Will spe­cial au­dit pan­els de­liver?

The Pak Banker - - 4EDITORIAL - Mubarak Zeb Khan

TAX ex­perts do not pin much hope in the con­cept of the spe­cial au­dit panel that was in­tro­duced in the fed­eral FY16 bud­get. They said it would not fare any bet­ter than a sim­i­lar pre­vi­ous ex­er­cise.

Many claim the idea came from the top and was adopted with­out con­sult­ing the rel­e­vant stake­hold­ers. It would serve the pur­poses of only a few peo­ple who would be en­gaged at hefty fees.

The Fi­nance Act 2015 em­pow­ers the Fed­eral Board of Rev­enue (FBR) to ap­point spe­cial au­dit pan­els, which will have two or more mem­bers. It will com­prise of­fi­cials from In­land Rev­enue, char­tered ac­coun­tant firms, cost and man­age- ment ac­coun­tants or any other per­son as de­ter­mined by the FBR. The FBR has en­tered into an un­der­stand­ing with the lenders that for­eign char­tered ac­coun­tants will be hired to be­come part of the au­dit pan­els along with their Pak­istani peers, and their hefty fees will be paid through loans ex­tended by them

The panel will con­duct an au­dit, in­clud­ing a foren­sic au­dit, of the in­come tax af­fairs of any per­son or class of per­sons, and the scope of the au­dit would be de­ter­mined by the FBR or the Com­mis­sioner of In­land Rev­enue on case-by-case ba­sis. The panel will be headed by a chair­man who will be an of­fi­cer of In­land Rev­enue.

The re­sponse to the panel au­dit has cre­ated a clear di­vi­sion within the tax ma­chin­ery. The group that sup­ported the idea be­lieves that the col­lab­o­ra­tive au­dit is de­signed to utilise the ex­per­tise of char­tered ac­coun­tants, cost and man­age­ment ac­coun­tants and other sec­tor spe­cial­ists in con­duct­ing more ef­fec­tive au­dit. The par­tic­i­pa­tion of a wider range of ex­perts would es­sen­tially strengthen the au­dit, while the pro­ce­dure and the le­gal as­pects will be steered by In­land Rev­enue of­fi­cers.

How­ever, tax of­fi­cials who deal with au­dit have the op­po­site ap­proach. Fi­nance Min­is­ter Ishaq Dar, who is also a char­tered ac­coun­tant by pro­fes­sion, is be­lieved to be the ar­chi­tect of the scheme. There­fore, no one is sup­posed to make com­ments on its draw­backs. The con­cept of the panel au­dit was in­tro­duced in 198990 with a lim­ited scope, but it failed to pro­duce the de­sired re­sults.

One of the draw­backs of the panel au­dit is that it will be headed by a tax of­fi­cial. There may be dif­fer­ences be­tween gov­ern­ment of­fi­cials and pri­vate pro­fes­sion­als on the panel. The char­tered ac­coun­tant who will be look­ing into the math­e­mat­i­cal ac­cu­racy of the au­dit will be paid hefty fees, while there is no in­cen­tive for the gov­ern­ment of­fi­cial on the same panel. The le­gal is­sue will be the re­spon­si­bil­ity of the tax of­fi­cial.

There is an im­pres­sion that a ma­jor firm is un­likely to be­come part of the au­dit panel and work un­der the tax of­fi­cials and then take the blame for the tax depart­ment's in­ef­fi­ciency. The au­dit panel will also have no power of amend­ment. The tax­payer will have to go through another has­sle where he will have to ap­proach the tax depart­ment for any amend­ment in the panel's re­port.

Foren­sic au­dit has also been in­tro­duced on the rec­om­men­da­tion of donors, even though there is no ex­per­tise for con- duct­ing such an ex­er­cise in the coun­try. The FBR has en­tered into an un­der­stand­ing with the donors that for­eign char­tered ac­coun­tants will be hired to be­come part of the au­dit pan­els along with Pak­istani peers. The hefty fees of the for­eign and lo­cal char­tered ac­coun­tants will be paid through loans from the donor.

For­eign con­sul­tants were hired in the past to make the au­dit pol­icy, which only re­mained on pa­per and was never im­ple­mented. The pol­icy pro­posed by those foren­sic con­sul­tants was mostly copied from those in de­vel­oped coun­tries and was there­fore not much suit­able for a coun­try like Pak­istan.

In­stead of wast­ing money and time, tax ex­perts sug­gest that the FBR should fo­cus on mak­ing an au­dit pol­icy for at least five years. The pol­icy should treat taxpayers on the ba­sis of turnover - large, medium and small taxpayers. The ex­perts be­lieve the fo­cus of the au­dit should be on the large taxpayers for at least five years in­stead of one year. The du­ra­tion of the au­dit should be three years for medium taxpayers and one year for small taxpayers.

Even the tax re­form com­mis­sion has found the con­cept of the au­dit panel faulty and in­ef­fec­tive and has ex­pressed its con­cern. The com­mis­sion be­lieves a tax of­fi­cer as the lead per­son in the panel au­dit will not work. A mem­ber of the tax re­form com­mis­sion be­lieves that the au­dit should be a sep­a­rate func­tion. There should be a spe­cialised cadre that goes through ex­ten­sive train­ing for at least three years. More­over, there should be an in­de­pen­dent set-up, he added. In short, there is a need for an ef­fec­tive al­ter­na­tive dis­pute res­o­lu­tion mech­a­nism that should be built into the pol­icy.

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