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ISLAMABAD:
The Federal Board of Revenue (FBR) has served an income tax audit notice to an information technology company on suspicion of evading taxes by claiming higher expenses and understating imports amid the government’s increased focus on plugging revenue leakages.
The FBR has requested records and books of accounts from M/s Pronet Private Limited under Section 177 of the Income Tax Ordinance, suspecting tax evasion during the tax year 2023, according to senior FBR officials. They stated that the company’s books need scrutiny after tax authorities found glaring inconsistencies in income tax returns filed over the past seven years.
The company’s records were obtained through intervention from the FBR headquarters, as it emerged that the Karachi field tax office was aiding tax evasion.
Sources revealed that the field office dealt with tax notices regarding short deductions of millions of rupees in withholding taxes, settling at a few hundred thousand for tax years 2016 to 2022. These notices were quietly settled in 2022.
Sources revealed that the FBR headquarters decided to conduct an income tax audit of the company for the tax year 2023 to ascertain the facts of the case. They mentioned that the actual amount of tax evasion will be determined only after the audit, but the initial desk audit suggested a significant amount.
Finance Minister Muhammad Aurangzeb stated on Tuesday that the government would work on a two-pronged strategy to enhance the low tax-to-GDP ratio. He urged improving tax enforcement to collect due taxes from existing taxpayers and broadening the tax base.
Prime Minister Shehbaz Sharif suspended a senior tax officer on Tuesday after an FBR counsel obtained a short adjournment in a case where a company had obtained a stay order against an audit notice issued in February last year.
The Supreme Court of Pakistan has instructed the high courts not to grant stay orders to taxpayers without first hearing the FBR. This increases the FBR’s prospects of completing tax audits without intervention from the courts.
The FBR spokesman did not respond to questions about the auditing of M/s Pronet Private Limited.
However, in a background briefing, a senior FBR official confirmed to The Express Tribune that the FBR has served an income tax notice to the firm under Section 177.
Another FBR official suggested that the company has significantly understated its profits over the past seven years. Pronet is engaged in the business of providing electronic equipment, computers, telecommunication equipment, and software.
The FBR has audited the company’s withholding tax deductions in the past. However, it is the first time that the FBR has decided to open the company’s books to see the complete details.
According to sources, the FBR cannot go back beyond six years, and the tax year 2018 will be time-barred by the end of next month.
The firm declared taxable income of Rs146.6 million for the tax year 2023. As per the income returns, the company claimed project expenses of Rs93.3 million, which prima facie are incommensurate with the revenue and projects in hand, and thus need to be examined with documentary evidence and tax deduction details, according to the sources.
For the tax year 2023, the company’s records suggest it should have paid a minimum tax of Rs50.4 million, but it showed only Rs43.6 million chargeable tax. The company has paid less minimum income tax than the legal requirement, they added.
The company claimed it collected Rs3.13 million in withholding taxes at the import stage, which suggests Rs57 million worth of imports last year when worked back at the rate of 5.5%. However, the company showed only Rs38.3 million in imports in the annual returns.
Similarly, the company showed liabilities of Rs292.9 million in the 2023 returns, but no such liability was there in the previous year. The entry, being strange, requires verification during the audit to appreciate the true facts of the case, according to the FBR sources.
The company claimed an aggregate of Rs288.5 million as administrative expenses and finance costs, equal to 67.40% of the gross profit of Rs427.9 million, according to FBR sources, which seems to be the biggest inconsistency.
In the tax year 2022, the company declared a profit of Rs155.3 million and paid Rs167.5 million in taxes. However, it claimed another Rs156.8 million as project expenses. In 2021, the company declared Rs125.8 million in profit and paid Rs43.8 million in profit. Yet, it again claimed Rs355.5 million as project expenses for the year.
For tax year 2021, the FBR’s view in March last year was that the company needed to pay Rs47.6 million. After examining books under Section 161, it charged only an additional Rs198,132.
The company claimed Rs473 million in project expenses in 2020, resulting in declared profits of Rs78.6 million. In 2019, Pronet claimed to have earned Rs190.5 million profit but showed Rs340.3 million in project expenses.
In 2018, the company declared Rs82.2 million in profit and paid Rs30.4 million in taxes. Yet, it declared Rs288.4 million project expenses. For the tax year 2018, the FBR served a notice for payment of Rs8 million, but the company made a payment of Rs172,806 on June 22, 2022.
The FBR served a tax notice to Pronet in April 2022 on short payment of withholding tax and demanded millions of rupees for tax year 2017. However, the FBR eventually settled at a meager payment of Rs179,913, according to the record.
In 2017, the company declared Rs121 million in profits and paid Rs41.5 million in taxes, while Pronet declared Rs280.7 million in project expenses for that year.
In 2016, the company declared Rs77 million in profits and paid Rs29.2 million in taxes. However, it showed Rs197 million as project expenses. For the tax year 2016, the FBR had initially raised a demand of Rs47.1 million but settled at Rs162,622.
The document date for the payment of small amounts of taxes for tax years 2016 and 2017 was the same – April 27, 2022.
Published in The Express Tribune, April 26th2024.
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