ISLAMABAD, Nov 21: The Asian Development Bank (ADB) has urged the government to provide an efficient self-assessment system based on a well-structured audit procedure that reduces burden on taxpayers.
“A major lacuna in the current tax administration system is the dysfunctional audit procedure, which stifles the growth of medium-sized firms in particular,” it further said.
The ADB in its latest report — SME Development in Pakistan, Analyzing the Constraints to Growth -– a copy of which was also made available to Dawn, said the prevailing system was non-standardized and allowed officers in charge of this function to act at their discretion.
The need for an efficient audit function also related to the new income tax structure, which mirrored the prevailing GST administration and was based on universal self-assessment backed by a selective audit procedure.
The report said reforms should focus on standardizing the audit instrument in order to reduce official discretion and ensure greater transparency in execution. Developing well-defined work programmes and checklists — not only for different types of audit but also for key sectors — are one response to the audit constraint.
“A risk-assessment instrument is needed to systemize the steps of an audit in each risk area. This form of standardization will reduce the scope for misuse and corruption,” the report believes.
It said the information required for each type of audit needed to be disseminated among taxpayers as part of a taxpayer education programme. This will ensure greater transparency and lower costs of compliance and corruption significantly. The dissemination of audit compliance information is important for small and medium enterprises (SMEs) since they tend to lack knowledge of tax payment procedures and laws.
In the case of GST, with its sophisticated computer database, it is possible to identify common errors found in returns and audit for particular categories of taxpayers. These errors can then be communicated to them in order to lower compliance costs. These reforms will lower the compliance costs of the tax system by improving taxpayer information and education.
In order to reduce compliance costs for large taxpayers, the Central Board of Revenue (CBR) has piloted a large taxpayer unit, which, the report hoped, would be a one-window operation for the administration of sales and income tax.
A similar unit needed to be piloted for small taxpayers in order to lower compliance costs for small retailers and medium-sized manufacturers. Since the major expansion in the tax net is expected to come from inducting these enterprises, it is important that tax administration changes remain broad based.
Findings of the report suggested that there was an urgent need to reduce the compliance costs of GST export refund and customs duty drawback procedures. Delays in payments to small and medium-sized exporters seriously undermine the competitiveness of Pakistan’s export sector. “Both procedures need to be rules-based and transparent.”
One area of concern, the report pointed out, was tax collectors’ tendency to circumvent well-structured legislative provisions and rules at negligible cost to themselves. Given this incentive structure and its inherent corruption and extortion effects, refund and drawback processes needed to be re-engineered to eliminate face-to-face contact between taxpayers and tax collectors.
“The best solution is an exception-based system of assessment where exceptions are made through an automated risk-assessment system based on predetermined validity checks,” the report maintains.
This system would ensure that complaints exporters have fast track access while non-compliant exporters face the threat of assessment. This system will strengthen the incentive for compliance. These reforms will also shift the prevailing refund and drawback processes from the direct assessment approach to one of self-assessment. Also customs duty drawback needed to be implemented urgently, the report added.
