public finance
TRANSCRIPT
LIMKOKWING UNIVERSITY
PUBLIC FINANCE
INDIVIDUAL ASSIGNMENT
By Ehab Mohsen
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Table of Contents2. Audit Mandate...................................................................................................................5
3. Basic Laws Of Taxation.....................................................................................................6
3.1. Income Tax Act, 1967.................................................................................................6
3.2. Petroleum (Income Tax) Act, 1967............................................................................7
3.3. Real Property Gains Tax Act, 1976...........................................................................7
3.4. Stamp Act, 1949..........................................................................................................7
3.5. Promotion of Investments Act, 1986..........................................................................8
3.6. Labuan Offshore Business Activity Act, 1990...........................................................8
3.7. Customs Act, 1967.......................................................................................................8
3.8. Excise Act, 1976...........................................................................................................8
3.9. Sales Tax Act, 1972.....................................................................................................9
3.10. Service Tax Act, 1975................................................................................................9
3.11. Goods Vehicle Levy Act, 1983................................................................................10
3.12. Road Tax on Motor Vehicle...................................................................................10
4. Revenue Audit Procedures..............................................................................................11
5. Audit Planning.................................................................................................................12
6. Reporting..........................................................................................................................12
7. Information Technology..................................................................................................13
8. Human Resource Development.......................................................................................13
9. Appeals.............................................................................................................................13
10. Fiscal Reforms................................................................................................................14
11. Tax Expenditure............................................................................................................14
12. Trade Classification And Valuation In Commodity Taxation....................................15
13. Accountability................................................................................................................15
13.1. Intra-Departmental Accountability Through Internal Control Systems............15
13.2. Legislative Accountability......................................................................................16
14. Collection And Accounting...........................................................................................17
14.1. Inland Revenue Board............................................................................................17
14.2. Royal Customs and Excise Department................................................................17
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15. Revenue Audit As An Instrument Of Change 15.1. Legislative.................................17
15.2. SYSTEMIC.............................................................................................................18
16. Conclusion......................................................................................................................18
16.1. Revenue Audit.........................................................................................................18
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1.Introduction
Malaysia is a federation of 13 States and the Federal Territories of Kuala Lumpur
and Labuan. The Federal Constitution contains special provisions regarding sources of
revenue that are assigned to the Federal and the State governments. Those that are
assigned to the State governments include revenue from land, forests, mining,
entertainment, water supply, bank interests, returns from investments, fines including
forfeitures (other than those imposed by the Federal Courts) and fees for licences and
permits (but not licences relating to motor vehicles and registration of businesses). All
other revenues, not specifically assigned to the states, are Federal Government revenues.
Malaysian Federal Government revenues are broadly classified as tax-revenues, non-tax
revenues and non-revenue receipts. The total revenue collected under these three
categories in the years ended 31 December, 1994, 1995 and 1996 is as follows :-
Category 1994 RM
million
% 1995 RM
million
% 1996 RM
million
%
Tax Revenues 37,685 76 41,892 82 47,271 81
Non-tax Revenues 11,368 23 8503 17 10,330 18
Non-revenue
Receipts
394 1 559 1 678 1
Total 49,447 100 50,954 100 58,279 100
Source : Federal Public Accounts (Summary)
1.3. Tax revenues include both Direct and Indirect Taxes. Direct taxes are collected by
the Inland Revenue Board and includes taxes such as income tax on individuals and
corporations, petroleum income tax, stamp duty and real property gains tax. Indirect taxes
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are collected mainly by the Royal Customs and Excise Department. Indirect taxes include
import duties, export duties, excise duties, sales tax and service tax.
1.4. Non-tax revenues of the Malaysian Government include fees for issue of licences
and permits, fees for specific services, proceeds from sale of government assets, rental of
government property, bank interests, returns from Government investments (including
gains from sales of investments) fines and forfeitures.
1.5. Non-revenue receipts consist mainly of repayments and reimbursements such as
refunds of overpayments in previous years and repayment of loans from the Federal
Government's Consolidated Fund (Revenue Account) received from other Federal
Government Agencies and State Governments.
