* Director, Office of the Auditor General, Nepal
Revenue audit is an important aspect of government audit. As developing countries like Nepal are aspiring for self-reliant economy, it could play a significant role in meeting this end by suggesting ways and means of increasing internal resource, strengthening revenue administration, making for sound fiscal statutes, and ensuring compliance. Therefore, it is very essential to pay adequate attention towards strengthening revenue auditing.
Two INTOSAI Congresses (1953 Riode Janiero and 1974 Madrid) have recommended exercise of maximum possible supervision on revenue administration extending to examining compliance with tax statutes in addition to checking of accounts. Besides such supervision audit should also evaluate the appropriateness of revenue estimation, economy in collection and control measures instituted in administrative system and offer suggestions to improve tax system.
Regarding the audit of taxation the Lima Declaration on Basic Auditing Precepts mentions that -
The Fourth General Assembly of ASOSAI (Bali, 1988) has suggested that SAIs should seek clear and specific legal authority for undertaking comprehensive tax audits in conformity with the relevant provisions of the Lima Declaration. It has also recommended that SAIs have access to the records of taxpayers, scrutinize the rules, regulations and notifications issued by executive agencies under tax statutes to ensure that collection of taxes are regulated strictly in accordance with laws. The declaration further recommends that revenue audit should be system based and should cover examination of economy, efficiency and effectiveness of administration and evaluate implication of tax measures in socio-economic development.
Thus, it is obvious that the scope of revenue audit has to be enhanced to make its role more meaningful. It has now emerged as a major discipline in government auditing.
The Constitution of the Kingdom of Nepal 1990, stipulates that "No tax shall be levied and collected except in accordance with law". Thus, administration of taxes is fully guided by law which is ultimately considered as the expression of people. Money bill approved each year by Parliament prescribes rates of revenue to be realized and any exemption or rebate to be allowed. The methods and procedures to be followed in revenue administration and realization are mentioned in specific tax laws.
The Ministry of Finance and four departments (tax, excise, sales tax and custom) under it are mainly responsible for revenue administration and policy formulation, although some other departments like Commerce, Forests and Land Revenue are also playing dominant role in revenue realization.
Generally, revenue is classified as tax and non-tax revenue. Tax Revenue includes direct and indirect tax (taxation on income, commodity etc.). Similarly, nontax revenue includes administrative fees, fine, royalty, interest on loan, dividend etc.
In regard to the practice of revenue auditing, the Office of the Auditor General (OAG) sends audit teams for field audit in districts. As all districts are not equally significant, in terms of the nature and amount of revenue, for annual external audit more than two-third of 75 districts are selected on the basis of past experience regarding performance in revenue administration and volume of revenue realization. For the remaining districts, internal audit authorities (District Treasury Controller Offices) are requested to complete the audit according to the requirement of the OAG and make certified financial statements together with audit observations available to the OAG for incorporation in the annual audit report.
The objective of revenue audit is to examine and evaluate compliance of revenue laws, measures instituted to ensure timely realization of revenue, efficiency in internal control and accounting system. The audit of revenue accounts shall be performed with a view to ascertaining that all earned revenues have been duly recorded and that appropriate classification of revenues has been consistently followed.
Recent approach to revenue auditing emphasizes on evaluation of economy and efficiency of administrative system and effectiveness of revenue plan and policy. The OAG has been making efforts to extend the scope of auditing. At present, the revenue audit examines and evaluates whether -
The general principles governing the audit of revenue are as follows:
The scope of revenue audit is very broad. The Audit Act 1991 stipulates that in addition to other matters, the Auditor General should examine whether the accounts of revenue and all other incomes or deposits are correct and the rules relating to assessment, realization and methods of book-keeping are adequate and are followed.
With our past experience, the major issues to be covered by revenue audit may be broadly classified as follows:
Records of Revenue: The efficiency of revenue administration largely depends on timeliness and accuracy of records. It ensures fair treatment to taxpayers and facilitates internal control system. Some revenue sources such as income tax,
urban house and land tax, excise duty and land revenue are known as fixed (lagati) and others as non-fixed (Hasbali) revenue. The records provide information regarding taxpayers' transactions and position of revenue realization, and provide significant assistance in decision-making. Whatever may be the nature of records, checking their timeliness, accuracy and completeness is considered the basic function of revenue audit. It would not be possible to list all issues to be covered in such checking for all types of revenue. Suffice it to say that such checking should be able to ensure that all the necessary information is available and in time, and that no biased attitude prevails in decision-making. In Nepal, the major weaknesses highlighted in revenue audit are related to records of taxpayers, and audit has constantly emphasized the need to maintain up-to-date records in the accounting formats prescribed by the Auditor General.
