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CONCEPT & SCOPE OF REVENUE AUDITING IN DEVELOPING COUNTRIES

Revenue auditing conclusively discharges the role of a watchdog

By S.M NAJMUL ARFIN
Nov 28 - Dec 04, 2005

Before discussing the concept & scope of revenue auditing it seems proper that we should first discuss the need for revenue auditing in the developing countries. The need and importance of revenue auditing is well recognised by now, the International Organization of Supreme Audit Institutions (1NTOSAI) as well as Asian Organization of Supreme Audit Institutions (ASOSAI) have indicated that revenue taxation be taken up in a much bigger way for the reason that revenue collection itself is a major activity of the government and government audit has to play its assigned role in enforcing the public accountability of the revenue departments of the government.

The second most important reason from the view point of developing countries would be that revenue resources are scarce, the tax base narrow and there is a great need for maximization of revenue. The revenue auditing could point out short assessment, wastage and system weaknesses in revenue collecting agencies. Thirdly, revenue auditing conclusively discharges the role of a watchdog. In the absence of revenue audit, revenue administration gets no occasion to review defective tax assessment in which government is the loser by way of short collection of revenue.

Traditionally, auditing of receipts of a government was limited to the checking of revenue account. Government auditors need to report on the working of the revenue departments of the government and assist government to increase the productivity of its taxes through improving systems and procedures. Surely revenue auditing has to be much more comprehensive than what is it today. The consensus reached in the international organizations and institutions such as that mentioned earlier is that besides auditing accounts, revenue auditing should concern itself with at least two other aspects. One is the aspect of conducting system studies in the revenue collecting agencies with a view to reporting on the effeciency, economy and effectiveness. The other is auditing of individual tax assessments covering legality as well as regularity; correct system of collection as well as correct accounting. Accordingly, we can look upon revenue auditing as an area of audit where, in addition to conducting such checks as to ensure correct accounting system, checks of tax on the macro level to seek assurance on their adequacy and effectiveness exist. It also involves auditing at the conceptual level namely; assessments, refunds, rebate, etc not only to normally point out short assessment of revenue but also to report system deficiencies wherever noticed.

With this understanding of what is involved in revenue auditing, we can now examine its concepts and scope. We mentioned that systems and procedures should be seen in audit to seek assurance that secure an effective check on assessment, collection and proper funding to government accounts. Where some procedures and systems are laid down in relevant law itself, the bulk of them are contained in the rules, regulations and administrative instructions issued by the tax body of revenue administration. Comprehensive revenue auditing involves examination of these rules, regulations and administrative instructions on a concurrent basis.

The object is to seek assurance on the legality, regularity and adequacy for the intended purpose. To cite a particular example, if the revenue administration introduces a system, say green channel clearance procedure exclusively for government imports and the imports by the government companies, audit examination of the relevant rules could extend to such issues as differentiating imports by a private person and imports by government companies, whether the procedure introduced is an improvement of the one replaced and whether the procedure is going to cause a fall in revenues. If it is so, whether government have allowed these concessions consciously?. This is the kind of examination that is called for. It is also at this stage of audit that audit forms some tentative opinion as to which of the systems, procedures and modifications would require special attention at the operational level.

There is another dimension to this examination of rules and regulations. Besides laid down systems and procedures, the revenue administration also issues exemption notifications exercising power delegated to them by law. Scrutiny of exemption notification remission and rebate orders issued by revenue administrations is also audit's work at this stage to ensure the revenue foregone is in accordance with the direction of law. Examination of the assessment records is an extra stage in audit as the number of assessment cases to be dealt with is very large. Audit goes in for test check concentrating on high value revenue. Audit at this stage demands a thorough knowledge of tax laws, rules, departmental systems and procedure, court's rulings, trade, commercial and engineering practices for commodity taxation and such matters.

We are very happy to see that the kind of way we are expecting, we have developed in our country Pakistan. That level of expertise is available for in-depth and detailed tax auditing. The law does lay down details of documents to be filed with the files of assesses, the time limits, step by step action that is required to be taken by the assessing officer, the manner of payment, the rate of tax, penalties on non compliance and what is discretionary. This is what the tax ]egislation generally talks bout. Each of these aspects in audit is to see that the steps taken by the assessing officer are in compliance with mandatory provisions. We will come to discretionary provisions later.

