1.1. This country paper has been written as a part of the Fourth ASOSAI Research Project:- Government Revenues - Accountability and Audit, with reference to Pakistan context. It deals with the work being currently done in this area.
1.2. The Lima Declaration on Auditing precepts states that the Supreme Audit Institutions (SAIs) should seek clear and specific legal authority for undertaking comprehensive tax audits. In Pakistan, the provision for the Auditor General exists in the Constitution. However, the Office derives its mandate from a Presidential (Audit and Accounts) Order, issued in 1973 read with government notification. Department of the Auditor General continues to be governed by the said Order. Its enactment has been on the anvil for almost quarter of a century. The enactment would, no doubt, enhance and strengthen the role of Audit having the authority of an Act. However, the absence of the Act has not impeded the functioning of the Department of the Auditor General. It maintains the accounts of the Federal and Provincial Governments. It deputes services of its officers to those offices where the accounts are departmentalized. It certifies the accounts and also audits them. Efforts are underway for functional separation of accounts and audit. Through a Controller General (Accounts), under the Auditor General, a separate federal accounts set-up under the Executive is envisaged. This will render the Executive responsible for all the expenditure while stress would be made to improve and strengthen the audit side. Audit aids Accountability. In the proposed re-organisation, Audit will ensure Accountability as the Executive, which had hithertofore been authorising payments through the accounts office of the Auditor-General, making them also responsible, would now be themselves solely responsible for any expenditure. Audit is, therefore, expected to be strengthened.
2.1. The Federal Government levies taxes and duties on the list of Federal subjects and the Provincial Governments on the Provincial subjects. Most of the major taxation are Federal subject. However, after deduction of 5% collection charges, 80% of the balance of certain federal receipts are allocated to the provincial governments as per formula agreed through the National Finance Commission. The 20% balance is retained by the Federal Government for its expenses.
2.2. The Federal taxes are as follows:
I. DIRECT TAXES:
II. INDIRECT TAXES:
III. SURCHARGES:
IV. NON TAX RECEIPTS
The Provincial Taxes and Duties are as follows:
2.3. Ever-growing economic needs require ever-increasing resources. The government makes every effort to increase revenue receipts at a faster pace than expenditure in order to reduce the budget deficit. The responsibility of audit is, therefore, two-fold i.e. to watch that expenses are made prudently and that revenue are received and accounted. In exercising both functions, audit can contribute to keeping the overall budget deficit within tolerable limits. Audit could also help contain growth in expenditure and suggest expansion in resource base by identifying areas requiring priority attention of the tax collecting agencies.
2.4. The following table compares the position of Federal revenue collected over the past 5 years.
Revenues as percent of GDP
| * Financial year | 1991-92 | 1992-93 | 1993-94 | 1994-95 | 1995-96 |
| * Total Expenditure | 26.5 | 26.0 | 23.2 | 23.0 | 22.8 |
| * Total Revenue | 17.9 | 17..9 | 17.3 | 17.1 | 17.2 |
| * Total Tax Revenue | 13.6 | 13.3 | 13.3 | 13.8 | 13.8 |
Source: Economic Survey of Pakistan (7995-96)
2.5. The size of GDP has been progressively increasing and also that of tax revenues. However, the interesting feature of the analysis of the above table shows that as percentage of GDP, the government was successful in reducing the expenditure, but the total revenue percentage has remained stagnant. While there is decrease in non-tax revenue over the years, there has been a slight increase in direct taxes, while the indirect taxes have marginally remained the same.
2.6. A further break-up of the main source of revenue, during the past 3 years, i.e. when the ratios started changing, is tabulated as follows:
Revenues Ratio
| Financial Year | 1993-94 | 1994-95 | 1995-96 |
| Total Tax Revenue | 76.9 | 80.3 | 79.9 |
| a) Direct Tax | 16.4 | 18.6 | 20.7 |
| b) Indirect Tax | 59.6 | 61.7 | 59.1 |
| Non Tax Revenue | 23.1 | 19.7 | 20.1 |
Source : Economic Survey of Pakistan (1995 - 1996)
2.7. It would be evident that government is heavily dependent on tax revenues and similar to the position existing in most of the developing countries, the dependence is more on indirect taxes, whereas in developed countries the share of direct taxes is just the reverse. As per generally accepted principles, Direct Tax is one that cannot be shifted by the taxpayer to somebody else. It is also logical that an entity needs to be taxed on what is earned. However, the irony in the developing countries is that inelastic taxation system has restricted expansion of taxation base proportionate to the increase in economic activities. It is, therefore, imperative that systems and monitoring are improved so that any tax evasion is restricted. It is at this juncture that audit needs to play its role in pointing out the deficiencies in the system and give direction to the revenue collecting agencies by identifying areas of possible tax evasion.
3.1. The primary objective of audit is to ascertain that adequate regulations and procedures have been framed to secure an effective check on the assessment and collection of revenue, and ensure through detailed checks enforcement of regulations and procedures. This is necessary to provide independent assurance, information and advice to the legislature on the adequacy of controls, thereby ensuring accountability through audit.