1.6. Since tax revenue constitutes 81% of the total Federal Government revenue the
Government has become increasingly dependent on such revenues. In the last few years,
Government had budgeted for increases in tax revenue even though there were reduction
of tax rates. This could only be realised by strict compliance, voluntary or otherwise, with
tax laws. Since voluntary compliance cannot be solely relied upon, strict monitoring by
the tax administrators is necessary. Reviews by Auditors on the effectiveness of existing
revenue laws and procedures can help to identify deficiencies in the systems. This will
enable the tax administrators to introduce controls that can discourage, if not eliminate,
tax evasion which, if unchecked, will eventually erode the tax base.
2. Audit Mandate
2.1. The Office of the Auditor General is provided for under Article 105 of the Federal
Constitution whilst the powers and duties of the Auditor General are provided for under
Article 106 and the authority to whom the reports of the Auditor General are to be
submitted is specified in Article 107. In compliance with Article 106 of the Federal
Constitution, Parliament enacted the Audit Act 1957 to make provision for the audit of
accounts of the Federation, the States and certain other authorities and specific bodies.
The Audit Act, 1957 also provides for the duties and powers including the nature of the
audit by the Auditor General.
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2.2. The Audit of government revenues is provided for in Section 6(a) of the Audit Act
which reads "The Auditor General shall in his audit make such examination as he may
deem necessary to ascertain whether all reasonable precautions have been taken to
safeguard the collection and custody of public moneys or other moneys subject to his
audit". Section 5 of the Audit Act also allows the Auditor General "to examine, enquire
into and audit the accounts of the Federation in such manner as he may deem fit."
2.3. The various revenue laws also contain provisions allowing the Auditor General
free and unimpeded access to all financial records. For example, Section 138 (4) of the
Income Tax Act, 1967 provides that "Nothing in this section shall prevent the production
or disclosure of classified materials to the Auditor General (or to public officers under
his direction and control) or the use of classified material by the Auditor General, to such
an extent as is necessary or expedient for the proper exercise of the function of his
office".
2.4. These provisions allow the Auditor General to audit not just the collection but also
the assessment of Government revenue. The audit of both the assessment and collection
of Government revenue has been conducted by the National Audit Department since
1957. In the audit of tax revenue, the audit activity includes the review of assessment
files of various categories of taxpayers. In the Royal Customs and Excise Department,
samples of customs and excise duty declaration forms are reviewed regularly for both
legal compliance and arithmetic accuracy. In both these agencies assessment and
collection systems are also reviewed regularly.
3. Basic Laws Of Taxation
3.1. Income Tax Act, 1967
3.1.1. In 1996 the Government collected tax revenue amounting to RJVI25,851 million
of which RM20,458 million is in respect of income tax. Stamp duty and real property
gain tax make-up the balance. According to the Income Tax Act, all tax payable must be
settled within 30 days from date of Notice of Assessment. Any delay will mean a 10%
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penalty on the outstanding amount and a further 5% penalty will be imposed should tax
remain outstanding after a further duration of 60 days or more.
3.2. Petroleum (Income Tax) Act, 1967
3.2.1. The Petroleum (Income Tax) Act was introduced in 1967 to levy tax on the
income of those involved in upstream petroleum operations i.e. searching for, extracting
and disposing crude petroleum and natural gas. Downstream petroleum operations such
as refining and marketing petroleum products do not fall within the ambit of this Act.
Petroleum Income Tax is imposed at the rate of 40% of the chargeable income. In 1996,
Government collected Petroleum Income Tax totalling RM2,203 million mainly from the
National Petroleum Company (Petronas) and its contractors.
3.3. Real Property Gains Tax Act, 1976
3.3.1. The Real Property Gains Tax Act was introduced in 1976 primarily to curb
speculative activities in the real property market. It imposes a tax on gains derived from
the disposal of real property. The Act encompasses both individuals and companies.
