Can FBR audit a software house under the IT export final tax regime, and what records must it keep?

A software house whose export proceeds are taxed at 0.25% by the bank may think its income tax affairs are closed once the return is filed. The Income Tax Ordinance, 2001 does not work that way. Final taxation settles the tax on the export income, but it does not remove the Commissioner’s power to examine the company’s records, and it does not remove the duty to keep them.

Can FBR audit a company under final tax?

Section 177(1) lets the Commissioner call for any record or documents, including books of accounts maintained under the Ordinance or any other law, “for conducting audit of the income tax affairs of the person”. Where records are kept electronically, the company must allow access to the machine and software holding them. The proviso requires reasons to be recorded and communicated to the taxpayer, and bars calling for records after six years from the end of the tax year to which they relate.

Nothing in section 177 excludes income taxed under section 154A. The section does not mention final taxation at all. What an audit can examine in a final tax case follows from the conditions in section 154A(2): the return was filed, withholding tax statements were filed where required, and no foreign tax credit was claimed. If a condition fails, section 154A(3) says final taxation does not apply.

After the audit, section 177(6) requires an audit report once the taxpayer’s explanation is obtained, and section 177(6A) allows the assessment to be amended after a hearing.

How does section 169(3) treat the return?

Section 169(3) applies where all the income a person derives in a tax year is subject to final taxation. An assessment is then treated as made, meaning the Commissioner is taken to have assessed the income and tax at the amounts in the return, and the return is taken for all purposes of the Ordinance to be an assessment order. A software house that also earns local income taxed under the normal rules is outside this sub-section for that year, and its return is dealt with in the ordinary way.

Which records must a software house keep?

Section 174(1) requires every taxpayer to maintain in Pakistan the accounts, documents and records that are prescribed. Section 174(3) sets the period at six years after the end of the tax year, longer if proceedings are pending.

Rule 29(1) of the Income Tax Rules, 2002 applies to every taxpayer deriving income chargeable under the head “Income from Business”. It requires proper books of account, documents and records of:

• all sums received and spent, and what they were for;
• all sales and purchases of goods and all services provided and obtained;
• all assets;
• all liabilities.

Rule 29(2) allows invoices generated by computerised accounting software, and rule 29(3) makes the retained copies and electronic records part of the records. Rule 29(4) repeats the six-year period.

A point the law leaves open. Section 169(2)(a) says final tax income is not chargeable “under any head of income”. Rule 29 is written for income chargeable under the head “Income from Business”. The rules do not say in terms how rule 29 applies to a company whose only income is final-tax export income. Section 174(1), which applies to every taxpayer, and section 177(1), which reaches records kept under any other law, are not limited in that way.

Worked example (illustrative figures)

Chenab Digital (Pvt) Ltd in Multan realizes Rs. 60,000,000 of software export proceeds and earns Rs. 5,000,000 from a Pakistani client in tax year 2027. Because it has local income, section 169(3) does not apply to it. It receives a section 177 notice in 2029.

What the notice might ask for	Where the duty comes from
Foreign client invoices and bank realization advices for the Rs. 60,000,000	Rule 29(1)(a) and (b), services provided and sums received
Invoices to the Pakistani client for the Rs. 5,000,000	Rule 29(1)(b) and (3)
Payroll and contractor payment records	Rule 29(1)(a), sums expended
Proof that withholding statements were filed	Section 154A(2)(b), condition for final tax
Fixed asset and loan records	Rule 29(1)(c) and (d)

Records for tax year 2027 must be kept until at least 30 June 2033, six years after the tax year ends on 30 June 2027.

What if the records are not produced?

Section 177(2AA) says that where records are not furnished, are incomplete, or defects are not explained, taxable income is taken as not correctly declared and is determined using sectoral benchmark ratios prescribed by the Board. Section 177(10) allows a best judgment assessment where required records are not produced.

The section 182 Table adds penalties. Entry 7 sets Rs. 10,000 or “five per cent of the amount of tax on this income”, whichever is higher, for failing to maintain required records. Entry 8 sets Rs. 100,000, Rs. 200,000 and Rs. 300,000 for failing, without reasonable cause, to produce records on the first, second and third notice under section 177.

Common mistakes

• Discarding records because the tax is final. Section 174(3) sets six years regardless.
• Assuming the return is automatically an assessment. Section 169(3) applies only if all income for the year is final-tax income.
• Treating one audit as the last. Section 177(7) allows audits in following years where there are reasonable grounds.

What to check in the official text

Read section 177(1), (2AA), (6), (6A), (7) and (10), section 174, section 169(2) and (3), section 154A(2) and (3), and rule 29 of the Income Tax Rules, 2002. Check entries 7 and 8 of the section 182 Table in the official PDF. Record-keeping duties under company law are outside this corpus.