Home »Taxation » Pakistan » Audit of banks: FBR to implement uniform WHT system

  • News Desk
  • Mar 29th, 2017
  • Comments Off on Audit of banks: FBR to implement uniform WHT system
The Federal Board of Revenue (FBR) will implement a uniform system of withholding tax audit of banks to streamline withholding tax collection from banking sector on real time basis. Sources told Business Recorder here on Tuesday that the initiative of withholding tax audit of banks was taken by Regional Tax Office (RTO) Rawalpindi.

The guidelines on the withholding tax audit of banks were prepared by the said RTO and Chief Commissioner RTO Rawalpindi Muhammad Tanvir Akhtar shared the procedure with the FBR. The FBR discussed the withholding tax audit of banks with the Chief Commissioners of Large Taxpayer Units (LTUs)/RTOs having jurisdiction over banks. An in-depth analysis of the said procedure was carried out by the FBR with the concerned LTUs/RTOs. The said LTUs and RTOs have fully endorsed the new system of banking audit which would be implemented across the country. A consensus has been developed among the FBR and its field formations that the new audit system of banks has addressed all key issues of banking sector.

After obtaining approval of the FBR Member IR Operations, the FBR has circulated the procedure of withholding tax audit of banks to the concerned LTUs/RTOs having jurisdiction over banks for compliance, sources said.

Sources said that the beauty of the new system is that it would ensure privacy and confidentiality of client's data of banks. The system has also addressed all issues raised by the banking sector. The guidelines of RTO Rawalpindi on the withholding tax audit of banks revealed that commercial banks in Pakistan normally avoid any type of withholding tax audit, mainly quoting the following reasons:

Firstly, banks have fully developed centralised & credible software for tax withholding which works in a foolproof manner. Secondly, withholding audit trespasses into the privacy and confidentiality of their client's data. Thirdly, the volume of banking transactions is so huge that physical checking is neither possible nor advisable. Fourthly, as withholding agents banks are rendering free services to FBR which in return should further burden the banks. The real irony is the fact that IR field formations holding jurisdictions over the banks tend to accept the said reasons without raising even very valid questions.

Notwithstanding the merits/de-merits of aforesaid reasons put forth by the banking sector the real question is why to conduct the withholding audit of banks. Keeping in view bank's core business (money business), the risk of misuse of available government money is quite high. Inland Revenue (IR) Wing's increasing dependence on banks has gradually eroded the writ of tax department which needs to be restored, report said.

Various studies and exercises conducted by tax authorities confirm the factum of tax avoidance in bank's withholding regime. Bank's sample withholding audit during FY 2011-12, steered by Directorate General I&I-IR and conducted by LTU Karachi and a study on bank's deductions u/s149, conducted by RTO Rawalpindi during 2015-16 are witness to this assertion, it said.

A recent study conducted by RTO Rawalpindi, (which has been shared at the Conference of Commissioners (Tax Withholding) held at FBR on 21st February 2017) opens a new window in this area. During this study it has been revealed that all banks, operating anywhere in the world open, maintain and operate General Ledger A/Cs(hereafter GL A/Cs) for tax withholding purposes. GL A/Cs function in line with the cardinal accounting principle ie double entry system. During normal banking operations whenever and wherever A/C of any bank customer, employee, related parties or banking company itself is debited on account of tax deduction/collection, simultaneously a credit entry has to be passed in some corresponding A/C. Though any specific title of such corresponding A/Cs is immaterial, yet generally these destinations A/Cs are termed as GL A/Cs. These A/Cs are actually withholding tax A/Cs, exclusively meant for tax deduction/collection. The field formations holding jurisdiction over the respective banks are fully entitled and authorised to excess the said GL A/Cs as privacy provisions do not apply here. It is neither client's privileged and personalised data nor it entails any tax probe in any individual case, the report said.

The RTO Rawalpindi report said that the exercise of bank's withholding audit can be divided into two major components ie withholding tax audit under customers related provisions and that of bank related provisions. For both audit segments following course of action is recommended for a quick, directional and meaningful withholding audit of banks. This withholding audit module is based on RTO Rawalpindi's aforesaid snap/test audits of bank's withholding regime.

