Malaysia is a federation of 13 States and the Federal Territories of Kuala Lumpur and Labuan. The Federal Constitution contains special provisions regarding sources of revenue that are assigned to the Federal and the State governments. Those that are assigned to the State governments include revenue from land, forests, mining, entertainment, water supply, bank interests, returns from investments, fines including forfeitures (other than those imposed by the Federal Courts) and fees for licences and permits (but not licences relating to motor vehicles and registration of businesses). All other revenues, not specifically assigned to the states, are Federal Government revenues.
Malaysian Federal Government revenues are broadly classified as tax-revenues, non-tax revenues and non-revenue receipts. The total revenue collected under these three categories in the years ended 31 December, 1994, 1995 and 1996 is as follows :-
|Category||1994 RM million||%||1995 RM million||%||1996 RM million||%|
Source : Federal Public Accounts (Summary)
1.3. Tax revenues include both Direct and Indirect Taxes. Direct taxes are collected by the Inland Revenue Board and includes taxes such as income tax on individuals and corporations, petroleum income tax, stamp duty and real property gains tax. Indirect taxes are collected mainly by the Royal Customs and Excise Department. Indirect taxes include import duties, export duties, excise duties, sales tax and service tax.
1.4. Non-tax revenues of the Malaysian Government include fees for issue of licences and permits, fees for specific services, proceeds from sale of government assets, rental of government property, bank interests, returns from Government investments (including gains from sales of investments) fines and forfeitures.
1.5. Non-revenue receipts consist mainly of repayments and reimbursements such as refunds of overpayments in previous years and repayment of loans from the Federal Government's Consolidated Fund (Revenue Account) received from other Federal Government Agencies and State Governments.
1.6. Since tax revenue constitutes 81% of the total Federal Government revenue the Government has become increasingly dependent on such revenues. In the last few years, Government had budgeted for increases in tax revenue even though there were reduction of tax rates. This could only be realised by strict compliance, voluntary or otherwise, with tax laws. Since voluntary compliance cannot be solely relied upon, strict monitoring by the tax administrators is necessary. Reviews by Auditors on the effectiveness of existing revenue laws and procedures can help to identify deficiencies in the systems. This will enable the tax administrators to introduce controls that can discourage, if not eliminate, tax evasion which, if unchecked, will eventually erode the tax base.
2.1. The Office of the Auditor General is provided for under Article 105 of the Federal Constitution whilst the powers and duties of the Auditor General are provided for under Article 106 and the authority to whom the reports of the Auditor General are to be submitted is specified in Article 107. In compliance with Article 106 of the Federal Constitution, Parliament enacted the Audit Act 1957 to make provision for the audit of accounts of the Federation, the States and certain other authorities and specific bodies. The Audit Act, 1957 also provides for the duties and powers including the nature of the audit by the Auditor General.
2.2. The Audit of government revenues is provided for in Section 6(a) of the Audit Act which reads "The Auditor General shall in his audit make such examination as he may deem necessary to ascertain whether all reasonable precautions have been taken to safeguard the collection and custody of public moneys or other moneys subject to his audit". Section 5 of the Audit Act also allows the Auditor General "to examine, enquire into and audit the accounts of the Federation in such manner as he may deem fit."
2.3. The various revenue laws also contain provisions allowing the Auditor General free and unimpeded access to all financial records. For example, Section 138 (4) of the Income Tax Act, 1967 provides that "Nothing in this section shall prevent the production or disclosure of classified materials to the Auditor General (or to public officers under his direction and control) or the use of classified material by the Auditor General, to such an extent as is necessary or expedient for the proper exercise of the function of his office".
2.4. These provisions allow the Auditor General to audit not just the collection but also the assessment of Government revenue. The audit of both the assessment and collection of Government revenue has been conducted by the National Audit Department since 1957. In the audit of tax revenue, the audit activity includes the review of assessment files of various categories of taxpayers. In the Royal Customs and Excise Department, samples of customs and excise duty declaration forms are reviewed regularly for both legal compliance and arithmetic accuracy. In both these agencies assessment and collection systems are also reviewed regularly.
3.1.1. In 1996 the Government collected tax revenue amounting to RJVI25,851 million of which RM20,458 million is in respect of income tax. Stamp duty and real property gain tax make-up the balance. According to the Income Tax Act, all tax payable must be settled within 30 days from date of Notice of Assessment. Any delay will mean a 10% penalty on the outstanding amount and a further 5% penalty will be imposed should tax remain outstanding after a further duration of 60 days or more.
