This is the first time in history that any revenue authority had made some of its taxpayers to take a bath in the river Ganges by destroying its record of more than five years in line with section 111 of Income Tax Ordinance, 2001 without having the basic understanding of the single most compelling fact that our legal and quasi judicial system takes years to pass its judgment in respect of appeals pending before them. This is the second time in the history of CBR that CBR is hiring foreign experts to implement software which will be customized in years according to the local laws because CBR feels ashamed in using local expertise of system analysts. This article is an endeavor to understand ifs and but of these two decision.
5 Year Record
The concept of unexplained investment is not new to the taxpayers of Pakistan. Section 111 was basically the harshest part of the piece of legislation known as Income Tax Ordinance, 2001 in line with its predecessor section 13 of Income Tax Ordinance, 1979.
However, before moving towards the dearth of this topic we must try to understand the concept of keeping the record. The record is the most crucial aspect of any organization and in the words of the CEO of Hewlett-Packard, “If HP (Hewlett-Packard) knows what HP knows then it might land somewhere else”. Though, it was a big hassle for the companies for maintaining and storing complex sets of books of accounts like Cash Book, Nominal Ledger, Day Book/Journal, JV Book, Stock record and finally General ledger apart from other complex accounting books structure for more than a decade and half.
After the emergence of the concept of computerized record which is also been embraced by the Business community very rapidly – concept of keeping the record has become less cumbersome than ever before. The only problem lies in the fact that the printed copies are normally signed by the relevant actors of the document. Such documents also form part of the word record apart from the computerized record.
However, this problem has also been resolved with the use of digital scanners. Nowadays, it is well known fact that computerized data [soft form of data – soft copy] is retained by the companies apart from the scanned copies of the printed documents [Convergence of Hard Copy into Soft Copy] for future purposes. A normal computer literate citizen of Pakistan is surprised over the decision that CBR is destroying the record of more than five years without even trying to use scanners and micro films. Wouldn’t it be possible that CBR people for once, do some work by scanning these documents and keep it as an archive for future purposes?
The strong recommendations from different walks of life compelled CBR to issue a beneficial circular which restricted the period to 5 years. In the very next budget, this 5 year period was incorporated in the piece of legislation namely Income Tax Ordinance, 2001. Now in the garb of reconciling with section 111, CBR is now trying to destroy its record which is older than five years.
Every one is surprised with this series of decisions and the concept of 5 years. In a light mood, one of my friends in UK told me that Pakistan is so much more advanced than UK and surely must have loads of money. When I asked the reason he replied that in the UK, the document retention period is 20 years and in Pakistan it is 5 years. Even I myself am unable to understand the logic of this decision for convergence from an indefinite period to just 5 years. However, I would also like to mention here the fact that the 20 year limitation period, applicable in UK, is to fecilitate deliberate concealment.
According to a news item, the Central Board of Revenue (CBR) is taking expert advice from globally reputed IT companies to develop 'Total Revenue Integrated Processing System' (TRIPS) for proper management of revenue collection, therefore, reducing the possibility of fraud and non-compliance by registered persons which was a hallmark of hefty paperwork.
CBR is again trying to spend a lot of money in the training of aliens in order get themselves acquainted with local revenue collection procedure and its modalities, as these non-residents are from Jamaica, a place which seems to have quite high regards in the eyes of CBR. The reason behind it is this software is a bespoke or off-the-shelf software which will be customized by this Jamaican team which would only happen when they have acquainted themselves with the local procedures, structures etc.
CBR must understand the fact that there are two types of software which its decision makers can acquire – custom-made and bespoke. However, some bespoke software can be customized according to the requirement. For both custom-made or customized bespoke – CBR needs to hire system analysts for initial flow charting, interviewing and other system analysis techniques.
However, in order to have a customized bespoke CBR needs to have two experts – the system analysts for bespoke software and system analysts who understand the local scenario. The work in such case is extensive merely because of hiring these two types of system analysts. However, it is also possible the same system analysts can do the job of analyzing Pakistani tax collection procedure, but then the whole process will take much more time.
We know that the task is not easy because such software may be instrumental in increasing revenue collection for the country and eliminating any chances of duplicity. At this time, this is not known by the foreign experts, however, any good local accounting firm which also has an MIS department is already aware of this and other similar facts. For example, it is not known by the foreign expert that custom stage income tax amount input into the system can be used by the banks for collection, used by the income tax department for verifying the data in statement under section 115(4).
