1.1. His Majesty's Government of Nepal (HMG/N) is expanding its role in social and economic development to encourage national prosperity. Expenditure from HMG/N alone in the year 1994/95 shows an increase of 398.7 percent in comparison to 1985/86. Major sources of government finance are revenues, foreign grants, loans and internal borrowings.
1.2. The following table gives the comparative statement of contribution in total government expenditure.
| Year | Total Expenditure (NRs "million) |
Total Revenue (NRs million) |
Revenue's share in
total expenditure (percent) |
| 1992/93 | 3,08,98 | 1,51,48 | 49.0 |
| 1993/94 | 3,35,97 | 1,95,81 | 58.3 |
| 1994/95 | 3,90,60 | 2,45,75 | 62.9 |
1.3. Similarly, the share of revenue in the Gross Domestic Product (GDP) is in increasing trend.
| Year | GDP (NRs. million) |
Revenue (NRs. Million) |
Rate of Revenue over GDP (Percent) |
| 1992/93 | 16,52,62 | 1,51,48 | 9.2 |
| 1993/94 | 19,15,40 | 1,95,81 | 10.2 |
| 1 994/95 | 21,01,38 | 2,45,75 | 11.7 |
* Exchange rate for different currencies vis-a-vis the US $ as on 31st March, 1997 are indicated in Appendix 1
1.4. Expected contribution of revenue over GDP in the year 1995/96 is 13.2 percent.
1.5. Revenue in Nepal is mainly based on import trade. Revenue from sales tax and import duty constitutes more than 60 percent of the total revenue. Major sources of revenues are custom duties on import and export, sales tax and excise, income tax, other taxes, fines, fees and registrations, etc., dividend, interests receipts and payback of principal of loan by government companies. The following table provides the picture of revenue for the last three years.
| Year | Total revenue | Tax | Revenue | (NRs. million) | Nontax revenue |
Percentage total of revenue |
Percentage of direct tax to total tax revenue |
||
| (NRs. million) | Direct Tax | Indirect Tax |
Trade Tax |
Total | (NRs. million) |
Tax Revenue |
NonTax Revenue |
(Percent) | |
| 1992/93 | 1,51,48 | 20,36 | 56,81 | 39,45 | 1,16,62 | 34.86 | 77.0 | 23.0 | 17.5 |
| 1993/94 | 1,95,81 | 28,56 | 72,61 | 52,55 | 1,53,72 | 42.09 | 78.5 | 21.5 | 18.6 |
| 1994/95 | 2,45,75 | 38,49 | 87,93 | 70,18 | 1,96,60 | 49.15 | 80.0 | 20.0 | 19.6 |
1.6. Parliament authorises government to raise taxes from the public. So government has the obligation to report to Parliament on matters of taxes and other incomes it earned as authorised by Parliament. Government has to report to parliament on financial, managerial and programme results of revenues. Government presents these matters in the manner it deems appropriate. This is what we call meeting public accountability obligation by" government. Office of the Auditor General (OAG) examines revenue accounts of government independently and reports to Parliament on what it observes from examination. Thus, the OAG plays an important role in the enhancement of public accountability by providing independent views observed during audit.
2.1. Adequate legal arrangements have to be made to tax people on their income and property. Revenue legislation includes Finance Act and other procedural laws formulated for the collection of revenue.
2.2. The Constitution of the Kingdom of Nepal 1990, has provided that no tax shall be levied and collected except by law. Basic laws for the levy and collection of taxes are Periodic Tax Realisation Act, Finance Act and other different procedural laws. Before the enforcement of Finance Act, Periodic Tax Realisation Act, 1956 has empowered government to notify by Orders for the immediate collection of custom duties, excise or any other taxes. The law has also provided that over realisations would be paid back if the Finance Act lowers the rate of taxes and duties notified by Orders.
2.3. Finance Act comes into effect at the beginning-of fiscal year. Some of the tax rates come into effect as and when the rates are declared by Finance Minister during delivery of Budget Speech in Parliament. Such tax rates come into force through Notified Orders and Finance Act.
