Systematic and effective approach to tax assessment lacking and information base not adequate, RAA says
Tax: The Royal Audit Authority (RAA) recommends reviewing tax laws and regulations to tighten revenue leakage from Business Income Tax (BIT).
Between 2009 and 2013, the number of business entities have grown from 19,062 to 28,346 while BIT collection has increased from Nu 707 million (M) to Nu 1.78 billion (B).
“Although both business units and BIT showed steady increase, the growth in number of business units is quite prominent,” the RAA’s performance audit on BIT administration states.
In the last five years, BIT’s contribution to the Gross Domestic Product (GDP) has only increased by 0.5 percent. With the country’s debt projected to reach 121 percent of the GDP in 2016-17, the audit states that in such economic conditions, a progressive taxation system could complement socio-economic development.
The income tax Act, 2001 states that when a taxpayer owns several businesses, each business shall be treated as a separate taxable unit. Further, the Act also mentions that losses from one unit shall not be offset against the profit of another unit.
However the same Act also states that businesses falling under the manufacturing and service sectors with same activity at different locations under same ownership may be treated as a single entity.
The RAA states that there is no clarity in the Act or its rules and regulations on how different business entities are identified for taxation purposes. It was found that there are many businesses possessing multiple licenses and filing tax as one entity. There are 10 businesses with more than 10 licenses..
The Act also states that businesses must register themselves with the revenue and customs department within three months from the date of establishment. The audit observation pointed out that there is no penalty clause in the Act in the event of non-compliance. “This makes the enforcement of legal stipulation for registration within three months difficult,” the report states.
The Regional Revenue and Customs Office (RRCO) in Thimphu saw 7,369 firms that delayed their registration, followed by Gelephu with 2,083 businesses. As of December 31, 2014, there are 15,609 licenses not registered for taxation.
RAA also points out that informal businesses, which are on the rise, are not under the scope of BIT. Unless informal businesses activities are not covered by the legal and policy framework, the report stated that monitoring alone will not have an impact.
Lack of a human resource plan, according to the RAA has also impeded the tax administration. For instance for every tax officer, there are 1,183 taxpayers in Thimphu.
Given the existing staff strength the department was conducting a random assessment solely depending on the knowledge of tax heads. Around 40 percent of the businesses have been assessed between 2009 and 2013. RAA noted that there were no guidelines on working papers and documentation.
Many business units avail the services of taxation and accountancy consultants. Although this is a cost effective way of tax filing for businesses that are unable to employ full-time accountants, the RAA highlighted that these consultants are not under any professional or regulatory oversight. There may be a possibility of misrepresentation and understatement of tax obligations besides questioning the accounting principles and ethics.
The RAA also reveals three observations pertaining to the Revenue Administration and Management Information System (RAMIS).
The RRCOs and DRC currently do not have access to the system for preparing reports or extracting information because the database is located outside the country and only the consultant from Kolkota, India can access it.
While there is a confidentiality of information clause in the contract signed with the consultant, the RAA points out that there is no practical mechanism to ascertain and ensure that confidentiality is maintained.
“This may lead to continued dependency with the consultants in future and frequent system disruption and inability to provide prompt solution,” the report states.
The RAA also found that there is no revenue intelligence or tax vigilance unit to monitor illicit activities, unauthorised or unlicensed imports and, undeclared income, among others. The DRC relies on information provided by tax filers in absence of such mechanism.
It was highlighted the Income Tax Act does not include any provisions on intelligence mechanism to curb tax evasions. The RAA recommends the need to have appropriate legislation in this regard as revenue intelligence is considered a powerful tool against tax fraud, evasion, money laundering, smuggling and other cross border illegal activities, among others.