Who checks FBR’s tax orders?

A business receives a sales tax order and discovers that the officer has decided a question the show-cause notice never raised. The business must now spend time and money answering a case it should have had the opportunity to answer before the order was signed. Who in the Federal Board of Revenue (FBR) would catch that defect before the envelope went out? In two cases put to Inland Revenue officers in Karachi, just seven per cent and 23 per cent, respectively, spotted it. For a taxpayer wondering what protection a second pair of eyes affords, the results for supervisors make reading even more uncomfortable.

The figures come from Sales Tax and Income Tax Capability of Inland Revenue Officers, Karachi, a combined training needs assessment. The sales tax sitting drew 150 officers of BS-17 and above, the income tax sitting 143. Of the 139 who took both, only four met the assessment’s standard for signing orders in both taxes under ordinary supervision. 

The exercise covered three cases per tax in one city. It cannot establish how many orders issued across Pakistan are defective. It does, however, put a question squarely to FBR headquarters. On what evidence does it entrust contested assessments to officers elsewhere?

The officers had their law books. Each received a factsheet they could take as accurate and three draft orders of increasing size. Examiners had planted 36 errors in each paper, ranging from a wrong date to an unsupported finding that a taxpayer had suppressed sales. 

Officers earned credit for finding an error and further credit for explaining it. The harder mistakes and those carrying graver consequences counted more. Average weighted scores were 26.4 per cent in sales tax and 33.3 per cent in income tax. The more revealing figures concern what happened when officers tried to explain their objections.

In the smaller income tax case, the heading itself disclosed which power the officer had invoked to amend an assessment on audit findings. Ninety-seven per cent spotted the defect. Only 19 per cent explained why it defeated the order. 

A taxpayer reading such an order is entitled to ask what provision authorised the amendment, which facts brought the case within it and how the officer dealt with the reply. An officer who can circle the wrong section in someone else’s draft may still struggle to answer those questions in a case bearing his or her own signature.

Errors also ran in the opposite direction. Of the entries officers made on their answer sheets, 31 per cent in sales tax and 24 per cent in income tax alleged a fault where the draft contained none. Consider the implications for a business whose bank deposits exceed its declared sales. The difference deserves examination. 

A transfer between the business’s own accounts, however, calls for a different conclusion from a customer’s payment for an unrecorded supply. The officer must trace the receipt and explain the inference. A computer can flag the discrepancy in seconds. The cost of an officer’s failure to investigate it falls first on the person receiving the demand.

One further finding deserves attention. Eighty participants identified an issue concerning unexplained income that the examiners had not planted. The marking guide acknowledged the point. Officers plainly do read judgments and remember them. Training should use that interest to teach the harder skill of deciding when a precedent fits the facts.

The assessment identifies precisely where supervision could make a difference. Sixty-five officers in sales tax and 72 in income tax qualified to draft notices or orders for a competent colleague to check. Across the two sittings, only 21 and 28 respectively met the standard for vetting another officer’s work. 

Among Commissioners and Additional Commissioners, the figures fell to four of 56 in sales tax and six of 53 in income tax. A file may travel all the way up the departmental hierarchy, collecting initials at every stage, while the defect that justified sending it upstairs survives untouched.

Deputy Commissioners supplied ten of the 15 officers who qualified to adjudicate sales tax cases and ten of the 14 who qualified in income tax. Karachi’s Large Taxpayers Office had nine officers who met the sales tax vetting standard, none of them a Commissioner or Additional Commissioner. 

At Regional Tax Office I, none of the 14 sales tax participants qualified to vet an order. Small groups and differences in the mix of grades counsel against ranking offices on narrow differences in scores. They do warrant asking why a Deputy Commissioner able to identify a fatal defect should have so little bearing on whom the department selects to review difficult cases.

The sums in the exercise give that question a fiscal dimension. The three sales tax drafts contained Rs. 439.6 million in measurable errors, including understated tax and demands vulnerable on appeal. The average participant would have corrected 27 per cent of that amount. In income tax, the corresponding figures were Rs. 95.4 million and 46 per cent. These sums belonged to the test cases. 

They cannot be booked as losses to the exchequer or multiplied across the national caseload. Their significance lies in the difference skilled scrutiny made. For every Rs.100 of measurable sales tax error, officers who qualified to adjudicate corrected Rs. 71, compared with Rs. 34 among those qualified to assist.

Karachi already has officers from whom others can learn. FBR should give its strongest reviewers time to work through contested files with colleagues. Begin with a notice about to issue. Ask the drafter to identify the transaction, the evidence and the precise allegation the taxpayer must answer. Return to the same file after the hearing and ask which part of the reply changed the proposed finding. If nothing changed, the draft should explain why. A supervisor who has followed that file can distinguish a failure to understand the law from a failure to read the taxpayer’s reply. Each calls for different instruction.

The training Academy could build its next course around anonymised orders returned on appeal. Give officers the original record, withhold the outcome and ask each to write the decisive paragraph. Then compare their reasoning with the appellate finding and repeat the exercise on a fresh file. FBR should apply the same test to senior officers who review orders. It should also record recurring defects by formation and publish aggregate results alongside collections. A Commissioner whose staff repeatedly miss limitation dates ought to be able to tell headquarters what changed in the office and whether the next review found fewer late orders.

For a citizen, the real measure of reform is what happens after evidence is furnished. Does anyone read it, can the officer explain its effect on the assessment, and will a supervisor intervene before an untenable demand goes out? For the exchequer, the corresponding test is whether an officer can establish the tax actually due and defend the calculation when challenged. Karachi’s assessment gives FBR a place to begin answering both. The next time headquarters asks a field formation how much revenue it has raised, it should ask for a sample of the orders behind the figure. Read the notices, read the replies, then see whether the signatures at the foot of those orders can carry the weight Pakistan’s tax administration places upon them.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws.  He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. 

He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).  He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). 

He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024),  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis). 

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). 

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan.  

His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).  Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer. 

His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others. 

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices . 

The recent publication, coauthored by these writes with Huzaima Bukhari is:                        

Pakistan Tackling FATF: Challenges & Solutions, available at: 

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35

https://www.amazon.com/dp/B08RXH8W46