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

A software house whose export proceeds are taxed by the bank at realization can assume its income tax affairs are closed once the return is in. The Income Tax Ordinance, 2001 does not work that way. Final taxation settles the tax on the export income. 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?

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

Section 177 does not mention final taxation at all, so nothing in it excludes income taxed under section 154A. What an audit can usefully examine follows from section 154A(2). The export deduction is final only if the return was filed, withholding tax statements for the year were filed where required, and no credit for foreign taxes was claimed. Section 154A(3) says final taxation does not apply to a person who does not meet those conditions.

After the audit, section 177(6) requires an audit report once the taxpayer’s explanation is obtained. Section 177(6A) allows the assessment to be amended after a hearing. Section 177(7) says being audited in one year does not prevent audits in later years where there are reasonable grounds.

Is the return treated as an assessment?

Only in one situation. 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: the Commissioner “shall be taken to have made an assessment of income for that tax year” at the amounts in the return, and the return is taken as the assessment order. A software house that also earns income from Pakistani clients, taxed under the normal rules, is outside section 169(3) for that year. Neither section 169(3) nor section 177 says that a deemed assessment shields the person from audit.

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, unless the Commissioner authorises otherwise. Section 174(3) sets the period at six years after the end of the tax year, longer if proceedings are pending. Section 174(2) lets the Commissioner disallow or reduce a deduction the taxpayer cannot support with a receipt or other record.

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. Rule 29(3) makes 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, is not limited in that way.

Worked example (illustrative figures)

Chenab Digital (Pvt) Ltd in Multan realizes Rs. 75,000,000 of software export proceeds and earns Rs. 6,000,000 from a Pakistani bank client in tax year 2027. Because part of its income is not final tax income, section 169(3) does not apply. In 2029 it receives a notice under section 177.

What the notice might ask for	Where the duty comes from
Foreign invoices and bank realization records for the Rs. 75,000,000	Rule 29(1)(a) and (b): sums received, services provided
Invoices to the Pakistani client for the Rs. 6,000,000	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)
Fixed asset and loan records	Rule 29(1)(c) and (d)

Tax year 2027 ends on 30 June 2027. Six years after that is 30 June 2033, the earliest date the records for that year may be discarded if no proceeding is pending.

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 the 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 further audits on 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, because the Table’s columns do not survive text extraction cleanly. Record-keeping duties under company law are outside this corpus.