Late tax filers not subjected to audit under section 214D

Late filers of tax returns not to be subjected to automatic selection for audit under section 214D of the Ordinance [Section 214D, Section 182A of the Ordinance]. Late tax filers not subjected to audit under section 214D is the new update through Amendment in Finance Act, 2018.

Prior to the passage of the Finance Act, 2018 a person was automatically selected for audit under section 214D if the person failed to file return of income within the time period delineated under section 118 of the Income Tax Ordinance, 2001 or within the time period extended by the Board or the concerned Commissioner under sections 214A and 119 of the Income Tax Ordinance, 2001 respectively.

Taxpayers were also subjected to automatic selection for audit if tax required to be paid along with return of income under section 137 of the Ordinance was not paid. Moreover, audit of the Income Tax Affairs of the person under section 214D of the Ordinance was required to be conducted as per procedure laid down under section 177 of the Income Tax Ordinance, 2001.

However, taxpayers were not subjected to automatic selection and were ousted from the ambit of section 214D of the Ordinance if they:-

(i) filed their income tax returns suo-moto within:-

• ninety days of the time period delineated under section 118 of the Income Tax Ordinance, 2001;
• or within the time period extended by the Board or the concerned Commissioner under sections 214A and 119 of the Income Tax Ordinance, 2001 respectively

(ii) and paid :-

• 25% higher tax as compared to the previous tax year on the basis of their taxable income; or

• the higher of 2% of turnover or normal tax liability alongwith return in cases where return for the preceding year was not filed or income below taxable limit was declared.

The concept of automatic selection for audit under section 214D of the Ordinance posed hardship for new taxpayers, desirous of coming within the fold of the tax net who file their income tax returns after the due date and mostly upon issuance of notice under section 114.

In order to provide relief to new taxpayers coming within the fold of the tax net and supplement efforts geared towards broadening of the tax base, section 214D of the Ordinance has been omitted.

Now the late-filers shall not be subjected to automatic selection for audit under section 214D of the Ordinance.

However, in order to create a deterrence against late filing of returns a new section 182A has been inserted through the Finance Act, 2018 whereby a person who fails to file return of income under section 114 of the Ordinance within the due date as delineated under section 118 of the Income Tax Ordinance, 2001 or within the date extended by the Board or the concerned Commissioner under sections 214A and 119 of the Ordinance respectively shall not be included in the active taxpayers list for the year for which return was not filed within the due date.

Therefore, a person who is unable to file return within the date stipulated under section 118 of the Ordinance or within the date extended by the Board or the concerned Commissioner under sections 214A and 119 of the Ordinance shall no longer be entitled to appear on the active taxpayers list for the year for which return of income is not filed within the due date i.e. a late filer shall no longer be treated as a “file( in terms of section 2(23A) of the Ordinance as the name of such taxpayer shall no longer appear on the active taxpayers list issued by the Board.

However, an explanation has also been inserted in section 182A of the Ordinance whereby it has been clarified that Section 182A of the Ordinance shall have prospective effect and shall only be applicable for the returns due for the Tax Year 2018 and onwards for which the first Active Taxpayers List is to be issued on 1st March, 2019 under the Income Tax Rules, 2002.

Therefore, taxpayers should ensure that their income tax returns for the Tax Years 2018 and onwards are filed within the due date under section 118 of the Ordinance or the date extended under sections 214A and 119 of the Ordinance in order to avoid higher rates of withholding taxes across a multitude of transactions applicable to non-filers viz-a-viz filers.

Prior to the Finance Act, 2018, banking companies were required to provide to the Board a list containing particulars of deposits aggregating Rs. 1 million or more during the preceding calendar month. By virtue of amendments made in section 165A of the Income Tax Ordinance, 2001 through the Finance Act, 2018 banks are now required to furnish particulars of deposits aggregating Rs. 10 million or more during the preceding calendar month.

Before the Finance Act, 2018 banks were required to provide a list of payments made by any person against bills raised in respect of credit card issued to such person, aggregating to Rs. 100,000/- or more during the preceding calendar month. Consequent to the Finance Act, 2018 banks are required to provide list of persons where payments against bills raised in respect of credit card(s) issued to such person(s) in the preceding calendar month aggregate to Rs. 200,000/- or more.

Read more blogs here and to contact FBR click here.