Audit report 2010-11: massive irregularities in FBR

The Auditor General of Pakistan (AGP) has detected embezzlements, irregularities, loss and mismanagement of more than Rs 316.65 billion in collections of direct and indirect taxes by the Federal Board of Revenue (FBR). This includes the Rs 109.74 billion judged as weaknesses and irregularities not considered worth reporting to the PAC.
According to Audit Report 2010-11 exclusively available with Business Recorder, there are embezzlement, irregularities, loss and mismanagement of more Rs 304.9 billion in indirect tax collections and Rs 11.8 billion in direct tax collections.
Audit Report 2010-11 on the account of indirect taxes reveals that: (i) the FBR did not provide record of 5,095 cases to the Audit. (ii) non-recovery of arrears of Rs 70.2 billion was noticed in 4,237 cases, (iii) blockage of government revenue of Rs 3.52 billion due to non-adjudication was pointed out in 168 cases, (iv) non/short-realisation of government revenue of Rs 17.4 billion was noticed in 5,438 cases, (v) excess payment of refund amounting to Rs 11.7 billion was pointed out in 348 cases, (vi) inadmissible exemption and concessions of duties and taxes were granted amounting to more than Rs 446 million, (vii) irregular/excess payment was made amounting to Rs 370.6 million, (viii) penalty and default surcharge on late/non filers amounting to Rs 998 million were not imposed in 24,368 cases, (ix) un-warranted/irregular expenditure of Rs 82.98 million and $509,133 was observed in 27 cases (x) irregularities of Rs 48.8 billion were observed due to weak internal controls in 9,201 cases, (xi) recoverable revenue of Rs 25 billion was not detected by e-FBR system, (xii) undue exemption/benefit was granted to sugar sector that deprived the exchequer of revenue estimated at Rs 15 billion in 80 cases and (xiii) non/late of detained/confiscated goods and vehicles valued at Rs 1.67 billion was observed in 1,397 cases.
The national kitty faced a loss of Rs 31 billion due to non-recovery of adjudged dues. The report says that test check of recovery register pertaining to ten filed offices of FBR revealed that tax collecting agencies did not take adequate measures for recovery of adjudged government dues of Rs 31 billion in 544 cases.
The lapse was pointed out to FBR during July to December 2010. In DAC meeting held in December 2010, the department revealed that recovery action had been initiated in a number of cases, whereas some cases were reported to be in courts of law. The DAC directed RTOs/LTUs to pursue cases in court of law, get the recovered amount verified by Audit and expedite recovery amounting to Rs 31 billion in remaining cases.
The Audit maintains that recovery process is very slow due to which recovery is pending. There is a need for concerted efforts by FBR to recover this amount expeditiously. In another case, the report further revealed that the nation also faced the loss of Rs 13.3 billion due to non-conduct of post refund audit.
The report says that LTUs, Islamabad and Karachi and RTOs, Peshawar, Abbottabad, Faisalabad, Islamabad, Multan, Gujranwala, Lahore, Karachi, Quetta and Hyderabad sanctioned 2,462 cases of sales tax refund involving Rs 13.3 billion subject to post refund audit. However, due to weak internal controls, post refund audit was not completed due to which genuineness of the claims was not ascertained. The department failed to exercise necessary checks in this risk area.
The DAC meeting held in December 2010 directed RTOs/LTUs to complete the exercise of post refund audit expeditiously and inform progress to Audit. Progress was awaited till finalisation of the audit report. The report also exposed that the national exchequer faced the loss of Rs 33.7 billion due to non-processing of refund claims.
The report says that according to concept paper, STARR was required to ensure transparent, uniform and efficient disposal of refund claims. In 8,012 refund cases involving Rs 22.2 billion no processing was initiated whereas 5,580 cases of deferred refund amounting to Rs 11.5 billion were reflected in STARR pertaining to year 2008-09 and 2009-10.
The matter discussed in DAC meeting held in January 2011 directed RTOs/LTUs to offer comments and intimate the factual position to Audit. Such inordinate delay in processing of refund claims or deferment thereof conceals true and fair position of revenue collection. No progress was reported till the finalisation of the audit report.
The Audit Report-2010-11 also revealed that the exchequer faced loss of Rs 14.2 billion due to insufficient policy response resulting in short realisation of sales tax from sugar sector, Rs 7.6 billion due to doubtful export, Rs 6 billion inadmissible adjustment of input tax, Rs 3.45 billion non-finalisation of assessment within prescribed period, Rs 2.48 billion non/short-realisation of sales tax and federal excise duty, Rs 2.87 billion short recovery of sales tax, federal excise duty and special excise duty, Rs 2.8 billion non-realisation of sales tax, Rs 1.57 billion to non-compliance of section 73 of the Sales Tax Act, Rs 1.4 billion inadmissible adjustment of input tax.
Similarly, Audit Report-2010-11 on the account of direct taxes reveals that: (i) the FBR did not provide record of 1,449 cases to the Audit, (ii) short levy of tax due to inadmissible deduction-Rs 1.9 billion in 44 cases, (iii) loss of revenue due to incorrect/excessive adjustment of brought forward loss- Rs 406.5 million in 11 cases, (iv) short levy of tax due to incorrect computation of taxable income estimated at Rs 4.8 billion in 37 cases, (v) non levy of minimum tax on the income of certain persons estimated at Rs 41.4 million in 16 cases, (vi) short levy due to grant of inadmissible depreciation allowance estimated at Rs 50.248 million in 10 cases, (vii) loss of revenue due to non taxation of income from other sources was estimated at Rs 87.8 million in six cases, (viii) short levy of tax due to application of incorrect tax rates estimated at Rs 11.293 million in seven cases, (ix) short levy of tax due to non-allocation of proportionate expenses cost the exchequer Rs 1.2 billion in 53 cases, (xi) short recovery of tax due to incorrect computation of tax estimated at Rs 28.82 billion in 56 cases, (xii) failure to collect/deduct withholding tax by the withholding agents cost the exchequer Rs 85.2 million, (xiii)non-levy of additional tax for failure to pay advance tax was estimated at Rs 200.58 million in 22 cases, (xiv) excess determination of refunds cost the exchequer Rs 766.3 million, (xv) non-realisation of Workers Welfare Fund estimated at Rs 1.5 billion in 915 cases and (xvi) issuance of doubtful refunds- cost the exchequer Rs 19.24 million in 927 cases.
The Audit Report-2010-11 on the accounts of FBR of direct taxes revealed that the nation faced loss of Rs 1.88 billion due to inadmissible deductions. The Report says that it was observed that in 44 cases, inadmissible deductions of capital in nature. Personal expenses of taxpayers, claims of lease rental and financial charges, reduction of tax from income, provision for doubtful debts and expenses not wholly and exclusively expended for earning income from business were allowed by the assessing officers.
This resulted in under assessment of income and consequently short levy of tax of Rs 1.88 billion. Audit revealed that the FBR replied that case with respect to short levy of tax during audit (2010-11) of Rs 1.88 billion were under process. During DAC meetings held in December 2010, the Committee asked the FBR to finalise the under process cases at the earliest and furnish reply in the remaining cases expeditiously. The report further exposed that the exchequer faced the loss of 4.8 billion due to incorrect computation of taxable income, Rs 650.315 million due to grant of excess tax credit and billion rupees in other cases.