A salient feature of this software is that the system has the ability to automatically block sales tax refund of a registered person where he is deficient in payment of income tax but is receiving Sales tax refunds. CBR must understand the fact that this is only possible if the system analyst defines the NTN as a key field in the software and collects all the information relating to a taxpayer in a single ledger account of such taxpayer. The ledger account will show all the debits and credits relating to income, sales, custom, excise etc and give the closing balance of such taxpayer. So this is normal tax accounting and is not unusual. But does the Jamaican experienced system analyst of TRIPS know the fact that when Custom related taxes, Excise Tax, Sales Tax and Income Tax are applicable? In furtherance, this involves the use of WAN linked with several LAN networks.
For example, each individual LAN in every Income Tax department in each city is connected to Central LAN in CBR through WAN. The other tax departments are also connected in a similar fashion. However for import and export, the link with ports and airport will also serve the purpose. Such a system is known as shared intelligence data which will enable CBR for better risk profiling and effectively combating fraud. If such a system of CBR is linked with Banks with limited authority, it would also serve the purpose of combating revenue collection related malpractices.
However, if this system is linked with NADRA, SECP, or other registration authorities like Registrar of Partnerships, registrars of the sale of land, sale of air tickets, car registration authorities and etc, this will also enable the CBR to identify the new taxpayers, intelligence and risk management. an integrated revenue system enables all government revenue streams to be managed and collected under a single umbrella. Such a system will reduce the cost of revenue collection by eliminating duplication of resources, enable inter-agency sharing of intelligence and improved compliance through web-based filing of returns.
We all know that if input is not good then the output is also bad – Garbage in Garbage out [GIGO], so a good system analysis would also require correct input at the origination of transaction to avoid duplicity and redundancy of data. The system analysis when converted into programming would result in the automated programmed risk assessment of returns filed in the income and sales tax department. This would also result in better profiling for audit and assessment.
Such a WAN can be accessed through internet having a secure intranet login for the CBR employees. New taxpayer can fill their data on the internet and get their NTN, sales tax registration certificate and etc after filling the form over the internet. However, the NTN and sales tax registration certificate would only be issued after taking a print-out of that form, attaching necessary particulars with it and send it to CBR. This should reduce the work of CBR to verify data already input by the prospective taxpayer and is a part of the e-government policy.
The concept of automated payments may be linked with the ledger account of taxpayers. The provisional figures may appear in the ledger account with different color. For example, an advance tax payment under section 147 of Income Tax Ordinance, 2001 pertaining to tax year 2005 would appear in blue and may not be allowed to be refunded to the taxpayer through a programming check into the system.
In furtherance, the ledger account may contain a drill-down facility. By drill-down facility I mean for example, when a person puts the cursor of mouse and clicks a figure it would provide the detail of such transaction, and then if any figure in such transaction detailed is clicked it will provide further detail and so on so forth. The payment will only route to the account number of the taxpayer submitted to the CBR and an email may automatically be sent to the taxpayer containing the statement of account of taxpayer, like bank statement so that his refund is issued. Furthermore, authorization of payment may involve electronic signature or proper authorization by at least two persons because firstly, it is a money matter and secondly our religion also asks us to have two witnesses in money matters.
Such a software should also contain a decision support system which would contain a knowledge base. Such knowledge base could contain information about different tax structures being followed around the world, analytical data of different tax structures and other similar information to help mid-level economic managers in accommodating changes in the tax-base including introduction of a new system and removal of old taxes.
I am afraid that Crown Agent’s (the Jamaican firm) submitted proposal regarding TRIPS for proper monitoring of revenue collection in Pakistan might not contain any of the above referred procedures. It is also mentioned that the company has conveyed to CBR that its system is already successfully operating in Jamaica which surely cannot be used as a yardstick for the purchase of this software.
The above referred analysis will help CBR to chalk down its policy regarding the software becoming an integrated revenue administration software and also by proper utilization of local accounting firms in Pakistan who better understand the environment, procedures, working model and organisation structure of CBR.
This company has claimed that until now no IT system has been capable of providing the necessary support to track, control and co-ordinate all of the government's various revenue streams. I am afraid that in Pakistani environment, TRIPS would fail in supporting the management and collection of all direct taxes and indirect taxes including custom duty.
CBR must have learnt some lessons from the experience of involving foreign experts in development of Income Tax Ordinance, 2001 which later had to be amended by local experts. It is also necessary that the source code of this software is also acquired so that amendments can be made according to the changes in laws. A local firm can perform this work with lesser cost and much more insight.
I would also ask CBR to not make itself suspicious by destroying data which more than 5 years old. In order to make process more transparent, they should first manage the record room and digitize the documents for future purposes. This should also help it in managing its own cases pending before the apex courts otherwise the cases will all be one-sided and the loss of revenue unaccountable.
The author is an International tax advisor and teaching UK and Pakistani Taxation at various approved colleges of ICAP and ACCA. He is also a member of publication committee of ICAP. His articles on taxation and corporate law have been published in leading local and foreign newspapers and journals. He can be contacted at firstname.lastname@example.org