Scrutiny of receipts & expenditures of FBR: AGP makes Rs 170,031 million ST, IT, FED audit observations

Auditor General of Pakistan (AGP) has made audit observations of Rs 170,031 million during scrutiny of receipts and expenditures of the Federal Board of Revenue (FBR) pertaining to sales tax, income tax and federal excise duty during 2013-14.
The latest audit report on FBR (Inland Revenue) Audit Year 2013-14, included audit observations of Rs 170,031 million in respect of compliance with authority audit of receipts and expenditure relating to Inland Revenue for the fiscal 2012-13, audited from July to December, 2013. It also includes audit for fiscal 2011-12, audited from January to June 2013. The observations included cases of non/short assessment of taxes, grant of inadmissible exemptions, excess and set off of losses, non levy of default surcharge, delay in adjudication proceedings, non recovery of adjudged revenue, inadmissible input tax adjustment, sanction of inadmissible refunds etc. Systemic deficiencies are also identified with recommendations for preventing recurrence of irregularities in the future.
As per report Directorates General of Audit Inland Revenue (North & South) carry out audit of Federal Receipts on account of inland revenues ie Income Tax, Sales Tax & Federal Excise and expenditure under four Grants ie Revenue Division, Federal Board of Revenue, Inland Revenue and Development Expenditure of Revenue Division.
The Directors General Audit Inland Revenue have a human resource of 146 officers and staff with 36,354 man days and annual budget of Rs 142.79 million. The Directorates are mandated to conduct regularity audit (financial audit and compliance with authority audit) and performance/ sectoral audit of FBR. Regularity audit of 131 formations was conducted during first half of audit year 2013-14 and second half of audit year 2012-13 by utilising planned man days, incurring an expenditure of Rs 139.45 million.
The FBR collected inland revenue of Rs 1,685,051 million against revised target of Rs 1,765,800 million for 2012-13. It paid refund on account of income tax, sales tax and federal excise duty aggregating to Rs 49,928 million. The Directorates General of Audit Inland Revenue conducted audit of receipts of Rs 806,235 million relating to income tax, refund of sales tax and federal excise duty, since FBR did not provide assessment record of sales tax and federal excise duty. However, Audit selected sample of income tax, sales tax refund and federal excise duty on the basis of partial data/record provided by field formations. The expenditure of Rs 11,291 million was incurred against final grant of Rs 11,436 million and audit of expenditure of Rs 9,598 million was also conducted. The total outlays audited are 48% of total population of Rs 1,696,342 million pertaining to FBR.
Audit pointed out recovery of Rs 143,569 million in the said report. The FBR reported recovery of Rs 4,465 million from January to December, 2013 which was verified by Audit. Out of the total recovery of Rs 4,465 million, an amount of Rs 4,446 million was not in the notice of the executive before audit.
The desk audit methods/techniques were applied using SAP/R3 data maintained by AGPR for audit of expenditure relating to Revenue Division, Federal Board of Revenue, Inland Revenue and Development Expenditure Grants. Initial accounts of receipts are maintained by FBR's treasuries and are automated by PRAL. The FBR did not provide access to soft or hard data of receipts despite repeated requests by Audit. This constrained it to rely on limited soft data acquired through field audit teams for desk audit and sample selection. For sampling, the AGP used Audit Command Language (ACL) and Computer Assisted Audit Techniques (CAATs). This facilitated, to some extent, in understanding the system, procedures and environment of FBR and identification of high risk areas for substantive testing in the field.
Audit identified 217 taxpayers in nine field offices of the FBR which were liable to be registered under the Sales Tax Act, 1990 having revenue implication of Rs 2,043.87 million. On Audit recommendation the department initiated registration of taxpayers to bring them in the sales tax regime by strengthening internal control mechanism.
The report said that the internal controls of the FBR were found weak and ineffective as various control lapses were identified including incomplete reporting of receipts, inadequate monitoring of withholding agents, lack of seriousness towards pursuance of amount detected by Directorate of Internal Audit. Audit emphasises proper implementation of financial reporting mechanism and enforcement of laws and regulations to improve internal controls of the department.
The key findings of the audit report detected non-provision of soft data of tax receipts and record of assessment/refund of sales tax and federal excise duty for audit by FBR. It also included excess reporting of income tax collection due to incorrect accounting of WWF against income tax - Rs 229.30 million. The audit detected non/short-realisation of sales tax and federal excise duty amounting to Rs 6,505.66 million. The audit also detected non-recovery of adjudged dues/arrears - Rs 49,669.59 million.
Other audit observations included short realisation of sales tax due to inadmissible adjustment of input tax - Rs 5,623.96 million and non/short-realisation of withholding tax - Rs 26,799.17 million. Other audit observations included loss of public revenue due to issuance of SROs conflicting with Acts - Rs 13,239.35 million; excess/unlawful sanction of refund of sales tax and special excise duty - Rs 7,553.29 million and non levy of minimum tax on the income of certain persons - Rs 4,309.54 million.
Audit observations also included short levy of tax due to non-allocation of proportionate expenses - Rs 2,418.41 million; non levy of tax on unexplained income and assets - Rs 6,651.66 million; short levy of tax due to inadmissible deductions - Rs 1,094.37 million; unjustified expenditure on account of payment of performance allowance- Rs 50.61 million; non recovery of receivable amount from NHA - Rs 22.29 million; irregular payment of cash reward - Rs 10.48 million and deferred liabilities of sales tax refund causing over statement of receipts - Rs 981.16 million.
The AGP has recommended the FBR to ensure timely production of auditable data/ record and those hindering the audit activity be proceeded against under the rules, ensure correct reporting of WWF to depict true and fair picture of tax receipts in financial statements, invoke provisions of laws holistically for recovery of duty and taxes and devise a mechanism to detect and deter tax evasion by enforcing legal provisions against defaulters.
The FBR should also strengthen mechanism for adjustment/ issuance of refund of tax, upgrade the existing internal controls in the department to avoid recurrence of similar irregularities year after year, improve monitoring of withholding tax as it constitutes a major portion of revenue collection of income tax, issue SROs in conformity with provisions of the Acts besides fixing of responsibility and improve financial management for making expenditure according to financial rules.