Bank's Withholding Audit: Customers related provisions: IR field formations having jurisdictions over the banking companies may draw the following check list along with the recommended course of action: Firstly, a complete and exhaustive list of bank branches (with branch codes) of the bank under audit should be prepared. (There can be situations where withholding provisions get invoked even at overseas branches of Pakistani banks). Secondly, preparation of a complete and exhaustive list of withholding provisions (after consulting bank's latest audited accounts) attracted in the cases of each individual bank. Thirdly, requisitioning of the details of GL A/Cs, opened, maintained and operated by the bank under audit for tax withholding purposes. Fourthly, obtaining complete bank A/C statements of said GL A/Cs for the period under audit. Once GL A/Cs statements for the period under audit are obtained, the following audit steps are recommended to check the veracity of banks version.

Check list also included chronological accuracy: complete data (date wise & month wise) is available. Structural accuracy ie tax withholding from all branches (to be identified through specific branch codes) is being reflected. Branch wise segregation would further help in this regard.

Transactional accuracy: The nature and volume inflow of credits from branches exactly matches with outflow towards state exchequer. This is the most important aspect of the whole audit because the possibility cannot be ruled out that taxes withheld by the banks are remitted to the tax department against bank's own tax liabilities. Procedural accuracy: Timelines as prescribed under law are fully complied with. While checking procedural accuracy audit party may like to check the total time consumed by the respective branches and HQs both. Penalty for delay alone may result in creation of a substantial tax demand.

Cross-sectional accuracy: That adjustable and non-adjustable taxes collected/withheld by banks are not mixed with each other. Similarly profit posted by various branches need to be cross-matched with the taxes deducted against the profit. Legal accuracy: The mechanism for segregation of filers/non filers, application of withholding tax rates, and above all the mechanism for allowing exemptions need to be checked under various withholding provisions.

Banks Withholding Audit: Bank related provisions: The concerned field formations may draw the following check list along with the recommended course of action: In case of salary, check list include complete details of house/car and other personal loans/advances and stocks/shares (respective bank) availed by bank employees/executives so as to see tax treatment of perquisites; details of all incentive/reward schemes along with payments made during the period under audit; documentation mechanism while allowing tax adjustments against current withholding liability; tax withholding treatment in cases of employees hired through outsourcing/HR consultants and payment mechanism and timelines for deduction & transmission.

In cases of rent of hired premises, list of hired properties and rent paid (for bank operations); list of cases where adjustable/non-adjustable advances (including amounts advanced for the construction or refurbishing of premises) or refundable securities have been paid; list of cases where through contractual arrangement regular repair & maintenance is being made and property taxes are being paid by banks; list of cases where private residential houses, rest/guest/farm houses & apartments have been hired by the bank.

In cases of contracts & supplies, list of all contractors and suppliers with amounts paid u/s 153 during the period under audit; random cross-checking of filers/non filers; accuracy of tax rates and rational & mechanism for exemptions. In cases of brokerage/commission, check list included details of payments made under above heads during the period under audit.

In case of auctions, the check list included details of auctions (forfeited properties, vehicles, plant & machinery and stocks) made during the period under audit (similar other provisions can be added keeping in view the cases of individual banks).

Online tax withholding audit: Future course of action: Directorate General (Withholding) IR may like to steer online audit of bank's withholding operations. The rationale and proposed mechanics of this exercise revealed that the GL A/Cs are actually withholding tax A/Cs, exclusively meant for tax deduction/collection, therefore the field formations holding jurisdiction over the respective banks are fully entitled and authorised to ask for direct/ online excess to the said GL A/Cs.

Moreover banks provide online access to their customers whereby they can ascertain debit/credit transactions, transfers to/from and balances of their respective A/Cs. Tax department deserves the same for GL A/Cs meant for parking and transmission of withholding tax collection/deduction.

Under the proposed mechanics for online withholding tax audit, the RTO Rawalpindi report suggested the development of uniform software, integrated with all withholding tax related GL A/Cs, maintained by the banks. This access, by no means aims at customers individual/personalised data, therefore it should not create any alert in the banking sector, including State Bank of Pakistan. This action is permissible u/s 237A of Income Tax Ordinance, 2001.

The aforesaid software may hyperlink all withholding tax related GL A/Cs maintained at individual bank branches with the centralised GL A/C at bank HQs. This linkage would facilitate cross-verification of the veracity of individual tax withholding transaction ie nature, volume and time frame of deduction and final payment.

This software may provide window for queries raised by the audit officer and the response by the banking company, ideally visible to the supervisory officers as well. Apart from transparency this move would showcase the quality of audit observations and the final settlement.

This IT application would streamline the tax withholding processes in banking sector on real time basis, in a way that over the period of time vigilant monitoring of withholding taxes shall replace the formal and cumbersome withholding tax audit, the RTO Rawalpindi report added.



the author

Top
Close
Close