2.4. These are the basic mandates to impose tax on people and property. Besides these acts, there are a number of procedural laws to determine the process of assessment and collection of taxes. Procedural laws include the Income Tax Act, 1974, The Sales Tax Act, 1966, The Custom Act, 1962, The Excise Act, 1958. All these acts are followed by respective regulations. There are other laws governing other revenue receipts which focus on the system of assessment and realisation of taxes. Procedures for assessment and collection of individual taxes, time for submission of return files, penalty for defaulters etc. are elaborated in detail in the respective Acts.
3.1. The account of revenues requires to be checked to ensure the legality of revenue realisation and also to evaluate the effectiveness of such collections. The Constitution of the Kingdom of Nepal, 1990 has empowered the Auditor General (AG) to audit the accounts of incomes and expenses of all government offices including Courts, Parliament, Constitutional Bodies, the Royal Nepal Army and the Nepal Police with due regard to regularity, economy, efficiency, effectiveness and propriety of transactions. Similarly, the constitution has also authorised the AG to ask for all required documents relating to accounts from any government office in course of auditing. All audit entities also have to submit any documents asked by the AG or his assistant. This provision fully authorises the AG to ask for any individual tax assessment file as stated in the Lima Declarations.
3.2. Audit Act 1991, has made detailed provision for carrying on the revenue auditing smoothly. The act requires auditors to check whether:
4.1. The revenue audit procedure and methodology has to meet the above standard prescribed in the Audit Act. Around 5 thousand government offices are spread all over the country. The OAG is centrally located and has to complete audit by deputing audit teams to revenue collecting offices. All government offices may not necessarily have revenue and many others may have limited amount of revenue. Excluding immaterial sources, auditors mostly have to visit around 165 revenue centres which account for more than 90 percent of revenues.
4.2. Revenue Audit Division in the OAG is basically responsible for the planning, examining, reporting and follow up of revenue audit.
4.3. Revenue audit procedures covers the following phases.
4.4.1. Every revenue audit starts with planning. Basically it can be divided into two types. They are central planning or strategic planing and operational planning. Central planning denotes the annual overall audit plan of the OAG. It mainly focuses on the timetable for submitting accounting statements and related information to the OAG. It also states the time of auditing and preparation of annual audit report. It stresses on the need to look into the follow-up actions taken by revenue offices on audit issues raised in last reports. An audit plan requests the Chief Accounting Officers to co-operate with the OAG by submitting account, documents and related information for the successful completion of audit. Request is also made to finalise internal audit and to reconcile and finalise the revenue accounts with central revenue of the government. Central planning also expects timely submission of management reply on queries raised by audit so that the final reports could present true and factual information to Parliament.
4.4.2. Central Co-ordination Unit (CCU) in the OAG also directs and supervises the overall audit operations. Key information collected by the CCU from various sources are made available to auditors of different division including Revenue Audit Division in the OAG.
4.4.3. Operational plan prepared to meet the objective of strategic planning is the basic guide of revenue audit. It lays down the timetable of auditing of individual revenue centres located at district level. District Treasury Controller's Offices (DTCOs) are informed of audit time table. DTCOs inform revenue centres to finalise the revenue accounts and complete internal audit to facilitate final audit.
4.4.4. Audit plan broadly covers the collection of information regarding the revenue accounting system, revenue policies and procedures contained in assessment and realisations. It provides guidelines to evaluate internal control systems managed by revenue administration. Audit plan stresses on the study of the system of serving accountability of audit entity. Audit plan also allocates audit resources on the basis of nature and volume of revenues by determining the extent and scope of examination and supervision to maintain the quality of audit work.
4.4.5. Operational plan stresses on the examination of different nature and scope of revenues. Volumes of revenue as well as number of revenue transactions are so large that detailed check of revenue accounts may make the use of audit resources uneconomical. Audit planning memorandum provides for the auditors using sample audit technique taking into account the internal control system, cases of fraud, malpractice and cash embezzlement. Sample audit techniques are designed to cover the accuracy of most of the assessment and realisations. Audit plan also envisages the study of systems and methods applied in collecting information relating to a taxpayer in determining taxable income. Similarly audit plan stresses on the desirability of studying the reports of Tax Inspectors who closely watch the business affairs in obtaining factual information of transaction.
