Sales tax audit will be resumed shortly, after training of tax officials at Lahore, though the new audit policy is more or less blueprint of the procedure in vogue for the last many years. The CBR had suspended sales tax internal audit since October 2004, barring auditors to visit premises of factories/industrial units and demanding record, without prior permission of tax officials.
The CBR claims that the decision would not only effectively check the harassment to the business community by sales tax auditors but would also bind the auditors to carry out genuine information-based audit.
Meanwhile, the CBR Audit Wing has been directed to devise a new policy to curb corruption and to improve the audit working. CBR has drafted a new audit policy, which was dispatched to the collectors of sales tax for compliance. Training of auditors started in line with the new audit policy.
Information collected by this scribe shows that the new policy is a replica of old practices, as it is unable to give any practicable solution to change the mindset of auditors and has failed to check harassment/blackmailing tactics used by them in the past.
A top tax consultant from Karachi said on Sunday that there are two main issues, which relate to audit in Pakistan. First, audit without going to the client's office. Desk audit is the best example of such audit, which is done by sales tax department without interacting with the taxpayers.
Secondly, audit after going to the taxpayer's office, which will definitely result in harassment. Now, the CBR has to decide whether it wants to conduct audit for checking evasion of sales tax or compliance audit. The CBR's priority should be to ensure compliance, instead of focusing on unearthing evasion. However, second option relating to checking of evasion should be secondary under the new policy. If CBR successfully conducts the compliance audit for at least one year, then second option could be investigative audit.
"Theoretically CBR can draft any kind of audit policy, but frankly speaking the new policy is unable to address those key issues which were reasons for suspension of audit," he said.
In either case of compliance audit or investigative audit, the CBR has not the infrastructure or capacity to carry it out. The CBR must give priority to 'compliance audit' as against 'investigative audit'. In case of compliance audit, the CBR may go for conducting more audits of registered persons, but in case of investigative audit, the number of persons to be audited should be less, he added.
He said that one policy could not be applicable on each category of taxpayers. The audit should only work as deterrence, as it could not be used as a tool to generate revenue. The CBR had surpassed Rs 590 billion in 2004-05 on the basis of taxpayer-friendly policies and not on the basis of audit and investigation. There should be a monitoring and control system, which could be used for conducting audit of selected taxpayers.
Other tax practitioners and experts said that the new sales tax audit policy is based on the models of Sweden, Germany, Malaysia, Singapore and South Africa. Interestingly, none of these countries has similar peculiar issues like massive tax evasion, delinquent character of taxpayers, enforcement problems, intellectual and professional dearth of human resources. The new policy does not address the issues particularly corruption (due to which audit was suspended), checking revenue leakage and tax evasion.
An analysis of the new policy showed that the CBR quoted the model of Sweden. The policy stipulated that 2 percent of all businesses are tax audited every year in Sweden. However, a considerable higher frequency of audit is there for large business sources. Sweden is the most tax-compliant country in Europe and is practically a role model for other European countries, which have enforced VAT. It is among those countries, which had adopted VAT in late 1960s. Thus, there is no justification in adopting the Swedish approach, as it has no comparison with Pakistan's tax environment of compliance and enforcement.
The new policy has quoted audit/compliance statistics of Germany, which is 11 years old, and it is strange that the CBR is making a new policy on the basis of old data. It is not possible for the CBR to collect 23 years old German tax data.
As per new policy, Malaysian model has been specified. The study of policy showed that Malaysian model is not properly studied. Mere glimpses of tax audits (income tax) are referred, reflecting that no effort has been made to deeply study the Malaysian model. Even the audit policy chapter on Malaysia does not clear whether VAT is applicable in this country or not.
Singapore and South Africa are the countries where the legislation of VAT is one of the best-drafted pieces of legislation. However, audit policy of UK is not quoted anywhere in the new policy. The Singaporean and South African models have not been properly studied with reference to audit. Only repetition of basic audit techniques has been mentioned (like ratio analysis, knowledge and experience, audit cycle, selection criteria and random selection of cases). If this simple audit approach is adopted by the Singaporean authorities, then Pakistan is far ahead in audit and enforcement, tax consultants and chartered accountants said.
Primarily, the references to Sweden, Germany, Malaysia, Singapore and South Africa, mentioned in the audit policy, is merely an eyewash. At present, there are three countries, which have adopted the most modern audit techniques ie UK, Australia and News Zealand, whose even names are not mentioned in the new policy.
The CBR's new policy has not mentioned the recommendations made by the International Monetary Fund (IMF) on audit. The international donors have played a key role in the tax administration reform program of the CBR, but IMF views on audit have not been given anywhere in the new policy.