Being an anti-speculation statute, tax is imposed at scaled rates, with the highest rate of
30% being imposed on gains arising from disposal of an asset within 2 years of its
acquisition. Gains from disposals on the sixth and subsequent years after the date of
acquisition are exempted from this tax. This tax is administered by the Inland Revenue
Board.
3.4. Stamp Act, 1949
3.4.1. The Stamp Act, imposes a tax known as Stamp Duty on certain documents and
instruments specified in the Act. Amongst the instruments subject to duty under the
Stamp Act are agreements, mortgages, bills of sale and insurance policies. The rate of
duty varies with the type and value of the transaction. The Stamp Act is also administered
by the Inland Revenue Board. In 1996, Stamp Duty collections amounted to RM2,708
million.
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3.5. Promotion of Investments Act, 1986
3.5.1. The Promotion of Investments Act provides various types of incentives and
reliefs from income tax to encourage the establishment and development, in Malaysia, of
industrial, agricultural and other commercial enterprises and for the promotion of exports.
The activities that may enjoy the incentives are determined, from time to time, by the
Minister of International Trade and Industry. This Act is applicable to companies only.
3.6. Labuan Offshore Business Activity Act, 1990
3.6.1. The Labuan Offshore Business Activity Tax Act was enacted in 1990 to provide
for the assessment and collection of income tax on offshore companies in or from the
Island of Labuan. In keeping with Labuan's status as a tax haven, tax imposed on such
activities is kept to the minimal. Income tax on offshore activities is charged either at the
rate of 3% of the net profits as reflected in the audited accounts of the company or at a
flat rate of RM20,000 if the company so elects. Being a regulatory tax, collections by the
Inland Revenue Board, in 1996, amounted to RM2.203 million.
3.7. Customs Act, 1967
3.7.1. Customs Act 1967 provides for the levy and collection of customs duties and
export duties. These taxes are collected based on declarations presented by the importers
or exporters (together with supporting documents). Physical examinations are also carried
out at random to ascertain the accuracy of such declarations made by them. The
collection of these duties is done at all major sea ports and the International Airports in
the country.
3.8. Excise Act, 1976
3.8.1. Excise Duties are imposed on locally manufactured or assembled goods, by
Custom Offices located throughout the country. Factories producing excisable goods are
licensed under the Act and are controlled either physically or by means of documents by
the Royal Customs and Excise Department. In factories that are physically controlled,
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Customs Officers are stationed at the premises to keep physical account for all taxable
goods produced, stored and released. In documentarily controlled premises, weekly and
monthly statements of production and releases are submitted to the Royal Customs and
Excise Department. In both types of control, duty has to be paid before the goods are
removed from the premises. The only exception to the rule is motor vehicles where
excise duty is paid at the time of sale to the buyer.
3.9. Sales Tax Act, 1972
3.9.1. Sales tax is payable on both imported and locally manufactured goods. Sales tax
on imported goods are collected by the Customs Division at the import station at the time
of release from the Customs control. Manufacturers of taxable goods are required to be
licensed under the Act. Sales tax are imposed on licensees on all sales made. They are
required to furnish monthly returns or statements of sales together with tax payable
within 28 days of the end of the month. The Customs Department also exercises control
through the inspection of records and premises of the licensee. Collection of sales tax
from imported and locally manufactured goods for the year 1996 amounted to RM5,621
million.
3.10. Service Tax Act, 1975
3.10.1. Service tax is levied at the rate of 5% in respect of :-
a. any prescribed service (taxable service) provided by or in any prescribed
establishment.
b. any prescribed goods (taxable goods) sold or provided by or in any prescribed
establishment.
3.10.2. The prescribed establishments/services are as follows :-
Hotels, restaurants, bars, coffee houses, night clubs, health centres, massage
parlours, dance halls.
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Private hospitals, motor vehicles service counters, telecom services, security and
guard services, services provided by courier service firms, services provided by
dentists and veterinary doctors
Public accountants, advocates and solicitors, professional engineers and architects
who are registered under the relevant law.
Surveyors, valuers and appraisers and insurance companies registered under the
relevant law.