4.5.1. One of the important tasks of revenue auditors is to evaluate internal control systems. Internal control systems in a tax office include every management system that tries to identify if any important job relating to collections have been missed by any level of management personnel. Evaluation of control systems helps to identify whether:
4.5.2. Weakness in internal control system or poor execution of control system indicates higher probability of revenue losses and leakages. Weak control in customs offices basically in valuation and classification as well as charging tariff rates causes higher revenue losses. The more internal control systems are executed, the more efficient realisation is achieved. Evaluation of execution of control systems helps management to adopt appropriate systems for the protection of government revenue.
4.6.1. It is important to note that each audit team is made aware of principles and practices of tax laws and regulations before execution of audit. Revenue laws, specially tax laws, are technical, comprehensive and complicated. Tax laws follow commercial accounting principles and practices and therefore, revenue auditors should have good knowledge of such principles. Finance Act provides for various rebates and exemptions and tariff changes. These are material information required for revenue auditors.
4.6.2. All entities audited by the AG are asked to produce documents as required by auditors. Revenue auditors go through individual tax files which covers the examination of following activities.
4.6.3. Income Tax Act requires all taxpayers (including firms and companies) to submit annual statement of returns within 3 months after the end of their fiscal year. Tax authorities have to complete assessment of tax generally within the same fiscal year on which the income statement is received. The examination of up dated records of tax payers, the position of submission of income statements of taxpayers, the assessment on such statements helps to judge the efficiency of tax realisations.
4.6.4. Examination of individual tax files is not limited to the records already available with the revenue office. It has to further access the accounts and other information. Generally, tax authorities express difficulties in making available additional evidences on the ground that they have checked all books and accounts of a taxpayer. Auditors request tax authorities to produce evidences relating to a few items of incomes and expenses which materially affect profit and loss accounts and balance sheet only if such evidence are not attached in tax files. Auditors can ask tax authorities to furnish further evidence by obtaining it either from tax payer or from any other sources.
4.6.5. Auditors normally check samples of assessment files. Samples are selected from each system of assessment and such systems are self assessment system, assessment based on books and accounts, assessment based on best judgement and assessment by a committee (comprising representatives of tax office, chamber of commerce, custom office, local authorities etc.). Sample also depends on the volume of revenue collected. Sample files are selected from each tax sub-heads. The number of samples from each sub-head depends on the size of revenue realization. Examinations of these sample sizes help the auditor to provide opinion on the accuracy, fairness, efficiency and effectiveness of every type of tax revenues.
4.7.1. Revenue tariffs are proposed considering broad socio-economic objectives like protection of internal industries, reduction of income disparities, promotion of exports, creation of employment opportunities, building of infrastructures and creation of environment for investment etc. It is difficult for auditors to evaluate the effects made by such revenue tariff due to lack of sufficient information. Auditors can state the effectiveness of revenue exemptions by comparing the impact of 2 to 3 years results of operations.
4.8.1. Regular supervision of tax audit by senior audit officers is required to secure intended results from audit. Results intended by audit includes ensuring the effective execution of internal control systems whereby whole revenue administration could have minimised leakages and optimised realisations. Audit by its sample testing technique has to provide opinion on the fairness of total transaction. Proper and timely supervision of audit can only facilitate auditor to provide such assurance.
4.8.2. Supervision could be done on different phases. Supervision at primary phase, middle phase and final phase of audit is preferable. Timely supervision can provide instructions to auditors to proceed in compliance with planning and to look into major areas of taxpayer's transactions. Supervision of audit in the final phase is very important where thorough examination of audit work shall have to be executed. Supervision helps to ensure whether collections of working papers and other evidences have been attached by the audit team to support their observations. Supervisors have to ensure whether audit examination has been completed as described by the audit plan and quality of work have been achieved. It helps to maintain quality of audit work.
4.9.1. The final and crucial stage of audit is reporting. Report is only the document to show performance of trust provided upon the AG by general public. It is also the document by which people can evaluate the degree of public accountability accomplished by government. Authority delegated to government by parliament to collect revenues from public needs its evaluation to determine whether revenue is collected in accordance with what it was asked to collect. Independent authority i.e. the AG examines the revenue accounts and provides his opinion on the legality and fairness of the revenue statements. The AG also evaluates the economy, efficiency and effectiveness of revenue transactions and gives his opinion on the basis of his examination.
