TAX experts do not pin much hope in the concept of the special audit panel that was introduced in the federal FY16 budget. They said it would not fare any better than a similar previous exercise.

Many claim the idea came from the top and was adopted without consulting the relevant stakeholders. It would serve the purposes of only a few people who would be engaged at hefty fees.

The Finance Act 2015 empowers the Federal Board of Revenue (FBR) to appoint special audit panels, which will have two or more members. It will comprise officials from Inland Revenue, chartered accountant firms, cost and management accountants or any other person as determined by the FBR.

The FBR has entered into an understanding with the lenders that foreign chartered accountants will be hired to become part of the audit panels along with their Pakistani peers, and their hefty fees will be paid through loans extended by them

The panel will conduct an audit, including a forensic audit, of the income tax affairs of any person or class of persons, and the scope of the audit would be determined by the FBR or the Commissioner of Inland Revenue on case-by-case basis. The panel will be headed by a chairman who will be an officer of Inland Revenue.

The response to the panel audit has created a clear division within the tax machinery. The group that supported the idea believes that the collaborative audit is designed to utilise the expertise of chartered accountants, cost and management accountants and other sector specialists in conducting more effective audit. The participation of a wider range of experts would essentially strengthen the audit, while the procedure and the legal aspects will be steered by Inland Revenue officers.

However, tax officials who deal with audit have the opposite approach. Finance Minister Ishaq Dar, who is also a chartered accountant by profession, is believed to be the architect of the scheme. Therefore, no one is supposed to make comments on its drawbacks. The concept of the panel audit was introduced in 1989-90 with a limited scope, but it failed to produce the desired results.

One of the drawbacks of the panel audit is that it will be headed by a tax official. There may be differences between government officials and private professionals on the panel. The chartered accountant who will be looking into the mathematical accuracy of the audit will be paid hefty fees, while there is no incentive for the government official on the same panel. The legal issue will be the responsibility of the tax official.

There is an impression that a major firm is unlikely to become part of the audit panel and work under the tax officials and then take the blame for the tax department’s inefficiency.

The audit panel will also have no power of amendment. The taxpayer will have to go through another hassle where he will have to approach the tax department for any amendment in the panel’s report.

Forensic audit has also been introduced on the recommendation of donors, even though there is no expertise for conducting such an exercise in the country. The FBR has entered into an understanding with the donors that foreign chartered accountants will be hired to become part of the audit panels along with Pakistani peers. The hefty fees of the foreign and local chartered accountants will be paid through loans from the donor.

Foreign consultants were hired in the past to make the audit policy, which only remained on paper and was never implemented. The policy proposed by those forensic consultants was mostly copied from those in developed countries and was therefore not much suitable for a country like Pakistan.

Instead of wasting money and time, tax experts suggest that the FBR should focus on making an audit policy for at least five years. The policy should treat taxpayers on the basis of turnover — large, medium and small taxpayers. The experts believe the focus of the audit should be on the large taxpayers for at least five years instead of one year. The duration of the audit should be three years for medium taxpayers and one year for small taxpayers.

Even the tax reform commission has found the concept of the audit panel faulty and ineffective and has expressed its concern. The commission believes a tax officer as the lead person in the panel audit will not work.

A member of the tax reform commission believes that the audit should be a separate function. There should be a specialised cadre that goes through extensive training for at least three years. Moreover, there should be an independent set-up, he added.

In short, there is a need for an effective alternative dispute resolution mechanism that should be built into the policy.

Published in Dawn, Economic & Business, August 3rd, 2015

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