Assessment, Collection and Accounting: The effectiveness of revenue administration depends mainly on its ability to motivate taxpayer for timely payment of government dues and realization of revenue according to the existing legislation. Similarly, efficiency of revenue administration is judged on the basis of fair assessment of taxable income or transaction (profit, production, distribution of goods and service, expbrt, import etc.). Therefore, the system and criteria of assessment should be clear and understandable to ensure cooperation from taxpayer. The main issues to be checked in this connection are whether -
Existing tax statutes indicate different measures to realize tax. The system of self-assessment has also been introduced with the expectation of minimizing administrative cost and boosting honesty as well as morality of taxpayer. Some bold policies and punitive measures against tax evasion are also mentioned in statute. In this connection audit should evaluate efficiency in application of such policies. Delay in realization of revenue encourages indiscipline and increases the cost of administration. Therefore, audit should check how timely assessed revenue has been realized.
In Nepal, majority of findings of revenue audit are related to assessment, collection and accounting of revenue. The main weaknesses noticed are inconsistencies in tax assessment, negligence in collection, inadequacies in enquiry about transactions, delays in collection of tax, inaccuracies in classification etc. Common weaknesses are related to underrealization of custom, misuse of rebate and frequent errors in calculating additional dues and surcharges. Excise duty is not generally collected in time; unauthorised rebates are allowed; the input-output ratio in production and ex-factory price are not determined in time. Land revenue faces critical
problems in assessment, collection and accounting due to increasing fragmentation of land ownership, dispute in ownership and trend of undervaluing of land in urban areas etc. Lack of qualified staff and proper attention towards records management and system improvement have also been noticed. These require immediate attention.
Legal Reforms: Administrative functions are guided by rules and regulations. Hence, it is usual to look into legal provisions and their application. Balance should be maintained between discretionary authority and strict legal control. Similarly, adequate attention should be given to check use of legal authority for personal benefit or in an otherwise inappropriate manner.
It is certainly necessary to indicate the areas of legal reform. Audit has highlighted the cases where misinterpretation or differences in interpretation of statutes and notifications have affected collection, where tax refunds are made without conforming to legal provisions and without being authorised by proper authority, and where frequent alteration in regulations and exemption have resulted in weakening the revenue administration. Each year parliament approves new proposals to ensure smooth tax realization. But some of those proposals are not timely supplemented by detailed guidelines. In such a case, change in tax system alone cannot make significant contribution. Audit has contributed to reform by highlighting cases of inadequate regulations, delay in issuing guidelines and lack of uniformity in interpretation of statutes, rules and regulations.
Socio-economic Objectives: The objective of revenue policy is very broad and it is a significant aspect of national development policy. It does not only contribute to raising revenue but also to achieve certain socio-economic goals such as reducing disparities in income, controlling price level and regulating the flow of resources to priority sectors. The scope of audit includes review of the system of monitoring and evaluation of the realization of such goals. Besides, the impact of tax rebate and concessions, system of approving exemptions and its contribution to the economy are to be assessed by audit. Audit makes its conclusions by collecting various statistics regarding industries and business, analyzing such statistics and holding discussions with concerned officials.
Administrative Efficiency: In recent decades, policies of strengthening public administration and making it relevant to national development have received adequate attention. Revenue audit makes significant contribution by highlighting the cases of inefficiency and lack of coordination between various authorities of revenue administration and by suggesting measures of improvement. Sound system of revenue planning and forecasting, up-to-date records, timely assessment, efficiency in tax law enforcement machinery and internal control system etc. are some of the prominent features of effective tax system and these are evaluated by audit.
Until now audit has not been able to sufficiently look into performance aspect of revenue administration. However, some cases are highlighted which have motivated revenue authorities to think seriously about policy improvement. For instance, in custom some illustrations relating to delay in decision-making regarding evaluation
of tariff limit, product classification and articles to be forfeited, and lack of effective control system to ensure that assessment is made according to Finance Act are mentioned in the report. Similarly, in regard to excise duty, audit has been constantly highlighting the need of effective control over raw materials, fixation of standard norms of wastages and other kinds of losses as well as input-output ratio of industrial production and adoption of well structured system to determine ex-factory price of commodities. In addition audit has cited various examples of loss of revenue from different sources, i.e., income tax and sales tax, due to ineffective control system in excise duty.
Audit has also indicated areas to improve system of revenue administration (personnel management, organization, flow of information between concerned agencies).
It is indeed a critical task for an auditor to highlight certain specific measures to make the revenue administration more efficient and effective. It is high time for the SAIs to make attempts to enhance the effectiveness of revenue auditing by improving the audit methodologies in the context of the pressing need to increase domestic resource base. The expanded scope of audit should include inter alia, evaluation of tax structure, organizational efficiency, accountability relationship of revenue authorities and impact of policy measures. SAI should consider these issues in preparing audit plans and shaping the approach of audit. Due care should be given towards developing the efficiency and skill of auditors through practical training.