3.2.1. The Petroleum (Income Tax) Act was introduced in 1967 to levy tax on the income of those involved in upstream petroleum operations i.e. searching for, extracting and disposing crude petroleum and natural gas. Downstream petroleum operations such as refining and marketing petroleum products do not fall within the ambit of this Act. Petroleum Income Tax is imposed at the rate of 40% of the chargeable income. In 1996, Government collected Petroleum Income Tax totalling RM2,203 million mainly from the National Petroleum Company (Petronas) and its contractors.
3.3.1. The Real Property Gains Tax Act was introduced in 1976 primarily to curb speculative activities in the real property market. It imposes a tax on gains derived from the disposal of real property. The Act encompasses both individuals and companies. Being an anti-speculation statute, tax is imposed at scaled rates, with the highest rate of 30% being imposed on gains arising from disposal of an asset within 2 years of its acquisition. Gains from disposals on the sixth and subsequent years after the date of acquisition are exempted from this tax. This tax is administered by the Inland Revenue Board.
3.4.1. The Stamp Act, imposes a tax known as Stamp Duty on certain documents and instruments specified in the Act. Amongst the instruments subject to duty under the Stamp Act are agreements, mortgages, bills of sale and insurance policies. The rate of duty varies with the type and value of the transaction. The Stamp Act is also administered by the Inland Revenue Board. In 1996, Stamp Duty collections amounted to RM2,708 million.
3.5.1. The Promotion of Investments Act provides various types of incentives and reliefs from income tax to encourage the establishment and development, in Malaysia, of industrial, agricultural and other commercial enterprises and for the promotion of exports. The activities that may enjoy the incentives are determined, from time to time, by the Minister of International Trade and Industry. This Act is applicable to companies only.
3.6.1. The Labuan Offshore Business Activity Tax Act was enacted in 1990 to provide for the assessment and collection of income tax on offshore companies in or from the Island of Labuan. In keeping with Labuan's status as a tax haven, tax imposed on such activities is kept to the minimal. Income tax on offshore activities is charged either at the rate of 3% of the net profits as reflected in the audited accounts of the company or at a flat rate of RM20,000 if the company so elects. Being a regulatory tax, collections by the Inland Revenue Board, in 1996, amounted to RM2.203 million.
3.7.1. Customs Act 1967 provides for the levy and collection of customs duties and export duties. These taxes are collected based on declarations presented by the importers or exporters (together with supporting documents). Physical examinations are also carried out at random to ascertain the accuracy of such declarations made by them. The collection of these duties is done at all major sea ports and the International Airports in the country.
3.8.1. Excise Duties are imposed on locally manufactured or assembled goods, by Custom Offices located throughout the country. Factories producing excisable goods are licensed under the Act and are controlled either physically or by means of documents by the Royal Customs and Excise Department. In factories that are physically controlled, Customs Officers are stationed at the premises to keep physical account for all taxable goods produced, stored and released. In documentarily controlled premises, weekly and monthly statements of production and releases are submitted to the Royal Customs and Excise Department. In both types of control, duty has to be paid before the goods are removed from the premises. The only exception to the rule is motor vehicles where excise duty is paid at the time of sale to the buyer.
3.9.1. Sales tax is payable on both imported and locally manufactured goods. Sales tax on imported goods are collected by the Customs Division at the import station at the time of release from the Customs control. Manufacturers of taxable goods are required to be licensed under the Act. Sales tax are imposed on licensees on all sales made. They are required to furnish monthly returns or statements of sales together with tax payable within 28 days of the end of the month. The Customs Department also exercises control through the inspection of records and premises of the licensee. Collection of sales tax from imported and locally manufactured goods for the year 1996 amounted to RM5,621 million.
3.10.1. Service tax is levied at the rate of 5% in respect of :-
3.10.2. The prescribed establishments/services are as follows :-
3.10.3. The prescribed establishments are required to be licensed and submit monthly statements together with the tax payable within 28 days of the end of the month. The control and system of payment are similar to sales tax.
3.11.1. The Goods Vehicle Levy Act was introduced in 1983 to encourage local exporters to export their products through Malaysian ports This Act, therefore, imposes a levy of RM 100.00 on all goods vehicles leaving Malaysia. In 1996, the Royal Customs and Excise Department which administers this Act collected a total of RM165 million as Goods Vehicle Levy.
3.12.1. The Road Transport Department within the ambit of Ministry of Transport is entrusted with the task of administering the Road Transport Ordinance 1958 under which tax is levied on all motorised vehicles using public roads. Tax is assessed and collected by the various regional branches of the Department based on :-
3.12.2. Tax in respect of vehicles registered with the Department may be paid either half yearly or annually. The Department with the cooperation of the Police Department ensures that all vehicles on the road have been taxed by carrying out surprise checks.
