A Recorder Report said the other day that the suspension of Sales Tax Field Audit since July 2004 had resulted in an aggregate loss of over Rs 20 billion to the exchequer according to a draft report of the CBR's audit directorate, ie Rs 10 billion per annum.
This appears to be a huge loss by any reckoning, particularly in view of the revenue generation crunch Pakistan has been experiencing due to a number of factors. Above all, the audit suspension has further pushed down the tax-to-GDP ratio in Pakistan, which is already one of the lowest in the world. The factors cited in the report for the colossal tax loss are 1) lack of accountability, and 2) payment of substandard emoluments of the staff, which have opened up additional avenues of corruption.
According to same sources, the estimate of Rs 10 billion loss is based on annual detection and audit observations of Rs 10-15 billion in 2003-04, and that the detection had led to recovery of billions of rupees in sales tax, which has evolved into one of Pakistan's key revenue generators. The figure is, therefore, cited as an indicator of revenue loss, based on past experience and is not derived from any detection or audit process.
This assumption can well be wide off the mark either way and surely cannot be made the basis of a policy shift. Starting with a negligible contribution of 1.7 percent to the GDP in 1990-91, the sales tax performance has since become fairly impressive, though it still remains short of the potential achieved by the high performing developing countries where its contribution to the GDP ranges between 4 and 9 percent. There is thus a need to further streamline the sales tax collection methodology, to plug all possible avenues of corruption.
The concept of field auditing of sales tax, though dynamic and innovative, is riddled with flaws, as it is a process that cannot take place without direct contact between the taxpayer and the auditor, which often constitutes a potent temptation for corruption.
Then, there are the exaggerated refund claims filed through the use of bogus invoices, non-accounting of cash sales or purchases, under-reporting of sales through maintaining multiple account books, claims based on purchases made from unregistered businesses, etc.
These are only some of the methods the unscrupulous use to avoid paying sales tax. Meanwhile, for revenue collection the cost of administration and monitoring of refunds has become almost prohibitive, as extensive capabilities are needed to operate the system, and the potential for tax evasion is quite large. Incidentally, Pakistan's tax structure is highly centralised, largely because of concentration of taxation powers with the federal government and partly because the taxation system is based on IMF "conditionalities." Pakistan passed the Sales Tax Act way back in 1990 with the objective of moving towards a global value-added tax (VAT) system.
However, many problems have since cropped up along the way, which are mainly related to refund claims filed on the basis of fake invoices and other documents. Actually the sales tax field auditing goes against the grain of the new operating methodology adopted by CBR which stresses minimum possible contact between the taxpayer and the taxman.
Further, field auditors at times resort to needless nit-picking to force business establishments to resort to "muk muka", which suits the field auditors with dubious professional ethics. All this has become a major source of corruption. It was precisely because of such illegalities that field audit was replaced with desk auditing, which is in fact a more effective methodology to detect tax evasion.
It seems that the clamour for restoration of field audit of sales tax owes itself to an intra-departmental turf war. If desk auditing can serve the purpose equally well, if not better, why go for a methodology that is likely to promote corruption and result in colossal loss to the exchequer in the shape of lost revenue? If, however, the desk audit reveals revenue evasion, then a field audit may be warranted, but that too in certain selected cases and after due permissions from the higher authorities which should be accorded in the form of a justiciable speaking order.
As already emphasised, field auditing violates the spirit of CBR's new operational parameters that seek minimum possible contact between the taxpayer and the tax collector.
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