax evasion


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Conduct of Sales Tax Audit – STGO No.3/2004

Audit Report be the Addl. Commissioner within 14 days

Audit report be forwarded to registered person within 4 weeks, this may be in the form of contravention report or audit observations notice

Audit completion certificate is required to be issued, which is generally avoided by the authorities, yet prescribed under STGO


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Audit by Special Audit Panels – Section 32A

Board can appoint SAP comprising two or more members of IR officers, CA/CMA firms, any designated person by Board (expert in forensic audit)

SAP to be headed by a chairman who shall be an officer of IR.

Absence of any member of SAP may not invalidate the audit proceedings

Scope laid down under Chapter VI of the Sales Tax Rules, 2006


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Assessment of tax – S-11 of STA

Section 36 of STA was omitted vide FA-2012 and merged in S-11.

Four situations are separately dealt u/s 11 of STA viz-a-viz:

If return is not filed and short-payment is due to any miscalculation.

Non-payment or short payment of tax or claim of inadmissible refund for reasons other than miscalculation.

If tax shortfall or claim of inadmissible refund is due to some collusion or deliberate act.

If tax shortfall or claim of inadmissible is by reason of any inadvertence, error or misconstruction.

It’s difficult for tax officer to distinguish the cases of willful & non-willful evasions

Show cause is mandatory in all above situations, which can be issued within 5 years of relevant date i.e. the time of payment of tax or when the refund was issued.


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Assessment of tax – S-11 of STA

Taxpayer must be awarded an opportunity of being heard.

Order-in-Original must be issued within 120 days, extendable by CIR upto 90 days, excluding the time lapsed due to stay proceedings or ADRC or adjournment applied by the taxpayer [not beyond 60 days].

If taxpayer fails to file a return, the tax officer is empowered to determine the tax liability of the registered person. Procedure for determination of minimum tax liability described under Sales Tax General Order No.3 of 2004, dated 12 June 2004.

Definition of ‘tax fraud’ describes the cases which tantamount to deliberate evasion of tax. If conditions are not satisfied, the tax officer cannot impose excessive penalties on the registered person.


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Key considerations

Audit observation needs to be responded quite seriously to avoid process of adjudication. On the other hand, it helps to reduce the demand prior to issuance of show cause notice.

It is not obligatory upon tax officers to issue audit observation prior to issue of show cause notice.

Show cause notice be examined first on technical grounds like time limitation, jurisdiction, etc. and then on merits.

Imposition of default surcharge and penalties should always be challenged if the tax officer has not proved the malafide intent on the part of taxpayer to evade the tax.

Reply to show cause notice generally emerges as a vital source to build up a strong case before the appellate / litigation forums.


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Investigations – S-38 of STA

• Section 25 itself provides authority of initiating investigation under Section 38 of STA in cases of tax frauds.

• Wide discretion of authorized officer acting on behalf of the Board or Commissioner to access business premises, stocks, records, etc.

• Onus lies on FBR / CIR to prove the tax fraud according to definition.

• Investigations are generally assigned to DG-I&I offices of FBR.

• Section 38 does not provide authority to adjudicate cases, as such assessment/recovery can be enforced through Section 11 of STA.


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De-registration, Blacklisting & Suspension

•Under S-21 of STA, Board or authorized officer can de-register any RP

•In case of issue of fake invoices or tax fraud, CIR can blacklist the RP or suspend the registration in accordance with prescribed procedure

•No input tax on invoices during the period of suspension

•Once blacklisted, the input tax or refund on invoices issued shall be rejected after adjudication

•Refunds can be blocked and investigative audit may be directed

•Rule 12 of Sales Tax Rules, 2006 provides detailed procedure on blacklisting and suspension

•Non-Active Taxpayer cannot file GDs, issue tax invoices, claim input tax or avail any concession. Other persons directed to avoid purchases from Non-Active Taxpayers.