4.1. The audit of Government revenues has been strengthened with inception of the Audit Act in 1957. Currently the audit is conducted by the Revenue Audit Branch. The Revenue Audit Branch is responsible for the audit of the Inland Revenue Board, the Royal Customs and Excise Department and the Ministry of Transport, which together account for more than 70% of Federal Government revenues annually.
4.2. The audit is carried out using system-based and substantive audit techniques. The relevant legislative and financial controls are reviewed and evaluated including compliance testing of the existence, effectiveness and continuity of operation of key controls on which reliance may be placed. Substantive tests are carried out to obtain sufficient appropriate Audit evidence to provide a reasonable basis for reporting the result of Audit examination.
4.3. The audit of receipts is generally conducted annually or through a two to three years cycle and the programmes are normally planned at the Federal level. Detailed audit directions and guides are also issued to auditors at state levels to undertake revenue audit. With this uniform audit guide, audit findings and reports are much more reliable and complete.
4.4. The main objectives of the audit of receipts are as follows :-
5.1. Annually the National Audit Department prepares an Audit Plan that identifies the areas that will be audited during the year and the resources that are needed to implement the Plan. Audit Planning Memoranda (APM) are prepared by the Revenue Audit Branch for review by senior management in the National Audit Department before Comprehensive Audits are conducted. Financial Audits are conducted according to the procedures published in the National Audit Department's Audit Manual. Procedures outlined in the Audit Manual are periodically reviewed to ensure that they incorporate changes in accounting and collection procedures implemented by the tax administrators.
5.2. In order to overcome resource constraints, the Auditor General has introduced several modern methods in auditing. Sampling techniques are extensively used to select transactions for audit scrutiny. Computers and computer software such as Audit Command Language are used to analyse accounting records based on predetermined parameters. In addition, the Auditor General has encouraged the establishment of Internal Audit Units (IAUs) in all ministries and departments to ensure compliance with administrative and statutory procedures. In order to ensure that the IAUs perform their functions satisfactorily, officers from the National Audit Department are seconded to these Units. Staff of the IAUs are often invited to participate in the National Audit Department's training programmes.
6.1. Article 107 of the Federal Constitution and Section 9 of the Audit Act 1957 require the Auditor General to submit his Reports on Audit of the Public Accounts wQd Activities of the Federal Government Ministries, Departments and Agencies to the Yang Di Pertuan Agong, who is the Constitutional Head of Malaysia. These laws further require the Yang Di Pertuan Agong to table the Auditor General's reports in the House of Representatives. A select committee known as the Public Accounts Committee is responsible for examining the reports of the Auditor General which have been tabled in Parliament. During its meetings, the Public Accounts Committee may call Heads of ministries, departments and agencies to explain the issues and matters raised by the Auditor General in his reports.
6.2. Routine audit findings are submitted directly to the Collectors of the various revenue departments for their attention. Any inordinate delay in responding to Audit observations is usually brought to the attention of the Ministry of Finance which usually ensures compliance.
7.1. The National Audit Department is currently using proprietary software i.e. Audit Command Language in conducting audits. The Revenue Audit Branch uses computer software in its sample selection procedures. However, the computerisation of auditing processes is very much dependent upon the computerisation programmes of the revenue collectors. A computer auditing team has been established in the Revenue Audit Branch to strengthen the Audit of computerised systems of revenue collection.
8.1. All audits need trained personnel. This need is more apparent in the audit of government revenues, where there are a lot of changes brought about annually both by the administration and the legislature. In addition to on-the-job training, regular in-house training programmes are conducted to keep Auditors abreast with any changes to collection and assessment procedures. Selected Auditors are also allowed to attend training courses and seminars conducted by the private sector and overseas institutions.
In an effort to develop a core of revenue Auditors, the National Audit Department has taken steps to minimize the transfer of Revenue Audit staff to other sections.
9.1. The Income Tax Act, 1967 provides for aggrieved taxpayers to appeal to the Special Commissioners of Income Tax. Appeals against the findings of the Special Commissioners in questions of law may be made to the High Court. In findings of fact, the decision of the Special Commissioners is final. Appeals against the assessments of the Collector of customs duties, excise duties, sales and service taxes may be filed directly with the Courts.
9.2. All decisions of the Special Commissioners and the various Courts are available to the Auditors. The National Audit Department also subscribes to journals which specialise in revenue cases decided within and outside the country. Analyses of the significance and impact of important revenue cases are circulated amongst the revenue Auditors.
10.1. Taxation is often used as a fiscal policy by Government to attract foreign investments into the country. Tax rates and scope of taxes are considered an integral part of government policy and therefore considered outside the scope of Audit review. However, specific rates of taxes are sometimes reviewed to ensure that cost on collection is commensurate with the revenue. Reviews are also conducted to ascertain whether the existing tax laws enable Government to achieve its desired objectives.
