Taxmen invested with enormous powers to audit banks

KARACHI: Tax officials have been invested with sweeping powers, enabling them to access, assess, and audit the financial affairs of banking companies with an aim to detect any possible anomalies and fudging of figures used to evade taxes, sources said on Monday.

Through Finance Bill 2019/20, the commissioners of Inland Revenue had been empowered to call for record, including information and documents, for examining and investigating expenditures, income, assets, and liabilities of the banking institutions.

Sources in Federal Board of Revenue (FBR) said such powers were already available with the board under Seventh Schedule of Income Tax Ordinance, 2001, but there was a flaw in the law and the banking companies would usually slip through that loophole -mostly moved to the courts for relief against such orders.

“Now it has been proposed in the finance bill to insert explanation to remove ambiguity regarding conducting audit of banking companies,” an official at Large Taxpayers Unit (LTU) Karachi said.

The Seventh Schedule of the Income Tax Ordinance, 2001 deals exclusively with taxation of banking companies.

Analysts at Deloitte Pakistan, a chartered accountancy firm, said the Finance Bill 2019/20 had proposed to add the explanation for the purpose of removal of doubt that nothing in the schedule restricted the powers of the commissioner to call for the record of a banking company for audit under Section 177 of the Ordinance.

“The bill also has proposed to insert three explanations related to financial affairs of banking companies,” experts at Deloitte said.

They said one of the clarifications proposed to be added was that the provision for advances and off balance sheet items should be exclusive of reversals of such provisions. It is further clarified that reversal of bad debt classified as doubtful or loss shall be taxable because the respective provision have already been allowed as deduction, the Deloitte experts said.

“In furtherance, the reversal of bad debts classified as loss shall also be taxable with effect from Tax Year 2020 because the respective provision has already been allowed as deduction,” the chartered accountants firm said.

It is also proposed that the banking companies from next tax year would also be liable to pay additional amount of tax on their exposures into the government securities. “Finance bill seeks to tax the taxable income arising from additional income earned from additional investment in the federal government securities at the higher rate of 37.5 percent, instead of applicable rate of 33 percent from year 2020,” Deloitte Pakistan said. Another setback for banking companies introduced through the finance bill is that they would not be allowed to adjust brought forward losses against payment of super tax.