4.9.2. Audit teams have to prepare draft reports to furnish them to auditees after verification of revenue accounts and statement. While writing up the draft reports audit teams have to be very cautious on each and every statement of the report and adequate documents and evidences have to be attached to support the statement. Senior officers have to go through the draft reports in detail and have to confirm whether adequate evidences have been collected and auditors' judgements are in the right place. Confirmation is required whether all notes and statement have been discussed with the appropriate level of management.
4.9.3. Audit reports in the OAG are of two types. The primary report has to be submitted to management to provide its opinion within 35 days. Copies of such reports are also made available to concerned department and ministry to initiate necessary actions. Final audit report is prepared after getting auditee's reply on primary report. This procedure helps to make the final report true and factual. Draft of final revenue report is made by Revenue Audit Division in the OAG and approved by the Deputy Auditor General and the AG. After completion of the entire process the AG calls for a meeting with the secretary of Ministry of Finance and the DGs of line departments. Opportunity is provided to give further clearifications. Final Audit report is then passed and the AG submits it to His Majesty the King and is later tabled in the parliament.
4.9.4. Revenue audit report contains statement whether:
4.9.5. Auditors have to be careful in writing revenue reports. Cases may be filed in courts against auditors on ground of misinterpreting revenue rules, regulations and government policies. Thus it is apparent that auditors have to be very much careful while identifying short realisations in different situations. It does not mean that auditors are restricted to note under realisations. They must do it. But auditors should be very careful and should provide adequate legal bases to realise short falls due to wrong assessment by tax authorities. Auditors are required to have a thorough knowledge of related laws, practices and procedures of evaluation, assessment and realisation.
5.1. In course of auditing, differences in opinion on matters of statutes/judicial pronouncements arise between audit and revenue administration. Such differences mostly arise in income tax, excise, sales tax and occasionally on customs duty. Lack of established system to timely resolve the differences in interpretation of revenue laws causes problems to auditors. Auditors in many cases try to find ways of resolutions from their own sources. Auditors check tax files of the whole tax centres. Cases may have been dealt in various ways in different tax centres. Auditors can provide examples of another tax office to resolve differences in interpretation of laws. Department of Taxation and Sales Tax have issued circulars to apply rules and regulations uniformly which have minimised differences of interpretations. Judicial pronouncements have also helped to reduce differences. Despite these provisions auditors can ask for advice from the Tax Departments and Ministry of Finance, Ministry of Law and Justices etc. if cases of differences arise. In the absence of the right explanation, auditor can interpret legal provisions objectively and report to parliament recommending ways and procedures for effective realisation of revenue. Auditors have to foresee the effects of interpretation of tax laws. Its material effects in revenue should be judged and auditors have to comply with the meaning and objective of tax statutes.
6.1. Computerisation of assesses's business information in revenue administration helps to determine actual income of assessee. Assessee would not be in a position to disagree with such information if they are collected and processed on actual basis. On the contrary, misleading information results in poor revenue realisations. Level of computerisation in revenue centres is being improved these days. Most of customs offices, tax offices and sales tax offices have installed computers and started to collect and provide information to each other. It has helped tax office to determine actual transaction of tax payer. Shortfalls in this system of computerisation like delays in providing accumulated information, weak controls in providing inputs etc. are being identified and intimated to management for effective collection and utilisation of information. Auditors' recommendations on these areas have initiated improvement in the efficiency of tax authorities in computing real income. However, the level of computerisation has to be improved further.
7.1. Information Technology (IT) audit have been given due priority by the OAG. Proper, adequate and timely information helps boosting quality as well as efficiency of revenue administration of the country. Every business related information of tax payer are to be collected in course of auditing to determine accuracy of assessment.
7.2. Auditors presently collect high value information manually and verify it with individual tax files. This helps auditors to identify items of incomes if they are not being incorporated in tax payers income statement. Computers have been installed in the OAG and programmes are to be designed in the coming years. Audit personnel are to be trained to understand computer systems to judge efficiency of information processing.