11.1. Tax expenditures in Malaysia are provided for under the Income Tax Act, 1967, the Promotion of Investments Act, 1986, the Customs Act, 1967 and the Excise Act, 1976. The objectives of these incentives are both economic and social. Some of the more significant incentives are :-
11.2. The administration of tax expenditures in both the Inland Revenue Department and the Royal Customs and Excise Department is periodically reviewed to ensure attaintment of stated objectives and to detect abuse.
12.1. Malaysia has adopted the International Harmonised System of Nomenclature to classify and value commodities for imposition of import and export duties. In addition to maintaining its own copy of the relevant documentation the National Audit Department also sends its revenue Auditors to attend training courses conducted by the Royal Customs and Excise Department on product classification and valuation.
13.1.1. The audit programme and arrangement for internal control at the collectors level consist of :-
(a) Programme covering collections and accounting
(b) It also involves scrutiny of monthly collection accounts for evidence of existence of internal control
(c) Audit programme covering the computation of taxes which encompasses the evaluation of the procedures and ascertainment of evidence relating to:-
(d) System oriented review of selected functions. This involves analysis and evaluation of the existing procedures for compliance and effectiveness
(e) Special studies of selected operations. This involves analysis and evaluation of current operation for effectiveness.
13.2.1. The Audit Act, 1957 provides for the Reports of the Auditor General on the Federal Government to be tabled in Parliament while those relating to the various states be tabled in Parliament and the respective State Legislative Assemblies. Officials of both the Inland Revenue Board and the Royal Customs and Excise Department have, on several occasions, been summoned to appear before the Treasury and the Public Accounts Committee to clarify matters relating to revenue administration as reported by the Auditor General.
14.1.1. Income taxes are assessed in branch offices situated around the country. However, collection of income taxes is centralised in Collections Branches located in Kuala Lumpur, Kota Kinabalu (Sabah) and Kuching (Sarawak). In addition to tljese three centres, income taxes may also be paid via the branches of Bank Bumiputera Malaysia Berhad (with effect from 1995). Taxpayer records maintained in the Collection Branches are computerised. While taxable incomes are computed manually, taxes payable are calculated using the computer which also updates the taxpayer records simultaneously. Collection details, however, are updated by batch-processing.
14.2.1. Assessment and collection of indirect taxes by the Royal Customs and Excise Department are carried out in branch offices located throughout the country. The assessment and collection is carried out manually except in the Klang Valley where the assessment and collection of import duties is partially computerised. The Department plans to extend the computerised system throughout the country in the near future.
15.1.1. The National Audit Department has on several occasions been instrumental in bringing about important legislative changes in revenue administration, especially income taxes. Examples are as follows :-
i) A review of the income tax provisions relating to life insurance business revealed several weaknesses in the existing procedures that allowed the businesses to claim certain tax exemptions on expenses more than once. This rendered such businesses practically tax free with large accumulated tax losses even though they all achieved substantial accounting profits. Consequent to this review the Government introduced several amendments to the Income Tax Act, 1967 to eliminate the weaknesses identified by the Revenue Auditors.
ii) A review of the Customs Act revealed that while importers were required by statue to declare their imports within 30 days, there was no provision as to when the resultant duty had to be paid. This led to abuse by several importers who delayed payment of duties by several months. As a result of observations raised by the National Audit Department the Customs Act was amended requiring importers to make payment within 14 days of the import.
15.2.1. Several systemic changes in the administration of revenue laws have also been made as a result of Audit findings. Examples are as follows :-
i) A review of the effectiveness of desk auditing of income tax returns, conducted by income tax assessors, led to the establishment of a field auditing unit in the Inland Revenue Board. This Unit now visits the premises of selected taxpayers to ensure compliance with the various provisions of the revenue laws. In addition such visits also enable the tax assessors to evaluate the scope and nature of the business more accurately.
ii) Another review which involved comparing particulars of owners of luxury vehicles maintained by the Road Transport Department with their income tax returns revealed several glaring discrepancies. As a result, the Inland Revenue Board, now routinely receives information of purchasers of expensive vehicles from the relevant department to identify possible cases of tax evasion.
16.1.1. Scope of revenue audit is confined to areas where the audit mandate allows the Auditor General to undertake audits. The continuous efforts made by the government to improve its revenue collection machinery have succeeded in increasing revenue without having to raise the tax rates. This has allowed the Government to maintain a balanced national budget. Nevertheless, revenue auditors should keep abreast with developments especially in information technology to improve and modernize auditing techniques.