Sales Tax audit - II

Article-169 of the Constitution of Islamic Republic of Pakistan empowers the Auditor General of Pakistan (AG) to audit accounts of: (a) Federal and Provincial Governments and (b) an authority or body established by the Federation or a Province. The article reads as follows:
"FUNCTIONS AND POWERS OF AUDITOR-GENERAL.- THE AUDITOR-GENERAL SHALL, IN RELATION TO:
(a). the accounts of the Federation and of the Provinces; and
(b). the accounts of any authority or body established by the Federation or a Province, perform such functions and exercise such powers as may be determined by or under Act of Majlis-e-shoora (Parliament) and, until so determined, by Order of the President."
DRRA is a wing of the A.G. Office.
The "accounts" referred to in Article-169 of the Constitution is required to be kept in accordance with principles, methods and forms prescribed by the AG. In this connection Article-170 reads:
"Power of Auditor-General to give directions as to accounts.- The accounts of the Federation and of the Provinces shall be kept in such form and in accordance with such principles and methods as the Auditor-General may, with the approval of the President, prescribe." Article-170 of the Constitution read with Article-169 fortifies the interpretation that DRRA has not been armed with powers to audit private accounts.
Constitutional experts are of the view that the DRRA, a subsidiary of AG, is not possessed with the authority to directly access taxpayers' record for carrying out sales tax/federal excise audit. The AG is only empowered to carry out audit of government organisations and corporations under provisions of article 169 of the Constitution of Pakistan.
Tax pundits hold that reliance on article 169 of the Constitution has to be confined to the functions and powers of AG office. The A.G. can function in relation to: (a) accounts of the federation and provinces and (b) accounts of any authority or body established by the federation/province under an Act of Parliament or Order of the President, the Constitution is emphatic about.
As per the Act the staff of DRRA is a non-existent authority - directly or indirectly. A non-existent authority cannot access the books of accounts and other sales tax record. DRRA auditors are not legally empowered to perform statutory audit of registered taxpayers.
Section 25 read with sections 37 and section 38 of the Act does not conceive that they can ask for tax record from the taxpayers. Accordingly, they cannot have direct access to the taxpayers' record. They have no power to operate as sales tax or federal excise officials for checking taxpayers' record on their own.
Under section 30 of the Sales Tax Act, 1990, the only authority which can appoint an officer of sales tax for purpose of the Act, 1990 is FBR. Legally, staff of DRRA do not have authority to summon presence or to interact with registered persons or directly or indirectly seek production of the taxpayers' books of accounts and sales tax record for inspection.
The access to the record of a registered person, framing of audit observation and initiating legal proceedings on their part is an arbitrary exercise. AG office can go into government revenue issues in government organisations and corporations. The charter of DRRA auditors functions is given in SRO 1195(I)/90 dated 17-12-1990 issued under Pakistan (Audit & Accounts) Order 1973 (President's Order No 21 of 1973) which reads:
"In exercise of the powers conferred by clause (a) of sub-paragraph (2) of paragraph-11 of the Pakistan (Audit and Account) Order, 1973 (President's Order No 21 of 1973), and in suppression of this Division Notification No SRO 800(I)/87 dated 06-10-1987, the President is pleased to require the Auditor-General of Pakistan to Audit the receipts of the Federal Government falling under the following Heads, namely:
(a) to (g)
(h).0220000 Sales Tax
(i).0230000 Federal Excise
(j) to (k)
The results of audit shall be included in the report to be submitted by the Auditor-General of Pakistan the President."
FALLACIES IN DRRA AUDIT
THE FOLLOWING ARE SOME TRACES OF FALLACIES IN RELATION TO A DRRA AUDIT:
(1). The Sales Tax Act (Act) does not provide for / recognise DRRA Audit. Paragraph-44 of STGO - 03 of 2004 dated 12-06-2004 reads:
"This order will however, not in any way curtail the powers of Collector of Sales Tax or Central Board of Revenue to order for re-audit for the reasons to be recorded or audit by the functionaries of the department of the Auditor General of Pakistan or any other department legally authorised to conduct audit of the records of the registered person."
Through the above STGO, the FBR has put a question mark on legality of authorisation of 'sales tax audit by the office of the Auditor General of Pakistan'.
Following proviso in section 25(2) of the Act, inserted through Finance Act-2008, has only re-confirmed FBR's distancing from sales tax audit conducted by the Office of the Auditor General of Pakistan: "Provided further that nothing in this sub-section shall bar the sales tax officer from conducting audit of the records of the registered person if the same were earlier audited by the office of the Auditor-General of Pakistan."
(2). By (present) text of section 25(2), the Act has made it clear that FBR shall conduct audit under the Sales Tax Act through its own machinery meaning thereby that it does not give credence to DRRA audit - to which the Act does not extend recognition.
This has been done by asserting the right to FBR to conduct sales audit of the records of the registered person even "if the same were earlier audited by the office of the Auditor General of Pakistan". This also speaks well of FBR's rating of DRRA audit and the credence it puts on the competence of DRRA auditors.
(3). As DRRA audit cannot be the basis for framing a 'contravention' against sales tax assesses as FBR is not authorised by the law to proceed with action on the basis of a DRRA audit to which it does not extend credence.
DRRA audit should be ignored when it attempts to stretch its wings to inflict a liability on a registered person. Because a tax liability can be created only by words of the law. It can not be on the basis of conjecture or presumption as would be in the case of SCN and OIO base of which is DRRA audit. Thus, according to law, FBR leaves a DRRA auditee as it finds it. So to say he remains in the position he was before the DRRA audit taking place. As such, FBR cannot legally extend its arm in deference of a DRRA audit.