Forwarding agents approved under the Customs Act 1967
3.10.3. The prescribed establishments are required to be licensed and submit monthly
statements together with the tax payable within 28 days of the end of the month. The
control and system of payment are similar to sales tax.
3.11. Goods Vehicle Levy Act, 1983
3.11.1. The Goods Vehicle Levy Act was introduced in 1983 to encourage local
exporters to export their products through Malaysian ports This Act, therefore, imposes a
levy of RM 100.00 on all goods vehicles leaving Malaysia. In 1996, the Royal Customs
and Excise Department which administers this Act collected a total of RM165 million as
Goods Vehicle Levy.
3.12. Road Tax on Motor Vehicle
3.12.1. The Road Transport Department within the ambit of Ministry of Transport is
entrusted with the task of administering the Road Transport Ordinance 1958 under which
tax is levied on all motorised vehicles using public roads. Tax is assessed and collected
by the various regional branches of the Department based on :-
Type of vehicle
Engine capacity
Type of fuel used
Type of ownership (whether for private or commercial use).
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3.12.2. Tax in respect of vehicles registered with the Department may be paid either
half yearly or annually. The Department with the cooperation of the Police Department
ensures that all vehicles on the road have been taxed by carrying out surprise checks.
4. Revenue Audit Procedures
4.1. The audit of Government revenues has been strengthened with inception of the
Audit Act in 1957. Currently the audit is conducted by the Revenue Audit Branch. The
Revenue Audit Branch is responsible for the audit of the Inland Revenue Board, the
Royal Customs and Excise Department and the Ministry of Transport, which together
account for more than 70% of Federal Government revenues annually.
4.2. The audit is carried out using system-based and substantive audit techniques. The
relevant legislative and financial controls are reviewed and evaluated including
compliance testing of the existence, effectiveness and continuity of operation of key
controls on which reliance may be placed. Substantive tests are carried out to obtain
sufficient appropriate Audit evidence to provide a reasonable basis for reporting the result
of Audit examination.
4.3. The audit of receipts is generally conducted annually or through a two to three
years cycle and the programmes are normally planned at the Federal level. Detailed audit
directions and guides are also issued to auditors at state levels to undertake revenue audit.
With this uniform audit guide, audit findings and reports are much more reliable and
complete.
4.4. The main objectives of the audit of receipts are as follows :-
to ascertain whether systems are designed and operated effectively to ensure that
all tax payers are brought on record
to ascertain whether systems and procedures designed and operated ensure that
tax liabilities are determined correctly and promptly.
to ascertain whether collections of taxes are promptly made and correctly
accounted for.
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5. Audit Planning
5.1. Annually the National Audit Department prepares an Audit Plan that identifies the
areas that will be audited during the year and the resources that are needed to implement
the Plan. Audit Planning Memoranda (APM) are prepared by the Revenue Audit Branch
for review by senior management in the National Audit Department before
Comprehensive Audits are conducted. Financial Audits are conducted according to the
procedures published in the National Audit Department's Audit Manual. Procedures
outlined in the Audit Manual are periodically reviewed to ensure that they incorporate
changes in accounting and collection procedures implemented by the tax administrators.
5.2. In order to overcome resource constraints, the Auditor General has introduced
several modern methods in auditing. Sampling techniques are extensively used to select
transactions for audit scrutiny. Computers and computer software such as Audit
Command Language are used to analyse accounting records based on predetermined
parameters. In addition, the Auditor General has encouraged the establishment of Internal
Audit Units (IAUs) in all ministries and departments to ensure compliance with
administrative and statutory procedures. In order to ensure that the IAUs perform their
functions satisfactorily, officers from the National Audit Department are seconded to
these Units. Staff of the IAUs are often invited to participate in the National Audit
Department's training programmes.
6. Reporting
6.1. Article 107 of the Federal Constitution and Section 9 of the Audit Act 1957 require
the Auditor General to submit his Reports on Audit of the Public
Accounts wQd Activities of the Federal Government Ministries, Departments and
Agencies to the Yang Di Pertuan Agong, who is the Constitutional Head of Malaysia.
