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Audit Report on the Accounts of Federal Board of Revenue (Inland Revenue) Audit Year 2017-2018

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Audit Report on the Accounts of Federal Board of Revenue (Inland Revenue) Audit Year 2017-2018 AUDIT REPORT ON THE ACCOUNTS OF FEDERAL BOARD OF REVENUE (INLAND REVENUE) AUDIT YEAR 2017-2018 AUDITOR-GENERAL OF PAKISTAN TABLE OF CONTENTS Page ABBREVIATIONS & ACRONYMS i PREFACE v EXECUTIVE SUMMARY vii SUMMARY TABLES I Audit Work Statistics xii II Audit Observations Classified by Categories xii III Outcome Statistics xii IV Irregularities Pointed Out xiii V Cost-Benefit Analysis xiii 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 17 CHAPTER-4 IRREGULARITIES AND NON-COMPLIANCE 4.1 Sales Tax 19 4.2 Refund of Sales Tax 58 4.3 Federal Excise Duty 62 4.4 Income Tax 67 4.5 Refund of Income Tax 101 4.6 Workers Welfare Fund 103 4.7 Withholding Taxes 104 4.8 Expenditure 116 CHAPTER-5 INTERNAL CONTROL WEAKNESSES 137 Annexure 1 MFDAC 149 Annexure 2 AUDIT IMPACT SUMMARY 183 Annexures PERTAINING TO AUDIT PARAS 184 (3-66) ABBREVIATIONS & ACRONYMS ACIR Assistant Commissioner Inland Revenue ACL Audit Command Language ACT Alternative Corporate Tax AGP Auditor General of Pakistan AGPR Accountant General Pakistan Revenue AOP Association of Persons ATIR Appellate Tribunal Inland Revenue ATL Active Taxpayer List BPS Basic Pay Scale BTB Broadening of Tax Base CAO Chief Accounts Officer CAAT Computer Assisted Audit Techniques CBR Central Board of Revenue CGA Controller General of Accounts CIR Commissioner Inland Revenue CIR(A) Commissioner Inland Revenue (Appeal) CNG Compressed Natural Gas CPR Computerized Payment Receipt CSTRO Centralized Sales Tax Refund Office CRTO Corporate Tax Office DAC Departmental Accounts Committee DAO District Accounts Office DCIR Deputy Commissioner Inland Revenue DDO Drawing & Disbursing Officer DG Director General DP Draft Para DPC Data Processing Centre DR&S Director Research & Statistics DSC Departmental Selection Committee DTRE Duty & Taxes Remission for Exports E&D Efficiency & Disciplinary ERS Expeditious Refund System FATE Facilitation and Taxpayer Education FBR Federal Board of Revenue i FED Federal Excise Duty FESCO Faisalabad Electric Supply Company FGEHF Federal Government Employees Housing Foundation FTO Federal Treasury Officer/Federal Tax Ombudsman FTR Final Tax Regime FY Financial Year GD Goods Declaration GDP Gross Domestic Product GFR General Financial Rules GST General Sales Tax HESCO Hyderabad Electric Supply Company HQ Headquarter HRM Human Resource Management I&I Intelligence and Investigation IPP Independent Power Producer IR Inland Revenue KIBOR Karachi Inter Bank Offer Rate LESCO Lahore Electric Supply Company LIEDA Lasbela Industrial Estate Development Authority LPG Liquefied Petroleum Gas LTU Large Taxpayers Unit MEPCO Multan Electric Power Company MFDAC Memorandum for Departmental Accounts Committee MPR Monthly Performance Report MR Management Report MS Mild Steel NBP National Bank of Pakistan NAM New Accounting Model NFMC National Fiscal Monitoring Committee NHA National Highway Authority NOC No Objection Certificate NTDC National Transmission and Despatch Company NTN National Tax Number NTR Normal Tax Regime OGDCL Oil and Gas Development Company Ltd. OGRA Oil and Gas Regulatory Authority ii OIO Order-in-Original OPD Out Door Patient Department PAC Public Accounts Committee PAO Principal Accounting Officer PESCO Peshawar Electric Supply Company POL Petroleum Oil Lubricants PPRA Public Procurement Regulatory Authority PRA Post Refund Audit PRAL Pakistan Revenue Automation Limited PTR Presumption Tax Regime QESCO Quetta Electric Supply Company Pvt Private RPO Refund Payment Order RTO Regional Tax Office SAP/R3 System Application Product SBP State Bank of Pakistan SECP Security and Exchange Commission of Pakistan SED Special Excise