The TRC recommended to improve effectiveness of existing processes through the work re-organisation which reduces tax payer/tax collector interface, provides pre-audit anonymity of auditors, assigns and distributes functions and responsibilities in a manner that reduces discretion of assessing officers, promotes one window operation, assigns functional responsibilities to specialised divisions, relieves assessing officers from non-assessment functions, and moves to a systematic basis for selection of cases for tax audit.
The TRC has recommended to develop a system with key features of universal self-assessment with selective audit, centralised information system, survey and research capability, functional specialisation, taxpayer education and customer service. The TRC has recommended to initiate education of taxpayers and withholding agents through a well-integrated programme of media campaign, booklets and brochures. The TRC has recommended to simplify and standardise the process of issuance of exemption certificates.
The national audit plan should be chalked out each year based on survey and investigative work carried out by the Audit Division. The audit at the field formation should only be conducted under direct supervision, scrutiny by the division based on risk areas identified during enquiry work.
There should be proper documentation of the audit process and the same should be carried out in a structured manner including a review by the supervisor before drawing any final conclusion, the TRC recommended.
The TRC said that effectively only about 150,000 or 20 percent of tax-filers are subject to any degree of tax assessment. This includes all company cases, which are subject to nearly 100 percent tax audit unless the entire income of a company is subject to presumptive tax. These taxpayers are not chosen on the basis of their risk profile nor because there is a prima facie inconsistency in their accounts but because these are the residual group once the salaried persons and self-assessment group are effectively excluded for detailed audit. The 72,000 audits/assessments are handled by an officer cadre in grade-17/18.
Tax audit is the core function of any revenue authority and should receive the maximum focus and attention. The prevailing structure of Audit Wing and its field formation of about 650 are not geared to undertake the required task. This means a workload of about 400 audits/assessments per officer per year. Therefore, it is not surprising that an overwhelming number of tax audits are conducted in haste and are perfunctory.
For income tax purposes, the population of the country could be categorised as: cases with no incomes or whose incomes are below the income tax threshold, cases which fall within the taxable bracket but are exempt from payment of income tax under Schedule II of ITO, 2001, cases which fall within the taxable bracket but have successfully avoided entering the tax net, cases which are within the tax net but under-report their incomes, cases which are within the tax net and correctly report their incomes but where there is the possibility of differences with the tax department on the extent of their taxable income. While property and commercial surveys, if conducted frequently can identify individuals and businesses that are outside the tax net and also limit the scope of tax evasion, these do not address one important source of tax leakage, namely 'flight of capital'. If tax that is evaded and reinvested back in the form of domestic assets is easily detected through surveys, tax evaders could start investing in foreign assets. The extent of this leakage may already be significant and could gain momentum if local avenues of evading taxes are effectively plugged. This is a strong case for detecting evasion primarily through effective tax audit and supplementing it with regular surveys to identify non-filers and cases of under-declaration and false declaration. If tax evasion is detected at the audit stage, than it can be caught before it finds its way out of the country. The reforms being suggested focus on tax administration and tax processes. A good tax system requires a good tax policy but more importantly, an administrative system that can put these policies into practice. Tax reform efforts in the past have concentrated primarily on issues of policy; the issue of improvement of tax administration and of processes has not been given the importance it deserved. The core subject of this reform effort is the improvement in tax administrative structure and simplification of processes.
Tax audit if properly planned and executed, can act as the most effective deterrent towards under reporting. "We feel that under reporting in Pakistan cannot be assigned to any reason other than the failure of Federal Board of Revenue to create the fear of audit amongst the taxpayers."
This failure is stemming due to lack of commitment, competence, capacity, corruption, inefficiency and non-document of audit process. "We strongly feel that this area needs special consideration by Ministry of Finance," said the TRC.
The system needs a complete overhaul to cater to the complexities and diversities of tax audit. Modern day tax audit requires resources in auditing, accounting and information technology, together with specialised sectorial knowledge.