Auditor General of Pakistan (AGP) declared that the federal government did unauthorised deduction of 1 percent Collection Charges from the provinces in addition to rate recommended by the National Finance Commission - Rs 5824.424 million in 2010-11. In its Audit Report for the Year 2011-12, the AGP observed that an additional deduction of 1 percent Collection Charges on Income Tax proceeds were not in agreement with the NFC recommendations.
The Audit Office disagreed with explanations of the Finance Division that as per Clause 2(b) of Presidential Order on 2010, that the Distribution of Revenues and Grant-in-Aid Order, 2010 provides that taxes on income includes Corporation Tax but does not include taxes on income consisting of remuneration paid out of Federal Consolidated Fund.
The AGP is of the view that it is inconsistent with the recommendations of the NFC, which does not allow additional deduction of 1 percent. If necessary, the Finance Division and FBR may devise a mechanism for collection of and segregation of tax being deducted on remuneration being paid out of Federal Consolidated Fund.
Audit holds that additional deduction of 1 percent Collection Charges is irregular. The agreement of the provinces, if any, is also not valid because Income Tax on the income consisting of remuneration paid out of Federal Consolidate Fund is not part of the Divisible Pool. During 2010-11, the Federal Board of Revenue reported vide letter dated 05/10/2011 Income Tax collection of Rs 585,424 million, on which the Finance Division deducted Collection charges at the rate of 2 percent amounting to Rs 11,648.48 million. Audit observed that the Finance Division deducted additional tax collection charges of Rs 5824.24 million at 1 percent in violation of the recommendations of the NFC.