Electronically filed tax returns

While E-filing of tax returns by large business houses and corporate entities has indeed made it relatively easier, and quicker, to file returns, the new system has also generated the problem of widespread non-compliance with the laid-down procedural parameters.
A Recorder Report, quoting official sources, has revealed that over 90 percent of top business companies and corporate entities affiliated to the Large Taxpayer Unit (LTU), Lahore, which have E-filed their income tax returns have done so without attaching the audited accounts and financial statements.
The issue came to light during a recent meeting held at Lahore to review the returns filed by large taxpaying units. It also transpired that only 51 returns had been received till 31 October 2007 by the LTU, Lahore, out of which over 90 percent did not carry the audited accounts/financial statements. As a result, LTU has been unable to conduct desk audit of these companies.
This has prompted the LTU to launch a well-co-ordinated effort to obtain the requisite documents from these companies. The Director-General, LTU, Lahore, has directed the Audit Commissioner to secure the help of the Enforcement Division for obtaining from these units all the documents required under the law. Instead of streamlining the return-filing system, such poor compliance has only made it more cumbersome.
Incidentally, taxpayers used to submit hard copy of income tax returns along with financial statements prior to the introduction of E-filing because it was easier for them to do so. But now the bulk of the documents such as audited accounts/statements presumably cannot be submitted through online filing system, using the web portal.
Many taxpayers may take the position that they have, technically speaking, fulfilled their legal obligation by filing the tax returns on time. Analysts believe that non-submission of audited accounts and financial statements by the taxpaying units is not something unusual under the new system, which has generated a host of complications, including the securing from these entities of all the supporting documents later.
Under the old system, the return receiving staff used to spot-check all the documents to ensure that none was missing. Therefore, the taxpayers, whether corporate entities or individuals, had to supply all the documents at the time they filed the returns.
However, with the introduction of E-filing in the country, the problem of missing supporting documents has become acute, as is apparent from our report. The non-supply of essential documents along with returns filed by corporate entities under the Self-Assessment Scheme is astonishing, to say the least. In a way it amounts to abuse of a system that was introduced to facilitate the taxpayers.
The fact that the Commissioner Audit has now been directed to liaise with the Enforcement Division to secure all the documents required under law from the return-filing entities seems also to point to wilful default. However, if poor compliance is indeed due to inability of the web portal to transmit the bulky documents, the software introduced last year under the National Audit Plan should be updated to increase its document-carrying capacity.
It should be mentioned here that auditing is probably the weakest, though the most crucial, link in our financial management system, which has generated numerous procedural problems, and has also opened up avenues of corruption. The weakness of the auditing system seems also to have compromised transparency, which is the government's avowed aim.
There is a perception in certain quarters that Pakistan lacks adequate professional human resource management to design and implement various taxation policies. There is, therefore, an urgent need for FBR to bolster the functional capacity of its tax administration.
Secondly, the recruitment system through which non-officers are inducted into the service is flawed, which should be improved to enhance the system's efficiency. Thirdly, performance appraisal too suffers from flaws in tax collection and auditing, particularly in the field audit.
The methodologies devised to firm up the National Audit Plan last year had indeed conformed to the models set for the member countries of the Organisation for Economic Cooperation and Development (OECD), which means that the systemic snags could well be man-made. (It should be mentioned here that the Directorate General of Intelligence, Customs and Excise, had instituted criminal cases against 14 industrial units last month for claiming illegal sales tax refunds by filing bogus invoices).
Large-scale tax evasion and revenue leakage in different forms has in fact become a major problem area of our economy, with our tax-to-GDP ratio being one of the lowest in the region. E-filing the tax returns without supporting documents is a very serious matter that needs to be sorted out at the earliest, because it can have a knock-on effect on the entire gamut of our taxation structure.
The process of desk auditing has already been held up due to poor compliance by many leading units operating in the documented sector. The FBR should first enhance the document-carrying capacity of the computer software, and make non-compliance an offence punishable under the law. Such systemic hiccups need to be expeditiously eased out before they further erode efficiency of the system.