4.1. Para 11(3) of the Pakistan (Audit and Accounts) Order, 1973, lays down that the President or the Governor of a Province may, after consultation with the Auditor General, make regulations with respect to the conduct of audit of receipts.
4.2. The Department of the Auditor General had been conducting audit of major taxes as per regulations of audit of receipts which were embodied in General Financial Regulations drawn in 1951, before which this audit was not formally within the jurisdiction of the Auditor General. Realising the importance of audit of revenue receipts, a special mandate to audit of revenue receipts was entrusted to the Auditor General in 1972. In March 1974, an office on revenue receipts commenced functioning with the aim of specializing in this field. As a result of successful functioning, the audit of provincial taxes and receipts was also entrusted to the office of revenue receipts in 1992.
4.3. Audit of Revenue Receipts is different from expenditure audit in the sense that while parameters and regulations for expenditure audit usually remain almost the same, there is an ongoing change in audit of revenue receipts. Every year changes in tax policy are enacted in the annual budget of the country. The fiscal changes affect the manner and mode of tax collections. The tariffs are changing consequent to the coming in to force the World Trade Order (WTO). Tax collection, and thereby its audit is an evolutionary process. The revenue receipts auditor must, therefore, be alert to the ongoing changes. The revenue receipts auditor must be equipped to respond to the opportunities and challenges of the future.
5.2.1. Compliance Audit:
The various Taxation Acts provide for time limitation clauses which restrict issuances of demand notices for recoveries etc. after the prescribed time limits. Therefore, audit has to be completed before the expiry of time limitations so that where recoveries are detected, the same could be pointed out to the collecting agencies and promptly recovered by them. All the formations have, per force, to be audited within the prescribed time. The inspection audit reports are discussed during and immediately after completion of audit, with the head of formation. A copy of the inspection audit report is also sent to the next higher authority of the formation audited, and the audit office. A time limit of 8 weeks is given for the reply to the inspection audit report. Any serious irregularities are, however, immediately brought to the notice of higher authorities of the auditees for prompt action. Any implication of policy decisions or interpretation of rules are reported by audit to the Central Board of Revenue or the Provincial Board of Revenue, as the case may be, in their capacity as agencies authorised to collect taxes and duties, and enforce government taxtion policies.
5 2.2. Subject Studies:
A group of activites involving taxes and duties could form a subject for detailed study of the systems, their control and monitoring by the collecting agencies. A few illustrative cases provide material for macro analysis of that particular segment of taxation activity. Such subject studies consume 3 to 6 months as various representative formations all over the country are examined. The number of such subject studies has been 4 to 5 in a financial year. The subject studies have been extremely useful. More need to be undertaken if manpower, expertise and resources are made available. In the subject studies, the existing rules and procedure are examined with reference to the prevailing practice. Irregularities lead to pointing out lacunae in the system. The control and monitoring system are studied due to laxity of which the system was not working properly. Conclusions are made and suggestions are offered as to the possible improvements in the prevailing system, as compared to the system envisioned. Subject studies, therefore, intend to identify, document and evaluate the main system to ensure that statutory requirements and changes are properly translated into departmental regulations and procedures. So far the audit office for revenue receipts has conducted 25 subject studies in 19 important fields/areas that have been reported in the Audit Reports of the Auditor General, presented for consideration of the Public Accounts Committee, a select committee of the legislature entrusted with the task of examining Audit Reports and thereby ensuring accountability of public funds.
6.1. The auditee formations have been classified according to their workload, as to whether they are heavy, intermediate or light formations. The mandays are allotted to the inspection teams according to the classification of the formations. Heavier formations obviously require more mandays.
6.2. The auditee formations have recently converted their records and transactions from manual to computerized system. The process has made audit more systematic, as the access to information is quicker. So also, comparison with the Harmonised System of Nomenclature (HSN), framed by the Customs Co-operation Council, Brussels, and universally adopted, renders the assessments easier. Also, the examination of individual tax assessments is readily possible.
6.3. The revenue receipts audit office has also embarked upon a computerisation programme. It will be in three phases, of which the first phase has been completed. The serious irregularities, named Proposed Draft Paras (PDPs) have all been computerized. The computerization, besides many other aspects, lists the types of irregularity and the formation where it originated. When the inspection audit team proceeds to a formation, the lists are handed over to the team to enable it to check remedial measures taken on the observations issued earlier, verify recoveries effected from the original treasury record, and proceed with current audit. The type of irregularity such as short-assessment, under valuation, misclassification, non-imposition of surcharges and penalties etc; is collated and the Central Board of Revenue is informed of the frequency of such incidences. Audit, in this way, provides information to the collecting agency the direction where priority attention is needed. The identification of grey areas helps the collecting agency to plug the loopholes and improve revenue collection.
