Audit Report on the Accounts of Federal Board of Revenue (Inland Revenue) Audit Year 2013-2014

AUDIT REPORT ON THE ACCOUNTS OF FEDERAL BOARD OF REVENUE (INLAND REVENUE) AUDIT YEAR 2013-2014 AUDITOR-GENERAL OF PAKISTAN TABLE OF CONTENTS Page ABBREVIATIONS & ACRONYMS i PREFACE v EXECUTIVE SUMMARY vii SUMMARY TABLES I Audit Work Statistics xi II Audit Observations Classified by Categories xi III Outcome Statistics xi IV Irregularities Pointed Out xii V Cost-Benefit xii CHAPTER-1 PUBLIC FINANCIAL MANAGEMENT ISSUES 1 CHAPTER-2 FEDERAL BOARD OF REVENUE 2.1 Introduction 7 2.2 Comments on Budget & Accounts 8 2.3 Brief Comments on the Status of Compliance with PAC Directives 13 COMPLIANCE WITH AUTHORITY AUDIT (AUDIT PARAS) CHAPTER-3 NON PRODUCTION OF RECORD 15 CHAPTER-4 IRREGULARITIES AND NON COMPLIANCE 4.1 Sales Tax 21 4.2 Refund of Sales Tax 46 4.3 Federal Excise Duty 53 4.4 Income Tax 58 4.5 Refund of Income Tax 76 4.6 Workers Welfare Fund 78 4.7 Expenditure 80 CHAPTER-5 INTERNAL CONTROL WEAKNESSES 95 Annexure 1 MFDAC 107 Annexure 2 AUDIT IMPACT SUMMARY 132 Annexures PERTAINING TO AUDIT PARAS 133 (3-61) ABBREVIATIONS & ACRONYMS AGP Auditor-General of Pakistan AGPR Accountant General Pakistan Revenue ADIA Additional Director Internal Audit AOP Association of Persons APPM Accounting Policies & Procedures Manual ATIR Appellate Tribunal Inland Revenue ACIR Assistant Commissioner Inland Revenue ACL Audit Command Language BCA Bank Credit Advice BOD Board of Directors BTB Broadening of Tax Base CAATs Computer Assisted Audit Techniques CAO Chief Accounts Officer CAP Collection Automation Process CBR Central Board of Revenue CGA Controller General of Accounts CIR Commissioner Inland Revenue CNG Compressed Natural Gas CPF Contributory Provident Fund CPLA Civil Petition for Leave to Appeal CPR Computerized Payment Receipt CREST Computerized Risk Based Evaluation of Sales Tax CSTRO Centralized Sales Tax Refund Office DAC Departmental Accounts Committee DAO District Accounts Office DCIR Deputy Commissioner Inland Revenue DP Draft Para DPC Data Processing Centre DR Departmental Representative DR&S Director Research & Statistics DTRE Duty and Tax Remission for Exports ECC Economic Coordination Committee E&D Rules Efficiency & Disciplinary Rules i ERS Expeditious Refund System FATA Federally Administered Tribal Area FBR Federal Board of Revenue FED Federal Excise Duty FMR Financial Management Report FTO Federal Treasury Officer FY Financial Year GD Goods Declaration GDP Gross Domestic Product GFR General Financial Rules GoP Government of Pakistan GST General Sales Tax HQ Headquarter HRM Human Resource Management I&I Intelligence and Investigation IDA International Development Agency IJP Internal Job Posting IR Inland Revenue IRS Inland Revenue Service KIBOR Karachi Inter Bank Offered Rate LTU Large Taxpayers Unit MAC Monitoring Audit Cell MFDAC Memorandum for Departmental Accounts Committee MPR Monthly Performance Report MR Management Report NBP National Bank of Pakistan NHA National Highway Authority NTN National Tax Number OIO Order in Original PaCCS Pakistan Automated Customs Clearance System PAC Public Accounts Committee PAO Principal Accounting Officer PATA Provincially Administered Tribal Area PCT Pakistan Customs Tariff PECHS Pakistan Employees Cooperative Housing Society ii PMU Project Management Unit POL Petroleum, Oil & Lubricants PRAL Pakistan Revenue Automation Limited PTR Presumptive Tax Regime PPRA Public Procurement Regulatory Authority RPO Refund/Rebate Payment Order RTO Regional Tax Office SAP System Applications & Products SBP State Bank of Pakistan SED Special Excise Duty SOP Standard Operating Procedures SRO Statutory Regulatory Order STARR Sales Tax Automated Refund Repository TARP Tax Administration Reforms Project TEVTA Technical Education and Vocational Training Authority TFC Tax Facilitation Centre VAT Value Added Tax WHT Withholding Tax WWF Workers Welfare Fund iii Preface Articles 169 and 170 of the Constitution of the Islamic Republic of Pakistan 1973 read with sections 8 and 12 of the Auditor-General’s (Functions, Powers and Terms and Conditions of Service) Ordinance, 2001 require the Auditor-General of Pakistan to conduct audit of expenditure and receipts of Government of Pakistan. The report is based on audit of receipts and expenditure of the Federal Board of Revenue relating to inland revenues for the financial year 2012-13. It also includes observations pertaining to previous years as well. The Directorates General Audit Inland Revenue (North and South) conducted audit during the audit year 2013-14 on test check basis with a view to reporting significant findings to the stakeholders. The main body of the Audit Report includes only the systemic issues and audit findings carrying value of Rs 1 million or more. Relatively less significant issues are listed in the Annexure-I of the Audit Report which shall be pursued with the Principal Accounting Officer at the DAC level and in all cases where the PAO does not initiate appropriate action, the Audit observation will be brought to the notice of the Public Accounts Committee through the next year’s Audit Report. Audit findings indicate the need