Experts referred to the IMF report on the VAT mode written by Liam Ebrill, Michael Keen, Jean-Paul Bodin and Victoria Summers. It elaborated an in-depth study on sales tax audit ignored in the new policy. IMF report said that audit is often the weakest component of VAT administration. Among the surveyed countries, audit performance is reported to be a particularly weak aspect of tax administration, irrespective of whether other aspects of the VAT are working well. It said that detection of offences, such as under-reporting of turnover, over-reporting of VAT credits, and use of fake invoices, requires field audits by well-trained officers, rather than desk verifications. The experience of countries with successful audit programs also shows that a VAT audit plan should be primarily based on short, issue-oriented audits covering a limited tax period (no more than one or two return periods). This plan should provide for a broad coverage of taxpayers (taking into account their classification by size and in duties.
Most tax administration experts agree that, by international standards, an effective VAT audit program should provide for a 25-30 percent coverage of taxpayers each year.
In addition, VAT audits need to be closely co-ordinated with audits of other tax liabilities (especially income tax). When significant under-reporting is detected during a VAT audit, the case should be transmitted to a joint audit division specialised in comprehensive audits. In most countries where VAT and income tax administrations are integrated (or have been able to develop close co-operation), the development of an effective VAT audit program significantly helps improve income tax compliance. Such methods have also proved to be more effective and more compatible with business requirements (for instance, in limiting the number of visits to taxpayers' premises and restricting in-depth audits to cases where significant underreporting is detected).
IMF added that like other taxes, VAT could be evaded. The development of effective audit programs is crucial to increase the risk of being detected and punish those businesses not in compliance with their VAT obligations. Typically, the most common sources of VAT evasion include non-registration of businesses, under-reporting of gross receipts, abuse of multiple rates, and non-remittance to the tax officials of the tax that has been paid to the taxpayers by its customers.
It observed that the absence of clear political support is another common reason for lack of an effective audit program.
Tax consultants stated that basic issues which need to be addressed are: reliance on audit which is the weakest area of the CBR; identification of evasion by the auditors; knowledge (accountancy and legal) on the part of enforcing authorities; and enforcement and gap between the tax managers and taxpayers.
The CBR's audit policy has focused only on the number of audits conducted instead of quality of audit, they said.
It is very much visible from the policy that the officials are trying to hand over the audit to cost accountants or Deputy Commissioners of Income Tax posted in the collectorates of sales tax. This approach may have negative implications and thereafter there are apprehensions about the future of audit in the VAT mode in case the new policy failed to check the corruption of auditors.
The DCITs posted in the sales tax collectorates are expected to perform differently from the deputy collectors in the customs collectorates. Secondly, the cost accountants have so far been unable to play any significant role in the sales tax department. Most of these cost accountants have never practically conducted the audit in the field.
According to these chartered accountants, even the previous policy was based on risk assessment, knowledge and experience, fixed audit cycles and random selection. The audit selection criterion is more or less the same.
The new audit policy has given special emphasis on "opening of the audit profiles of the registered taxpayers". It is a fact that the department has not enough information on individual taxpayers to open full profiles to be used for audit. Department has to make profiling of taxpayers keeping in view factors like credentials of the taxpayers, reliance level on the taxpayers and details of various contributing factors for reliance or otherwise.
Sources said that the old audit policy was not documented whereas the new policy has nothing new except making references to certain countries, which is merely an eyewash.
Some of the sales tax consultants opined that prior to suspension of audit, there were many cases where the auditors had conducted audit without permission of authorities and when the audit reports were challenged in the Collectorates of Customs, sales Tax and Central Excise, Appeals, the viewpoint of auditors were outrightly rejected. In some cases, the records were not available with the collectorates or intimation letters were issued to the registered persons to harass the taxpayers. However, none of these important issues has been elaborated in the new audit policy.
Under the new policy, taxpayers would be selected for audit through mixtures of four major approaches--cyclical audits, high-risk audits, knowledge and experience audit and random selection audit.
Tax experts argued that the policy is mum over the ultimate effects of these measures through audit. The impact of audit through different thresholds has not been mentioned in the new audit policy. Secondly, the issue of fake audit has also not been addressed in the new policy.
Others pointed out that the suspension of audit had caused a huge loss to the national kitty as it had encouraged the unscrupulous elements to indulge in under-reporting, claiming wrong refunds, refunds on fake and flying invoices and cases of forensic exports.
It is claimed that for the first time the sales tax auditors would be equipped with the 'Sectoral Notes' of different industries needed for conducting audit. The notes will guide the auditors about the working and complete details of a specific industry. The firsthand knowledge and understanding of a particular industry is the most important tool for audit. But, this aspect had never been given importance due to poor audit policies in the past, a tax official opined.
Comments
Comments are closed.