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Refunds Refunds


Refund - S-10 & S-66 of ST Act

Refund Situations

Input tax exceeds

from output tax

on account of zero

rate supplies

[S-10];

Input tax arise due to export

[S-10];

Unadjusted Input

tax against supplies

other than zero rated or export

[S-10];

Input tax accumulated due to restriction provided

under Section-

8B [S-10];

Sales tax paid

through inadvertence, error

or misconce

ption

[S-66];

Input tax not

claimed within

relevant tax period

[S-66]


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Refund procedures– ST Rules, 2006

Refund is claimed through monthly sales tax return [Rule-28];

Refund claim through filing of sales tax return is considered valid only after furnishing of requisite data in the format prescribed in Refund claim Preparation Software [RCPS] alongwith supporting documents [Rule-28];

RCPS data and supporting documents are required to be furnished within 120 days of the filing of sales tax return [Rule-28];

On submission of Refund claim, Refund Receipt Section shall ensure completeness of the data and then upload in the system [Rule-29];

Uploaded information are processed to determine and sanction the amount of refund [Rule-30].


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Refund procedures–ST Rules, 2006

Restriction on the input tax refund [Rule 33]

Refund to the claimant shall be paid to the extent of the input tax paid on purchases or imports that are actually consumed in the manufacture of goods to be exported or supplied at zero percent rate or at reduced rates under five export sector regime.


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Refund procedures– Rule 34 of ST Rules, 2006

Time period to claim refund

When Input tax remain unadjusted for a minimum consecutive period of 12 month except in following cases:

Any time for following persons:

five sectors mentioned in SRO 1125 dated 31 December 2015,

gas transmission and distribution companies,

manufacturer of fertilizers,

electric power producers and electric power distribution companies

When Input tax remain unadjusted for a minimum consecutive period of 3 month in case of Plastic, paper and steel sector;

After the end of accounting year or financial year in case input tax not adjusted due to restriction provided in 8B of ST Act

Sales Tax Withholding


Sales Tax Withholding In Pakistan Under Federal ST , Sindh and Punjab Acts-

Sales Tax Withholding in Pakistan

Sales Tax Special

Procedure

(Withholding) Rules, 2007

[Federal WHT]

Sindh Sales Tax Special

Procedure (Withholding) Rules, 2015

[Sindh WHT]

Punjab Sales Tax on Services (Withholding) Rules, 2015

[Punjab WHT]

Issued by FBR

Issued by SRB

Issued by PRA


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Sales Tax Special Procedure (Withholding) Rules, 2007

Withholding Agent [Purchaser] Supplier [whose GST to be withheld] Registered status of Supplier Rate of GST Withholding

Federal Govt; Provincial Govt;Autonomous body Public sector organization

Registered Person Wholesaler, dealer or distributor 1/10th of Sale Tax Amount

Others 1/5th of Sales Tax Amount

Unregistered Person N/A 17% or at the applicable rate of

sales tax

Companies as per Income Tax Ordinance, if registered with sales tax, excise or income tax

Registered Person Wholesaler, dealer or distributor 1/10th of Sale Tax Amount

Others 1/5th of Sales Tax Amount

Unregistered Person N/A 1% of gross value of supplies

Persons Registered under sales tax as Exporter Registered Person

Wholesaler, dealer or distributor 1/10th of Sale Tax Amount

Others 1/5th of Sale Tax Amount

Unregistered Person N/A 1% of gross value of supplies

Recipient of service of advertisement, who are registered for sales tax

Registered Person N/A

Applicable rate of sales tax

Unregistered Person Applicable rate of sales tax

EXEMPTIONS:

Payments to registered persons against acquisition of following goods are exempt from sales tax withholding :Electrical energyNatural gasPetroleum products supplied by petroleum production and exploration companies, oil refineries, oil marketing companies and dealer of motor spirit and high speed dieselRegistered persons paying sales tax under Chapter XI of the Sales Tax Special Procedure Rules, 2007, except those paying sales tax on ad valorem basis at standard rate.