for adherence to regularity framework besides instituting and strengthening internal controls to avoid recurrence of violations and irregularities. Audit observations included in this report have been finalized in the light of departmental response, where received, and discussions in DAC meetings. The Audit Report is submitted to the President of Pakistan in pursuance of Article 171 of the Constitution of the Islamic Republic of Pakistan 1973, for causing it to be laid before the both houses of Majlis-e-Shoora [Parliament]. Dated: 14 March 2014 Muhammad Akhtar Buland Rana Auditor-General of Pakistan v EXECUTIVE SUMMARY The Directorates General of Audit Inland Revenue (North & South) carry out audit of Federal Receipts on account of inland revenues i.e. Income Tax, Sales Tax & Federal Excise and expenditure under four Grants i.e Revenue Division, Federal Board of Revenue, Inland Revenue and Development Expenditure of Revenue Division. The Directors General Audit Inland Revenue have a human resource of 146 officers and staff with 36,354 mandays and annual budget of Rs 142.79 million. The Directorates are mandated to conduct regularity audit (financial audit and compliance with authority audit) and performance/sectoral audit of FBR. Regularity audit of 131 formations was conducted during first half of audit year 2013-14 and 2nd half of audit year 2012-13 by utilizing planned mandays, incurring an expenditure of Rs 139.45 million. a. Scope of Audit FBR collected inland revenue of Rs 1,685,051 million against revised target of Rs 1,765,800 million for the FY 2012-13. It paid refund on account of income tax, sales tax and federal excise duty aggregating to Rs 49,928 million. The Directorates General of Audit Inland Revenue conducted audit of receipts of Rs 806,235 million relating to income tax, refund of sales tax and federal excise duty, since FBR did not provide assessment record of sales tax and federal excise duty. However, Audit selected sample of income tax, sales tax refund and federal excise duty on the basis of partial data/record provided by field formations. The expenditure of Rs 11,291 million was incurred against final grant of Rs 11,436 million and audit of expenditure of Rs 9,598 million was also conducted. The total outlays audited are 48% of total population of Rs 1,696,342 million pertaining to FBR. b. Recoveries at the instance of Audit Audit pointed out recovery of Rs 143,569 million in this report. The FBR reported recovery of Rs 4,465 million from Jan to Dec, 2013 which was verified by Audit. Out of the total recovery of Rs 4,465 million, an amount of Rs 4,446 million was not in the notice of the executive before audit. vii c. Audit Methodology The desk audit methods/techniques were applied using SAP/R3 data maintained by AGPR for audit of expenditure relating to Revenue Division, Federal Board of Revenue, Inland Revenue and Development Expenditure Grants. Initial accounts of receipts are maintained by FBR’s treasuries and are automated by PRAL. The FBR did not provide access to soft or hard data of receipts despite repeated requests by Audit. This constrained it to rely upon limited soft data acquired through field audit teams for desk audit and sample selection. For sampling, this office used Audit Command Language (ACL) and Computer Assisted Audit Techniques (CAATs). This facilitated, to some extent, in understanding the system, procedures and environment of FBR and identification of high risk areas for substantive testing in the field. d. Audit Impact Audit identified 217 tax payers in nine field offices of FBR which were liable to be registered under the Sales Tax Act, 1990 having revenue implication of Rs 2,043.87 million. On Audit recommendation the department initiated registration of taxpayers to bring them in the sales tax regime by strengthening internal control mechanism. e. Comments on Internal Control and Internal Audit Department Internal controls of the FBR were found weak and ineffective as various control lapses were identified including incomplete reporting of receipts, inadequate monitoring of withholding agents, lack of seriousness towards pursuance of amount detected by Directorate of Internal Audit. Audit emphasizes proper implementation of financial reporting mechanism and enforcement of laws and regulations to improve internal controls of the department. f. The key audit findings of the report This report includes audit observations of Rs 170,031 million in respect of compliance with authority audit of receipts and expenditure relating to inland revenue for the FY 2012-13, audited from July to Dec, 2013. It also includes audit for FY 2011-12, audited from Jan to June 2013. The observations include cases of non/short assessment of taxes, grant of inadmissible exemptions, excess viii carry forward and set off of losses, non levy of default surcharge, delay in adjudication proceedings, non recovery of adjudged revenue, inadmissible input tax adjustment, sanction of inadmissible refunds etc. Systemic deficiencies are also identified with recommendations for preventing recurrence of irregularities in the future.

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