Are you next for tax audit? It's now the software's call

The National Board of Revenue (NBR) is developing specialised software, which according to officials will bring transparency to the tax audit process, check taxmen's discretionary power, detect tax evasion and eliminate audit fear among taxpayers.

The software, called "Risk Management Engine" that can communicate with other government agencies for data collection, will select files for in-person audits after scanning returns submitted by taxpayers, individuals and companies alike. 

The piloting of this automated computer program will begin in one or more circle offices of Tax Zone 6 in Dhaka at the end of this month or next month. The software will start full-scale operation next year, an NBR official informed.

The NBR is also formulating an audit manual for the first time, under which the programme will operate. Due to a lack of a tax manual, taxmen now choose files randomly – a process many taxpayers alleged often inflicts harassment.   

A senior NBR official, on condition of anonymity, told The Business Standard (TBS), "With the new automated system in place, tax officers will not be able to randomly opt for tax audits as the software will pick which taxpayer's file to be audited based on specific criteria."

When asked how the software would communicate with other government agencies for data, he said, "A lot of information about a taxpayer's assets can be found if we look into secondary sources (different government offices) such as the Dhaka Power Distribution Company Ltd (DPDC). With the information we have now with the DPDC, we can start the audit of about 250,000 files."

"There has been a lot of progress in building the database of all secondary sources. The software will be able to process and profile taxpayers based on these databases," he said, adding that this automated process will play a major role in bringing transparency not only in tax but in the overall financial system of the country.

The work of collecting taxpayers' data for the past three years is underway, he said, the NBR's Income Tax Department is getting access to the databases of other government agencies so the software can identify suspicious files based on certain criteria by comparing the income, expenditure and wealth information shown in the tax file with other categories of information.

Those files will be then forwarded to NBR's Tax Risk Unit which will make final decisions and enable the field-level officials for audits, the official said.

Asked what kind of file would be on the suspect list of the audit, the NBR official said, "The criteria have not been finalised yet. However, people who have major discrepancies in income, expenditure or assets will come under scrutiny."

For example, any individual (or business) who has been exempted from income tax but has massive income, or making large profits in the stock market, bringing in large amounts of remittances, might be considered for audit, said another NBR source.

However, fresh taxpayers are more likely to be out of the list unless there are major irregularities, according to the source.

According to related NBR sources, the Income Tax Department is already analysing the import and export data of the last five years, provided by the automated software ASYCUDA World of the Customs Department of the NBR. It will help the NBR to verify the import-export information with the tax files.

Out of 86 lakh Taxpayer Identification Number (TIN) holders, more than 28 lakhs submitted their returns last year, of which about 30,000 were corporate taxpayers and the rest were individuals. 

Although there are some directives for tax audits, these are not implemented at the field level, as alleged by some taxpayers.

A tax officer usually selects files and sends letters to taxpayers for audit at will – a process which creates intimidation among taxpayers, as well as scopes for harassment.

Currently, there is no legal framework as to what percentage of files a tax office can audit. However, NBR officials said about 2% of tax files are currently audited.

At a meeting in the NBR office on 9 February, NBR Chairman Abu Hena Md Rahmatul Muneem admitted that the tax net will not expand if the fear of taxpayers about audits is not eliminated. 

"The NBR is preparing a manual to alleviate taxpayers' fear of audits. The audit will be done based on authentic data and evidence," Abu Hena added.

Tax experts are viewing the NBR's fresh initiative as positive. Md Shahadat Hossain, former president of the Institute of Chartered Accountants of Bangladesh, told TBS, "This is a good initiative. However, measures should be taken so that the criteria, on which the taxpayers will be scrutinised, does not strike further fear among taxpayers."

According to sources, a group of Bangladeshi technicians living in Australia are assisting NBR in developing this software.

Expressing optimism, Mohammad Hatem, a Narayanganj-based ready-made garment exporter, told TBS, "If the audit files are selected automatically on fixed criteria, the harassment of taxpayers may be reduced. Hopefully, it will also reduce audit time."

He, however, thinks that it is possible to harass taxpayers if officials want to even with the use of the software.