7.1. Audit reporting has assumed an important aspect as it is the culmination of audit activities. Every year in March an Audit Report is printed in its final form. It pertains to the audit activities pending finalization within the previous financial year which closes in June. The Federal Audit Report is submitted by the Auditor General to the President who causes it to be laid before the legislature. The Audit Report is considered by the Public Accounts Committee where the head of the executive department personally, known as the Principal Accounting Officer, explains the position of his department pertaining to the Audit Report. The PAC either accepts the explanations or issues directives to be complied immediately. A report by the PAC is also prepared for the legislature for action by the Government. Similar action is adopted for the Provincial Audit Reports which are presented to the Governor of a Province and are then considered by the Provincial PAC.
7.2. Measures have also been taken to quarterly apprise the Auditor General on matters requiring immediate attention by the PAC, in advance of its scheduled sessions. If deemed fit the matter would be submitted before the PAC.
7.4. In case of (b) if audit is satisfied with the clarification the audit observation is treated as settled. However, if a dispute arises between audit and auditee, a Departmental Accounts Committee (DAC) meeting between the heads of the auditee and the audit office is held. The prerogative to finally settle the desputed audit observation, recommended by the DAC, rests with the head of the revenue audit office.
7.5. Many issues concerning policies and interpretations are raised by audit. The corrective measures either stall loss of government revenue or increase it. All the corrective measures adopted consequent to suggestions by audit are difficult to be computed monetarily. The benefit derived is manifold when compared to the cost of audit. However, the exact recoveries at the instance of audit have been recorded. There has been an increase every year. The cost - benefit ratio on this account in 1995-96 was 7558 percent. It is likely to be further increased in 1996-97.
8.1. When all the three phases of computerization have been completed, it is proposed to introduce entire monitoring of audit observations through the computer. When all the manual and the inspection audit reports have been computerized, the feedback on particular aspects would be convenient and quicker. Follow-up of the results of Audit would become systematic and automated. A link is proposed to be established with the Central Board of Revenue so that updating of follow-up activities is simultaneously accessible.
9.1. This area is a big challenge for efficient management of audit. No doubt experience of personnel outweighs other factors but adaption to the fiscal and policy changes is a continuous process and updating of knowledge of ammendments to the laws is a must. Every year at the beginning of a financial year a workshop is held to discuss budgetary measures and changes enacted for the financial year. The Central Board of Revenue and Provincial Board of Revenue senior officers at the policy advising level are invited to discuss changes in their respective areas. A week before the commencement of the workshop, the new Finance Act is circulated to all the auditors, along with the budgetary measures and changes. There is a free interaction between the auditees and auditors. The result is that any clarification required by any auditor is provided on the spot which benefits all the participants. Similarly, any short-coming in the budgetary measures is registered with the executive.
9.2. The audit plan for the financial year is then activated. The annual audit plan contains a brief account of activities to be audited during the year. The auditor is adequately equipped before he is launched to the field.
9.3. The library provides the auditors with all updated manuals, copies of landmark judgements and other reference materials.
10.1. The responsibilities of audit of revenue receipts are generally framed in terms of examining the adequacy of regulations and whether they operate in practice.
10.2. The efficiency, effectiveness and economy in audit is secured through established planning, monitoring of control systems and key performance indicators. The main systems used are :
10.3. After computerization the last item would be on continuing basis.
11.1. In view of shortage of resources, emphasis is on system based audits instead of routine audits so as to achieve meaningful results. Meetings of all inspection audit teams working in the field are convened quarterly so as to exchange views with each other and discuss outstanding achievements. The exchange of information and comments by all in the field and those at headquarters of the audit office helps substantially to improve quality.
(a) examine the revenue accounts in order to ascertain whether adequate regulations and procedures have been made to secure an effective check on the following:
| Assessment | - | Whether regulations and procedures adequately provide for the proper and correct assessment of revenue (or revenue repayments) and whether they operate in practice; |
| Collection | - | Whether regulations and procedures adequately provide for the collection (or repayment) of sums assessed and whether they operate in practice; |
| Allocation | - | Whether regulations and procedures adequately provide for sums collected (or repaid) to be allocated to the appropriate head of account and whether they operate in practice. |
(b) examine the correctness of the taxes assessed;
(c) ensure correctness of Refunds and Rebates (classified as deduct receipts) through:
| Completeness | - | all payments have been recorded; Occurrence - recorded payments did in fact properly occur; |
| Measurement | - | recorded payments are stated at the correct value; |
| Regularity | - | recorded payments are in accordance with relevant legislation and other specific authorities required by them; |
| recorded payments are properly shown in the revenue accounts; | ||
| Disclosure | - | full disclosure of the account |
| Discharge | - | after allowing for payments which may properly be charged, all revenue received has been correctly deposited into government account. |
13.1. The government has introduced General Sales Tax (on the pattern of Value Added Tax - VAT) in the budget for the financial year 1996-97. Presently, it is imposed at the import and manufacturing stage. Every transaction would be documented and all assessments would be audit based. Audit of Assessments would be a new experience for the Audit authorities. The General Sales Tax is intended to be later applied to retail basis. The auditors would need to acquire expertise on this account as early as possible so that when the retail stage is launched, Audit will be ready to meet its enhanced responsibility.