Vegetable ghee and cooking oilTelecommunication servicesGoods falling under the Third Schedule to the Sales Tax Act, 1990

Goods supplied by commercial importers on which Value Addition Tax has been paid at import stage


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Sindh Sales Tax Special Procedure (Withholding) Rules, 2015Withholding Agent if he is resident in Sindh or has a place of business in

SindhService provider [whose SST to be withheld] Rate of SST Withholding

- Offices and departments of Federal Government, Provincial Governments, and Local or District Governments;

- Autonomous bodies;

- Public sector organizations, including public corporations, state-owned enterprises and regulatory bodies and authorities;

- Organizations which are funded, fully or partially, out of the budget grants of the federal or provincial governments;

Registered Person 1/5th of Sales Tax Amount


Companies, as defined in clause (28) of section 2 of the Sindh ST ActRegistered Person 1/5th of Sales Tax Amount


FBR-registered or SRB-registered persons receiving taxable services of advertisements, renting of immovable property, services of auctioneers, services of inter-city transportation of goods, services of advertising agent.

Registered Person Applicable rate of sales tax except for services of advertising agent


SRB registered person receiving taxable services from unregistered personsN/A Applicable rate of sales tax

EXEMPTIONS:

Payment to following, if registered under Sindh Sales Tax on Services Act, 2011, are exempt from Sindh sales tax withholding :

Telecommunication service providersBanking companiesFinancial institutionsInsurance company other than reinsurance companyPort operatorsAirport operatorsTerminal operatorsAirport ground service providers


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Punjab Sales Sales on Services (Withholding) Rules, 2015

Withholding Agent [Purchaser]Service provider [whose sales tax to be

withheld] Rate of PST Withholding

Federal Govt;Provincial Govt;Autonomous bodyPublic sector organization etc.

Registered Person Applicable rate of sales tax


Company which is a resident or has a place of business in the Punjab



Recipient of advertisement services registered for Federal sales on goods or Punjab sales tax on services



Registered persons receiving taxable services from other than registered persons

N/A Applicable rate of sales tax

Accounting office responsible for payment against invoices of taxable services received by Government department



EXEMPTIONS:

Payments against following services are exempt from Punjab sales tax withholding :

Telecommunication

Banking

Courier

Insurance

Services (except advertisement services) provided by the companies being the active taxpayer.


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KPKRA Sales Tax Special Procedure (Withholding) Rules, 2015

Withholding Agent Service provider [whose sales tax to be

withheld] Rate of withholding sales

tax

- Offices and departments of Federal Government, Provincial Governments, and Local or District Governments;

- Autonomous bodies;

- Public sector organizations, including public corporations, state-owned enterprises and regulatory bodies and authorities;

- Organizations, projects which are funded, fully or partially, out of the budget grants of the federal or provincial governments;



Companies, as defined in clause (12) of section 2 of KPK Act, which are resident of the Province or have a place of business there.



Recipient of Advertisement Services who are registered for FBR's sales tax on goods or for KPK sales tax on services Act.



Registered person in KPK receiving taxable services from unregistered persons

N/A Applicable rate of sales tax

Exclusion from Withholding provisions

NONE

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Offences, Default Surcharge and Penalties

Offences, Default Surcharge and Penalties


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Default surcharge under Section 34

Default Surcharge: Default Surcharge is attracted in case of non payment of tax due within due date whether intentionally or otherwise, as per the following rates:

Non payment on account of any reason, other than tax fraud

KIBOR plus 3% per annum of the amount of tax due

Non payment on account of tax fraud 2% per month (24% per annum)


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Penalty under Section 33

If a person commits offenses prescribed under various provisions of law, then penalties as provided in the Table of Section 33 would be enforced.

Penalties are waived on voluntary compliance by registered persons as provided under Section 25 of STA. However, default surcharge is payable on every late payment of tax due.

Superior courts have held in plethora of decisions that penal provisions of any tax statute become applicable whenever the element of mens-rea exists in relation to evasion of tax.


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5 January, 2016 Audit, Assessment, Investigations, Refunds, Withholding Sales Tax, etc. By: Mazhar Saleem Shah, FCMA 04 November 2015.

Documents

member firms

tax audit section

course of audit

completion of audit

sales tax act

sta audit investigation

sales tax rules

special audit panel