Financial Times

Scams and accountability issues at the Tax Office
An important lesson learnt in early school days was the need to close and lock the stable door to prevent the horses from bolting. It appears that those in governance have not accepted the need to lock the stable door, even after the horses escaped more than once.

The stable in this instance is government revenue; the horses being the collection of taxes and the door; the weak internal financial control mechanisms and low accountability in the Department of Inland Revenue (DIR).
A few years ago a senior private sector official who played cricket with a straight bat went to the DIR and met his assessor by appointment.

He had recently been offered a golden hand shake and was keen to ensure that the correct tax was withheld by his employer and paid to the DIR and the balance released to him for investment. Being a qualified accountant with a good knowledge of taxation he had made a computation of the tax liability and presented it to the assessor for validation.

After a few minutes of review, the private sector official was taken by surprise when the tax assessor asked “Sir ta pissu the?” (Sir, are you mad?) The official enquired of the errors in his computation? He was greeted with the same comment “Sir ta pissu!” (You are Mad!). The tax assessor explained that the official was mad in paying unnecessarily high level of tax when there was a more efficient methodology to settle the liability.

The tax assessor had suggested that instead of paying the tax as computed, for a fraction of that value he can be provided with a payment receipt for the full tax payable, confirmed as duly paid to the bank to the credit of the DIR. This receipt will then be recorded in the tax file of the official and matched with the copy tax receipt submitted with the tax return. The official did not accept this suggestion not wanting to change his usual batting style. He paid the tax on his computation and sent his return with the copy receipt for the correct value. He however briefed his mentor in the private sector of this incident. The mentor had around the same time received similar reports from another private sector company under restructure, where several employees were negotiating voluntary retirement service packages. They wished that their dues be paid gross, (ie without a withholding on account of tax) on the basis that tax payments and tax clearances will handled for them by their respective assessors.

The civic minded, high integrity mentor had alerted a senior official of the DIR of the possibility that tax payments made to banks for the credit of the Department were being abused by tax payers in connivance with the officials of the Department. He suspected that false receipts were likely being generated and accounted as tax payments, without actual deposits into the Bank, pointing out those errant officials needed only a simple date stamp to perpetrate this fraud.

The senior tax official was requested to check the reconciliation processes of bank records with tax payments. The senior tax official had rung the private sector official and informed that the reconciliations were nearly up to date and had been carried out regularly. The private sector official then enquired whether the tax official had verified the reconciliations of an item titled “reconciliation differences” that was used to balance the accounts. True to prediction, the reconciliation had a significantly large “reconciliation difference” which could easily account for the false tax receipts accounted as if deposited in the bank direct.

The stable door being ajar in the case of VAT collections was well known for the last several years. The fact that the VAT refunds were disproportionately higher than the correlated input VAT was the subject of discussion at meetings the Chamber leaders had with the Treasury Big Boss. There was no need for Sherlock Holmes to be summoned to say “elementary my dear Watson” and find where the leakage occurred.

A mere month on month correlation of input VAT and VAT refunds with garment export and import trends would have raised the amber light of alarm. With sophisticated computer systems at the disposal of the Department they could have developed individual, sector wise and composite reconciliations that should have alerted the leaders of the Department and the Treasury. The Auditor General, a villain in the eyes of the Treasury big boss, must be recognized for his courage and professionalism in raising this matter even late in the day.

Snow White who slept and Cinderella who was locked up must at least now close the Treasury stable door left ajar, to prevent other horses from bolting!.
(The writer could be reached at wo_owl@yahoo.co.uk).

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