The country’s income tax self-assessment scheme is based on the premise that taxpayers will declare correct taxable income and will pay due taxes.

However, the scheme does not seem to be very successful in improving tax collection through voluntary tax return filing.

Just look at the evidence. Only 30pc of direct tax revenue is being collected through tax returns.

The self-assessment scheme has been operational since the tax year 2003, pursuant to section 120 of the Income Tax Ordinance of 2001.

Accordingly, returns of income filed by taxpayers are taken as an assessment order to the extent of their declared taxable income and tax paid thereon.

To ascertain whether the taxpayers’ declaration is correct or not, section 120(1A) of the ordinance empowers tax authorities to audit the taxpayers’ income tax affairs.

Accordingly, taxpayers’ cases are selected for audit either by the Federal Board of Revenue (FBR) under section 214C of the ordinance or by the Commissioner Inland Revenue under section 177.

It is difficult for authorities to obtain information regarding such deals

For example, the FBR selected 2,173 corporate cases and 82,090 non-corporate cases pertaining to tax year 2015 for audit through parametric computerised ballot under Audit Policy 2016, announced on Nov 23, 2016.

Pursuant to section 177 of the ordinance, tax authorities have to rely on the information and documents provided by the taxpayers while auditing.

Additionally, pursuant to section 176, tax authorities can obtain relevant information from third parties, including business concerns, individuals with whom taxpayers have conducted economic transactions, and banks with which the taxpayers have opened bank accounts or have obtained loans.

Practically, the information or documents so obtained do not prove to be useful for detecting tax evasion as the same are being managed in accordance with the declarations.

Taxpayers conceal taxable income through many sophisticated techniques. One such technique is to conduct business transactions through other persons (benamidars) who are not real beneficiaries of such transactions.

For example, the Directorates of Intelligence and Investigation (Inland Revenue) have identified a number of business concerns that have bank accounts in the name of their employees or other irrelevant persons.

It has also been identified that some business concerns have been registered under the names of employees or persons who are not real beneficiaries.

In fact, the quantum of benami transactions is massive in the country and hence the tax evasion. By and large, tax evasion in the real estate sector is associated with benami transactions.

It is extremely difficult for tax authorities to obtain information regarding benami transactions and then to link them with the actual beneficiaries to establish cases of tax evasion under the ordinance.

Therefore, to stem tax evasion especially in the real estate sector, the government has implemented the Benami Transactions (Pro­hibition) Act 2017, whose section 2(8) prohibits an individual, a company, a firm or an association of persons (AOP) from entering into a benami transaction.

Such a transaction is where a property is transferred to a person (a benamidar) but the consideration for such property has been provided or paid by another person and the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration (the beneficial owner).

Furthermore, a property transaction carried out in a fictitious name or a property transaction where the owner of the property is not aware of, or denies knowledge of, such ownership or a property transaction where the person providing the consideration is not traceable or fictitious also constitute benami transactions.

The section 4 of the act provides that a benami property is liable to be confiscated by the federal government.

Furthermore, a person or a fictitious person (a benamidar) in whose name the benami property is transferred will not be allowed to retransfer the property held by him to the beneficial owner (section 5 of the act).

Pursuant to section 51 of the act, the perpetrators of a benami transaction will face imprisonment of between one and seven years and will be liable to a fine of up to 25pc of the fair market value of the property.

After the implementation of the act, tax authorities are in a better position to stem tax evasion in lieu of benami transactions.

The writer is Additional Director Intelligence and Investigation (Inland Revenue) at the Federal Board of Revenue

Published in Dawn, The Business and Finance Weekly, August 7th, 2017

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