FBR Unveils Comprehensive Tax Audit Initiative

The Federal Board of Revenue (FBR) is launching a comprehensive audit initiative targeting income and sales taxpayers, a bold move to strengthen tax compliance with far-reaching implications for businesses. Our tax law firm warns clients to prepare for heightened FBR scrutiny and ensure robust compliance to mitigate audit risks.

Under the Inland Revenue Transformation Plan, the FBR will deploy desk audits, investigative audits, forensic audits, and field audits, partnering with third-party auditors and industry experts to enhance audit quality and capacity. These auditors, hired with detailed job descriptions, performance metrics (40% productivity, 30% audit quality, 30% behavioral factors like accountability), and review mechanisms, will assist FBR officers in pinpointing non-compliance, discrepancies, and risk areas in tax filings, as reported by media outlets like The News.

The auditors will analyze taxpayer declarations, reconcile data across income tax, sales tax, federal excise, and customs, and scrutinize financial records—including tax returns, financial statements, and accounting books—against standards like the Companies Act, Income Tax Ordinance, and Sales Tax Act. They will leverage financial ratios and industry benchmarks to detect tax fraud, verify expenses, examine tax credits and claims, and report on exemptions and tax reductions, aiming to boost tax revenue, per the FBR’s stated goal.

From a tax law perspective, this multi-faceted audit approach signals increased compliance burdens. Clients must ensure accurate documentation under Section 29 for deductible expenses, as disallowances could trigger penalties (e.g., 5% default surcharge or Rs10,000 per instance, per historical FBR norms). Input tax credits under Section 8B are at risk if sales tax reconciliations falter, while customs-related discrepancies could lead to retroactive assessments. The involvement of third-party auditors may intensify forensic probes, especially in high-risk sectors like manufacturing and trade, as web sources like Dawn note FBR’s focus on revenue leakages amid IMF pressure.

Critically, the narrative of “enhancing audit quality” may mask an aggressive push to meet revenue targets—web reports like The Express Tribune suggest this initiative targets under-reported income and non-compliant firms, reflecting Pakistan’s chronic tax gap. Clients should anticipate extended audits and prepare accordingly.

Our firm advises clients to review tax filings, strengthen compliance documentation, and brace for FBR audits, safeguarding their tax position in this intensified enforcement era.