In review of assessment, Audit does not go beyond what the law requires the assessing officer to do. To give you an example, there is a system of levying tax called assembly assessment in which the assessing officer is not required to subject the returns filed by the tax payers to detailed scrutiny. In this system, a list of checks prescribed by law exists and this is what the assessing officer does when he reviews assessment and this is what we also do in audit. We do not go beyond what the law requires the assessing officer to do. This is one thing.

The other important point is the matter of reviewing assessment decisions taken by assessing officers exercising discretionary powers vested in them by law. Audit does not substitute the judgment of the assessing officers by its own judgment. What it does is, it sees generally whether the assessing officer has taken into account all the relevant facts before arriving at a judgment. Whatever the judgments be, we respect it. We do not question it. But when obviously, the assessing officer has not taken into account the relevant facts, we make a very polite inquiry to the assessing officer that this is to be the relevant consideration and we hope this has been taken into account. That kind of polite query is done.

And then there are also problems as we are dealing with the cases in which the Income tax officer exercises sometimes quasijudicial functions or appellate functions.

Normally, Audit does not question such decisions. In fact, appeal decisions are not even seen by Audit. Nevertheless., if there is clear cut judicial opinion available which the assessment officer has not taken into account, once again, we make a polite reference to the assessing officer that this is the supreme court judgment. Apparently this has not been seen.

The examination of individual tax assessment is basically in the interest of revenues but revenue audit has also to work in favour of the tax-payers because correct assessment according to law not only means no short assessment but also no over - assessment. Thus, excess levying of tax, delay in refund, short payment of interest on refund and such other factors are our concern of revenue auditing. When we are looking into details, we get to know the actual working of the systems and procedures. Theoretical study of rules are not the actual working of the systems and procedures. These things are seen while we are auditing the individual tax files. This combine of the knowledge enables us to undertake system studies.

There are basically two types of system studies that we do. One is to pick up the areas of tax administration mostly relating to the procedural aspects. That is one way. The other way of doing it is to look into specific areas. Suppose we take cement, one of the largest commodities manufactured in Pakistan. Now, we undertake review of the system of assessment and collection of revenue of small scale industries relating to cement because that gives us the maximum yield of revenue. That is one way of area studies. The other is we look into the non-revenue objectives which are part and parcel of every legislation in developing countries, for development of backward areas, promotion of industries, generation of employment, adjustment of backward areas, small scale industries promotion, etc. are implied objectives of tax legislation. There would be this kind of study; we test check people who are availing this concession and see whether they really deserves this concession. We see whether the conditions subject to which these concessions were available, are actually there. As such a number of examples are there.

The audit of accounting is mainly to ensure that what is collected, is brought into the account. Especially in a country like Pakistan, the tax proceeds are divisible between the Centre and provinces and the Auditor General of Pakistan has been given special task of certifying the net proceeds of tax. The audit of accounting of revenues becomes more important when Auditor General gives a certificate and authenticates the accounts /net proceeds of tax. Therefore, great amount of care is required to be maintained so far as our auditing of accounting is concerned.

Now we have come to the main points which are challenges and constraints which revenue auditors have to face.

First point is audit mandate. Audit mandates are not theoretically available everywhere. They have to be chalked out first.

The second most important thing, in Auditor's view is production of record. Therefore, working arrangements with the revenue collecting agencies are to be made in order to avoid minor irritancy over availability of records or non compliance of audit observations. This kind of hurdles have to be sorted out.

Audit also has to come to turn out how to deal with differences that may arise in the revenue administration in the interpretation of law, especially where there are many high courts. Each high court gives its own opinion and there is no authoritative opinion of the Supreme Court available to lay down the law of the land. The revenue authority is quoting one case and the Auditor quoting the other case. This kind of conflict takes place. But there must be machinery for resolving that kind of conflict. Therefore, we must strive for such a machinery.

 
 

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