The tax year is 1 July through 30 June. However, tax authorities are empowered to approve a special year-end.
All companies are required to file an income tax return each year by 31 December for the preceding financial year (1 July through 30 June) by accounting for business income on an accrual basis. If the special year granted by the tax authorities ends between 1 July and 31 December, then the tax return is required to be filed by 30 September following the year-end.
An across-the-board self-assessment scheme is in place whereby assessment is taken to be finalised upon filing of the return. The Commissioner, however, has powers to amend the assessment if it is believed that the assessment made is prejudicial to the interest of revenue or on the basis of audit or definite information that any income chargeable to tax has escaped assessment/has been under assessed/has been assessed at a lower rate or there is any misclassification between various heads of income. These powers are to be exercised within a prescribed time frame. In the case of transactions between associates, the Commissioner can substitute the transaction value with the fair market consideration. The Commissioner is also empowered to determine tax liability according to the substance of the transaction, disregarding formal arrangements between the parties.
Persons subject to final tax regime were required to file a statement prescribed in the law in lieu of return of income. The concept of statement in lieu of return has now been omitted with such persons now required to file a return income. The FBR is to prescribe returns for different classes of income or persons, including those covered by final tax regime.
Tax authorities can require a person whose name is not appearing in the ATL to file an income tax return.
Filing of a revised return requires prior approval of the Commissioner unless it is revised within sixty days, which has certain limitations and conditions. The Commissioner is also empowered to grant approval for revision of return for bona fide omission or wrong statement.
A time limit for notifying an annual income tax return form under the Ordinance has been introduced.
Payment of tax
Companies are required to pay advance tax on the basis of tax liability of the immediately preceding tax year in respect of their income (excluding capital gains and presumptive income). The advance tax is to be paid after adjusting the taxes withheld at source.
Advance tax is required to be paid in four quarterly instalments on or before 25 September, 25 December, 25 March, and 15 June in each financial year. Credit for tax paid in a tax year shall be allowed against tax liability of that year. However, in case of banking companies, such advance tax is payable on a monthly basis.
The total tax liability is to be discharged at the time of filing the return of income. However, penal action are prescribed in the law where tax payable at the time of filing of return is in excess of 10% of the total tax liability.
Advance taxes and taxes withheld are adjustable against the tax payable with the return of income.
Tax audit process
The FBR is authorised to prescribe criteria for selection of audit of taxpayers who have filed their returns for a tax year. Based on such criteria, cases are selected through computer ballot separately for income tax, sales tax, and federal excise duty. The returns are examined by tax authorities, and related documents and information are requisitioned. Show-cause notices are then raised and, on receipt of explanations from taxpayers, income or loss is assessed. In case of disagreement with assessments, the taxpayer has the right to agitate the issues before appellate forums.
A procedure has been proposed by the tax authorities, whereby the FBR's system would automatically scrutinise a tax return within six months of its filing in order to identify and adjust (after affording an opportunity of a hearing) any arithmetical and clerical errors, incorrect claims, and disallowance of tax credits, deductions, and losses, etc. in the declared version of the taxpayer's return.
The concept of an ‘agreed assessment’ has been introduced. A taxpayer intending to settle a case may file an offer of settlement in the prescribed form before the ‘assessment oversight committee’, in addition to filing a reply to the notice of amendment proceedings. The Committee shall decide its position on the said offer and communicate to the taxpayer. In case of agreement, the taxpayer can deposit the tax due, with the Commissioner passing an amendment order to this effect (in which event the taxpayer shall lose the right to appeal); otherwise, the matter would again be referred back to the Commissioner for continuation of the amendment proceedings in the routine manner. This option is, however, not available in cases involving concealment of income or where the interpretation of question of law is involved and having an effect on other cases.
The taxation authorities can apply generic sectoral benchmarks and ratios, etc. for determination of taxable income disregarding the results furnished by a taxpayer. This provision will only apply where a case is selected for tax audit and the taxpayer fails to provide the information/documents/explanations required during such audit.
The Commissioner, in addition to being authorised for having access to taxpayers’ premises, place, accounts, documents, or computer, if required, in pursuance of any audit or other proceedings initiated under the Ordinance, is also allowed real-time electronic access to such records of the taxpayer. The Commissioner is also permitted to conduct audit proceedings electronically through video links or any other prescribed facility.
Alternate Dispute Resolution (ADR)
An aggrieved person may apply for resolution of a dispute pending before any court of law or appellate forum, through ADR mechanism in following cases:-
a) Where the liability of tax is PKR 100 million or above or admissibility of refund;
b) The extent of waiver of default surcharge & penalty; or
c) Any other specific relief required to resolve the dispute.
However, any case where criminal proceedings have been initiated fall outside the purview of ADR
mechanism. Previously, in case of a dispute where a mixed question of law and fact was involved, the FBR was empowered to examine as to whether ADR Committee should be constituted or not. This hindrance has been removed.
Under the new mechanism, the taxpayer has a right to nominate a person from the panel notified by the FBR except where the relevant Chartered Accountant or an Advocate has been an authorised
representative of the taxpayer. Furthermore, the taxpayer will have to withdraw his appeal for seeking relief under ADR.
Statute of limitations
An audit of the tax return filed by a taxpayer can be conducted by the tax authorities within five years of the end of the financial year in which the return is filed. A person, whose income tax affairs have been audited in any preceding four tax years, he shall have immunity from selection of audit.
Tax authorities can probe into the source of unexplained offshore assets and foreign source income irrespective of any time limitation.
The time period to pass an amendment order is 180 days from the issuance of show cause notice.
Nevertheless, FBR is empowered to extend the time limitation for any application to be made or any act or thing to be done subject to certain conditions.
A non-resident not operating in Pakistan through a PE can apply to the FBR to issue an advance ruling setting out the Board’s position regarding application of the provisions of the Income Tax Ordinance to a transaction proposed or entered into by the taxpayer. The tax ruling, once issued, is binding on tax authorities.
Topics of focus of tax authorities
Tax authorities focus on the following issues:
- Transfer pricing.
- Relationship of expenditure with the business of the taxpayer.
- Advance tax.
- Payment of tax due within the time prescribed.
- Audit of returns filed.
- Compliance by taxpayers.
- Collection of arrears.