8.1. It is an obligation of tax payer to pay tax assessed on him by tax authorities. Tax legislations has also protected every tax payer by way of legal remedy if he is not satisfied with tax officer's assessment. Tax assessment on adhoc basis gives rise to a lot of dispute between taxpayer and tax authorities. Such situations create under realisations of revenue and economy of a country finally have to face revenue deficits. So tax authorities should be very careful in using their judgement and interpretations so that disputes could be minimised.
8.2. Generally disputes have not arisen on self-assessment files and on other files where assessment is based on books and accounts. Disputes normally arise on assessment based on best judgement basis if the tax authority does not keep sufficient business information of the assessee. A tax payer can go either to the Director General of the Department of Taxation or to the Revenue Tribunal Office (a judicial authority) against tax assessment order or penalty order if he does not agree with such orders. Similarly a tax payer can also move the Appellate Court or Supreme Court if he is not satisfied with the decision of Revenue Tribunal Office or the decision of the Director General. So law has protected tax payers against unlawful burden of tax.
8.3. Tax authority has also remedial options against tax disputes. If tax office thinks the decisions of the Revenue Tribunal Office have legal mistakes which will cause revenue leakage, it can move the Appellate Court against the decision of Revenue Tribunal Office. This kind of remedial channel protects both the assessee and revenue.
9.1. Tax personnel have great responsibilities in revenue administration. They have to gather and process actual information about turnover of assessee and obtain annual statement of returns. Besides this, assessment on the statement and collection and realisations of revenue are other major responsibilities. Tax authorities have to take timely action as provided by laws against tax payers who do not submit returns, and do not pay tax. For efficient fulfilment of such duties, tax laws basically have provided two levels of revenue personnel. These are the Director General (DG) and the tax officers. Laws provide for the post of the Director General of the Department of Taxation and the DG of the Department of Sales Tax. Senior tax officers and other tax officers can be counted as primary level personnel and the secondary level can be defined as DG Several other tax inspectors and their assistants help in discharging the duties of Tax Officers and DG. Preliminary assignments relating to collection of information, as well as annual statements and income computation, tax assessment, realisations, penalties etc. are initiated by Tax Officers. Approval of additional time period for submitting returns and assessment, reassessment etc. are to be recommended through the DG. The DG has also to work as a semi judicial authority on tax payer's appeal against tax order.
9.2. The revenue division in the line ministry headed by senior joint secretary formulates plans and procedures for revenue collection. It is an apex body for monitoring revenue administration. The division plays important role in revenue administration, although the tax laws do not provide any hierarchy to it.
10.1. Nepal has unitary system of government. There is no separate provincial and federal set up of administration. Different levels of judicial authorities are established to settle revenue disputes. These levels are the DG, the Revenue Tribunal office, The Appellate Court and the Supreme Court. Tax payer and the tax authority both can enjoy legal remedies from these various levels of courts.
10.2. Generally cases of conflicting judgements have not come to auditors' notice. Auditors, however, have felt that some cases have been settled by the courts in a way not in conformity with the spirit of tax laws. For example, The Income Tax Act, 1974, provides all expenses of a tax payer to be added back to his net income, if tax deduction is not made at source on such expenditure by the taxpayer. In a particular case, court ordered tax authorities not to add back all expenses to tax payer's net income merely on account of the absence of tax deduction at source, because court declared those expenses real. Auditors have to look into such matters and draw attention of tax administration to make suitable amendments in law.
11.1. The Constitution of the Kingdom of Nepal, 1990 has empowered the AG to conduct audit of books and accounts of incomes and expenses of every government office. The AG conducts compliance audit of revenue as provided by the Audit Act 1991. Compliance audit, among other things, determines whether:
11.2. Beside regularity audit, auditors have to test economy, efficiency and effectiveness (three E's) of revenue transactions and programmes. Auditors are in need of upgrading their skills and knowledge to assess the economy, efficiency and effectiveness of every revenue programme. Similarly auditors also need further training in the field of computer and information technology audit. Other problems include non-submission of financial statement, lack of adequate records and information, lack of internal audit, absence of bank reconciliation, action not initiated against tax payers for not paying tax and weaknesses in the collection of confidential information of tax payer etc. These are some of the problems auditors encounter from the part of revenue administration. Auditors, however, have used their resources at the optimum level in evaluating the three Es and given recommendations for better revenue realisation and more effective system of controls.