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World Bank praises new sales tax audit plan

ISLAMABAD (November 08 2003): While appreciating the Central Board of Revenue (CBR) plan to develop a separate 'Tax Audit Function', the World Bank (WB) has shown optimism that automatic selection of cases for sales tax audit would help in curtailing under-reporting/under-payment of taxes.

A World Bank project information document on Tax Administration said that audit function should be strengthened through independent quality reviews and audit parameters be imbedded in the Information Management System, allowing the system to identify returns/filings for further scrutiny.

Moreover, in an effort to make GST collection system foolproof, the CBR is focusing on taxpayer registration, case tracking and computerised audit selection system along with strengthening sales tax information and communication system for processing/reconciliation of sales tax returns.

The World Bank observed that the most crucial issue on sales tax side is the limited number of ST registrants and their poor compliance.

About 150,000 units are registered with the sales tax department against potential 800,000 to 1.5 million.

To bring the sales tax regime in line with general international practices, the scope of GST should be extended to more goods and services.

WB maintained that the CBR will also allow “input tax credit” for office equipment, office supplies, building materials, electricity consumed and other items used to support taxable activities. The input tax claims and ST refunds system will be reviewed and streamlined.

The World Bank has identified some of the problems plaguing the audit function which include lack of cost-effectiveness, non-differentiation of the various forms of control, audit experiences not extracted and distributed throughout CBR, the auditing process characterised by a bargaining process between the auditor/collector and the taxpayer, and the selection of cases for audit not carried out according to a structured risk assessment–carried out randomly.

Presently, there are different audit schemes for different taxes, and the development of audit programs varies both in quantity and quality.

In certain cases, individual employees have developed advanced control programs and audit case selection systems.

The system of giving rewards to tax officials is based upon fulfilment of the goal set for collection rather than the number and quality of audits.

For effectively dealing with the audit, the CBR will establish a Tax Audit Function as a separate functional stream.

It will also develop an automated approach to audit-case selection based upon consideration of the risks of under reporting and underpayment of taxes and case distribution among auditors with specialised functions.

The audit function will be strengthened through independent quality reviews and audit parameters will be imbedded in the Information Management systems, allowing the system to identify returns/filings for further scrutiny, WB added.

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