The field formations of the Federal Board of Revenue (FBR) have started issuing notices requiring from claimants of sales tax refunds, under the Electronic Refund System (ERS), to physically interact with the tax department and submit all relevant tax record under the exercise initiated in the backdrop of 'Post-Refund Audit' (PRA).
Tax experts told Business Recorder here on Saturday that the FBR has initiated the concept of ERS to end manual interaction between the department and the registered persons. The introduction of e-filing and ERS are the continuity of this policy. However, the notices of the PRA issued by the field formations are in total contradiction of the concept of electronic refund payment system, which is a key component of the reforms programme.
The notices of the ERS reflect that field formations have failed to follow the spirit of the ERS. The parameters of the PRA demand focus on snap checking or random audit and to avoid pattern of detailed annual audit. Considering this, the Board has issued deadline of July 30 for audit completion. It is learned that notices have required taxpayers to provide record, manually, which were already transmitted to the ERS and refunds were issued on the basis of such electronic cross matching of tax data.
Instead of analytical review of data, the department is still using old and conventional methods of audit where plenty of record was required. The review of audit notice showed that the tax department has demanded record of purchase invoices (including zero-rated), bills of lading, short shipment details (if any), and foreign remittances (bank credit advice and Form-E) along with complete bank statement and inventory record of raw materials, accessories, spare parts--on the laid down format.
The notice said, "You have been receiving refund through Expeditious Refund Payment System (ERS) under Rule No.26A of the Sales Tax Rules, 2006. Since ERS issued refunds must be followed by the Post-Refund Audit (PRA) in view of sub Rule (8) of the Rule 26A of Sales Tax Rules, 2006, for the tax period read with Rules 36 of the Sales Tax Rules, 2006. Therefore, it is requested to produce records pertaining to expeditious processing and payments of sales tax refunds before the Audit Team."
Responding to notices, sources said that the refund claimants have no objection in providing bills of lading, short shipment details and BCA, but there is no justification to demand zero rated purchase invoices. In cases of purchase invoices, department may require taxable invoices. The zero rated purchase invoices have no relevance for verification of refunds claimed under ERS. According to independent experts, once data is transmitted to the ERS, the Large Taxpayer Units and Regional Tax Offices should verify the authenticity of the data which has variation of input/output ratio percentage of refund claim in relation to the sales value and other risk based related check. The filed formation rather has sought zero-rated records which have no justification with the data of refund claims. The taxpayers have claimed refund on the basis of taxable invoices, thus the audit should be confined to invoices on which refund has been claimed. Even the department should not seek the taxable invoices, whose data is already available with the department in electronic format and can easily be cross verified electronically.
Another major apprehension in the PRA notices is the requirement of Inventory Record, which has already been provided in the ERS. It is not clear why the tax department is asking for Inventory Record. The percentage of payable refund has already mutually been agreed between the trade and the FBR. The analysis of Inventory Record, as a routine, has no relation with the ERS, which may further complicate things for the refund claimants.
The notice of the PRA further said, "To ensure smooth and early completion of the Post-Refund Audit, the refund claimant is further requested to depute any senior member of management well versed with the matters relating to the above said records and other financial knowledge relating to your unit".
This part of the notice is totally against the reforms introduced in the GST regime. The ERS was introduced with the concept, if not totally eliminate physical interaction between the taxpayers and the department, it should be curtailed to the maximum extent in order to introduce corruption free regime. Contrary to this, the department is requesting the refund claimants to depute senior member of management for completion of audit. Instead of conducting analytical audit, based on the electronic record provided by the taxpayers, the department has encouraged physical interaction between the taxpayers and department. This reflects apparently from the language of the notice. The physical interference of the taxpayers during the audit of electronically paid refunds through the automated system seems unjustified. It's quite surprising how the tax department itself commits a major violation of reforms and encourages physical interaction between the taxpayers and the tax officials, as is evident from the PRA notice.
Sources said that the Board has issued instructions to the field formations for completion of the PRA by July 31, 2011. However, the field formations have entirely failed to understand the spirit behind the system and modern techniques of audit rather following conventional practices of 'muk mukao' audit. The ERS only clears refund payment after electronically cross matching of data of input/output declared by the purchasers and suppliers. After matching of data, the ERS approves the refund claims through the system. Hence, this modern regime requires analytical audit like whether purchases have been suddenly increased, percentage of refund in relation to sales has alarmingly increased or decreased, trend of refund claim against complaint or non-compliant unit and verification of exports data.
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