The Federal Board of Revenue (FBR) is facing a major challenge to conduct audit of all late filers of income tax returns and high volume of cases (7.5 per cent) selected for audit through risk-based selection process.
This has been mentioned in the joint report of World Bank (WB) and UK Aid on the Tax Policy and Tax Administration Reform Component to improve business process of the FBR.
One of the key recommendations of the report is to reduce the number of audits being conducted to a manageable level, dropping automatic selection of late filers.
Through the tax component of the Multi Donor Trust Fund for Accelerating Growth and Reforms, the business processes of the FBR were reviewed by a technical team.
The objective of the review was to document procedures, identify opportunities for simplification and to identify gaps in automation, the report said.
According to the report, the FBR recently introduced a risk-based audit selection process, targeting selection of 7.5% of all returns. This is a significant step forward, replacing the previous ballot-based selection system. This approach will result in more targeted, efficient audits to yield increased revenues. At the same time, it will reduce unnecessary audits of compliant taxpayers.
The report said that significant challenges remain, particularly the high volume of cases selected for audit. In addition to the risk-based selection process, late filers are automatically selected for audit. While this practice penalises late filing, it creates a large volume of audit casework, as up to 10% of all filings are late. This practice should be abolished to free up resources for intelligence-based audit.
Over the longer-term, the FBR should introduce automated mass audit. In this practice, third-party information sources are systematically matched with the information contained in tax returns. This low-cost, wide-coverage approach has yielded very positive results in Chile and Spain, for example. As this will require improved quality and management of third-party data, automated mass audit will take time and resources to implement, the report stated.
The report recommended the FBR to reduce the number of audits to be conducted to a manageable level, dropping automatic selection of late filers. Secondly, the staff should receive specific and timely training to implement the strategies to address the key priority risks.
Thirdly, obtain feedback from the Commissioner Appeals to identify weaknesses in audit skills.
Fourthly, it is recommended to stop conducting the current desk audit process and redeploy staff to do risk-based audit work. Introduce automated mass audit using third-party data.
Fifthly, jurisdictional issues relating to the audit of economic groups need to be removed.
Sixthly, it is recommended to develop end to end strategies to tackle key priority risks such as non-lodgement of returns and understatement of income.
The FBR should develop engagement strategies for the largest taxpayers in Pakistan, the top 500 approximately.
In conjunction with mentoring and training, develop the skills of the auditors to identify the risks within an audit and take the appropriate course of action, the report recommended.
The report further recommended the FBR to restructure the internal operating model within FBR so there are clear lines of reporting and accountability.
It recommended the FBR to develop a reporting regime that is linked to the strategic direction and key priority risks that the organisation has chosen to address
Review the performance benchmarks that are in place and that are used to judge the performance of the audit areas, it recommended.
The report further recommended the FBR to review the roles of all of the audit staff in FBR to minimise the numbers of support staff and to optimise the number of staff who perform value added compliance functions.
Remove or reduce the other duties of the auditors to allow them to concentrate on producing a quality audit, it recommended.
The report concluded that all adjournment requests must be lodged through IRIS system of the FBR, it added.