Duty SEPCO Sukkur Electric Power Company SMEDA Small and Medium Enterprises Development Authority SNGPL Sui Northern Gas Pipelines Limited SPR&S Strategic Planning and Research & Statistics SRO Statutory Regulatory Order SSGCL Sui Southern Gas Company Limited STARR Sales Tax Automated Refund Repository STRN Sales Tax Registration Number TARP Tax Administration Reforms Project TFC Tax Facilitation Centre UFG Unaccounted for Gas WAPDA Water and Power Development Authority 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 compliance with authority audit of Inland Revenue and Expenditure of the Federal Board of Revenue for the Financial Year 2016-17. The Report also includes observations relating to previous years. The Directorates General Audit Inland Revenue (North and South) conducted audit during the audit year 2017-18 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 rupees one 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 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]. Javaid Jehangir Dated: 23 February 2018 Auditor-General of Pakistan v EXECUTIVE SUMMARY The Directorates General of Audit Inland Revenue (North & South) carry out audit of Federal Receipts of Inland Revenues i.e. Income Tax, Sales Tax, Federal Excise Duty 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 145 officers and staff with 10,876 mandays and Annual Budget of Rs.180.89 million (FY 2017-18). The Directorates are mandated to conduct Regularity Audit (Financial Audit and Compliance with Authority Audit) and Performance/Sectoral Audit of FBR. Regularity Audit of 138 formations was conducted during second half of the Audit Year 2016-17 and first half of the Audit Year 2017-18 by utilizing planned mandays, incurring an expenditure of Rs. 212.38 million. a. Scope of Audit FBR collected Inland Revenue of Rs. 2,807,541 million against revised target of Rs. 3,017,305 million for the FY 2016-17 and paid refund of Rs. 63,314.04 million. The Directorates General of Audit Inland Revenue (North & South) conducted audit of receipts (including refunds) of Rs. 2,526,786 million. The FBR incurred expenditure of Rs. 16,642 million against final grant of Rs. 16,675 million for which audit of Rs. 15,760 million was also conducted. The total outlays audited were 86 % of the total formations under audit jurisdiction. b. Recoveries at the Instance of Audit Audit pointed out recovery of Rs. 319,054.60 million in this report. The FBR reported recovery of Rs. 4,608.46 million on pointation of Audit from March, 2017 to February, 2018 which was verified by Audit. 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 automated by PRAL. The FBR provided data containing three fields which was insufficient for risk analysis. This constrained Audit to rely upon limited soft vii data for desk audit and sample selection. The sample was selected randomly rather than on criteria basis. This office used Audit Command Language (ACL) and Computer Assisted Audit Techniques (CAATs) for sampling. 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 contributed towards the amount recovered at the instance of Audit which had escaped from Tax authorities while making assessment of tax. Audit provided deterrence against leakage of government revenue which ultimately helped FBR in achieving the revenue targets. e. Comments on Internal Control and Internal Audit While conducting Compliance with Authority Audit, internal controls of the FBR were found weak and ineffective as various control lapses were identified repeatedly for several years by Audit. These shortcomings included excess reporting of receipts, non/short realization of Sales Tax, Federal Excise Duty, default surcharge and penalty etc. Moreover, some instances of non- recovery of arrears, inadmissible zero rating, irregular claim of exemption, inadmissible/excess payment of refund, non/short
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