(4). According to section 25 of the Act and the STGO referred to hereinabove, Sales Tax Department can not accept responsibility for DRRA audit. Sales Tax Department does not stand accountable in relation to an audit conducted by a DRRA audit party.
(5). FBR does not have to and it cannot act on the basis of a DRRA audit, also because the Act ascribes competence for sales tax audit to only Sales Tax Officers, Chartered Accountants and Cost and Management Accountant. An SCN issued on the basis of DRRA audit is unauthorised, based on mistakes of law, unlawful, void ab initio, with no effect.
(6). DRRA audit is not in keeping with a legal tautology enforceable by the FBR. FBR does not have a legal arm to proceed with recovery proceedings etc on the basis of a DRRA audit.
(7). To be veracious and thus legally valid a sales tax audit's undergoing procedural steps laid down by the FBR through Sales Tax General Order (STGO) - 03 of 2004 is not just directory. It is mandatory. Also because the concept, methodology or mechanics for sales tax audit have not been provided otherwise.
(8). According to Daily Business Recorder dated 07 April, 2008, the Federal Board of Revenue (FBR) had approached the Ministry of Law and Justice to obtain a legal interpretation on the powers and jurisdiction of the DRRA of AG office to access taxpayers' record for carrying out sales tax audit.
Sources had confided to the paper that the ruling had been declared in favour of the FBR. The ruling of Ministry of Law had also removed misgivings on the limitations of DRRA's auditors who unnecessarily intervene in the Board's jurisdiction for audit purposes.
According to sources, audits conducted by the DRRA are illegal, without any legal grounds, as the ruling received stated that the (FBR) auditors can only function under Constitution of Pakistan. Law does not permit the AG to directly access taxpayers' record for audit purposes.
The Directorate of Revenue Receipt Audit (DRRA), a sub-ordinate of Auditor General of Pakistan (AG), is not legally empowered to directly access taxpayers' record for carrying out sales tax / federal excise audit, the story went on. Sources said, the FBR had been informed that it is the only authority to conduct audit of a registered person. The DRRA could check the sales tax working to verify whether refunds were correctly issued or other such matters.
DRRA auditors have no powers to operate as sales tax or federal excise officials for checking of taxpayer's record on their own, Business Recorder claimed. All actions in pursuance of such an act on the part of DRRA are unconstitutional and void ab initio, one would extrapolate.
(9). The Customs, Excise and Sales Tax Appellate Tribunal does not accept DRRA audit as proper / lawful audit in terms of the Act. The Customs, Excise and Sales Tax Appellate Tribunal, Peshawar, in the case of PEL Appliances Ltd, Gadoon Amazai vs. Collector of Sales Tax and Federal Excise (Appeals), Northern Zone, Rawalpindi (PTCL 2007 CL. 366), observed:
"The issue whether the DRRA which is a branch of Auditor General of Pakistan could audit the record of industrial units? If not, with what effect? In the instant case, the audit was conducted by audit party of DRRA, Lahore which is the staff of Directorate General of Revenue Receipts Audit.
It is a branch of Auditor General of Pakistan and its officers are neither sales tax officers under section 30 of the Act nor they are authorised under the Sales Tax Rules-2005 to have access to premises and accounts of any registered unit. They do not even fall in the category of officers mentioned in section 25 of the Act in the execution of the aforesaid Act.
Staff of DRRA is non-existent authority as far private registered units are concerned and they cannot have access to their books of accounts and other record under the sales tax laws. It becomes clear from the perusal of above notification that the President of Pakistan has required the Auditor General of Pakistan to audit the receipt of Federal Government and not the record of the private enterprises/industrial units licensed/registered under the Sales Tax Laws. Thus the whole exercise conducted by the DRRA in this particular case is quorum-non-judice."
SOURCE: The Sales Tax Act, 1990 (42nd Edition)
Pages No 410-411 - by Tariq Najib Choudhry.
(10). Tax Reference No 24/2008 was reference of the Collector of Sales Tax and Federal Excise, Peshawar, before the Peshawar High Court challenging vires of an order passed by the Customs, Federal Excise and Sales Tax Appellate Tribunal, Peshawar, in relation to a Federal Excise Liability based on 'contravention' reported by the DRRA Auditors.
The Hon'able Appellate Tribunal upheld the registered person's appeal against an Order-in-Appeal in favour of the revenue. The Hon'able High Court upheld the plea that under the fiscal laws (Federal Excise and Sales Tax Acts) only the departmental officers are (legally) competent to conduct the respective audit.
THE HON'ABLE HIGH COURT DECREED: "In the result, this reference being devoid of merit is dismissed. However, the Federal Excise and Sales Tax Department may conduct fresh audit of the respondent-unit, if so advised and permissible under the law. In case, any contravention is detected, the respondent-unit may be proceeded against in accordance with law."
THE HON'ABLE HIGH COURT RULED: "The case of petitioner-department solely rests on the audit that was conduct by the Directorate General of Revenue Receipt Audit, Lahore (DRRA). The latter is a branch of Auditor General of Pakistan and its officers are neither sales tax officers under section 30 of the Act nor they are authorised under the Sales Tax Rules-2005 to have access to premises and accounts of any registered unit.
They do not even fall in the category of officers mentioned in section 2(28) of the Central Excises Act, 1944. The staff of DRRA is non-existent authority as for private registered units are concerned and they cannot have access to their books of accounts and other record under the sales tax/central excise laws."
(Concluded)
(The writer is a former Chairman of ICAP and ICMAP Joint Committee and a Sales Tax Lawyer)