These laws further require the Yang Di Pertuan Agong to table the Auditor General's
reports in the House of Representatives. A select committee known as the Public
Accounts Committee is responsible for examining the reports of the Auditor General
which have been tabled in Parliament. During its meetings, the Public Accounts
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Committee may call Heads of ministries, departments and agencies to explain the issues
and matters raised by the Auditor General in his reports.
6.2. Routine audit findings are submitted directly to the Collectors of the various
revenue departments for their attention. Any inordinate delay in responding to Audit
observations is usually brought to the attention of the Ministry of Finance which usually
ensures compliance.
7. Information Technology
7.1. The National Audit Department is currently using proprietary software i.e. Audit
Command Language in conducting audits. The Revenue Audit Branch uses computer
software in its sample selection procedures. However, the computerisation of auditing
processes is very much dependent upon the computerisation programmes of the revenue
collectors. A computer auditing team has been established in the Revenue Audit Branch
to strengthen the Audit of computerised systems of revenue collection.
8. Human Resource Development
8.1. All audits need trained personnel. This need is more apparent in the audit of
government revenues, where there are a lot of changes brought about annually both by
the administration and the legislature. In addition to on-the-job training, regular in-house
training programmes are conducted to keep Auditors abreast with any changes to
collection and assessment procedures. Selected Auditors are also allowed to attend
training courses and seminars conducted by the private sector and overseas institutions.
In an effort to develop a core of revenue Auditors, the National Audit Department has
taken steps to minimize the transfer of Revenue Audit staff to other sections.
9. Appeals
9.1. The Income Tax Act, 1967 provides for aggrieved taxpayers to appeal to the
Special Commissioners of Income Tax. Appeals against the findings of the Special
Commissioners in questions of law may be made to the High Court. In findings of fact,
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the decision of the Special Commissioners is final. Appeals against the assessments of the
Collector of customs duties, excise duties, sales and service taxes may be filed directly
with the Courts.
9.2. All decisions of the Special Commissioners and the various Courts are available to
the Auditors. The National Audit Department also subscribes to journals which specialise
in revenue cases decided within and outside the country. Analyses of the significance and
impact of important revenue cases are circulated amongst the revenue Auditors.
10. Fiscal Reforms
10.1. Taxation is often used as a fiscal policy by Government to attract foreign
investments into the country. Tax rates and scope of taxes are considered an integral part
of government policy and therefore considered outside the scope of Audit review.
However, specific rates of taxes are sometimes reviewed to ensure that cost on collection
is commensurate with the revenue. Reviews are also conducted to ascertain whether the
existing tax laws enable Government to achieve its desired objectives.
11. Tax Expenditure
11.1. Tax expenditures in Malaysia are provided for under the Income Tax Act, 1967,
the Promotion of Investments Act, 1986, the Customs Act, 1967 and the Excise Act,
1976. The objectives of these incentives are both economic and social. Some of the more
significant incentives are :-
pioneer status
investment tax allowance
abatement of adjusted income
location in promoted areas
small scale industries
compliance with government policy
promotion of exports
incentives for specific businesses
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storage, treatment and disposal of hazardous wastes
plantations
tourism industry
double deduction of expenses
insurance premiums on imports
insurance premiums on exports
promotion of exports
research and development
promotion of tourism
approved training programmes
wages of handicapped persons
remission of import duties in respect of export orientated industries
remission of excise duties on promoted industries
11.2. The administration of tax expenditures in both the Inland Revenue Department
and the Royal Customs and Excise Department is periodically reviewed to ensure
attaintment of stated objectives and to detect abuse.
12. Trade Classification And Valuation In Commodity Taxation
12.1. Malaysia has adopted the International Harmonised System of Nomenclature to
classify and value commodities for imposition of import and export duties. In addition to
maintaining its own copy of the relevant documentation the National Audit Department
also sends its revenue Auditors to attend training courses conducted by the Royal
Customs and Excise Department on product classification and valuation.
13. Accountability
13.1. Intra-Departmental Accountability Through Internal Control Systems
13.1.1. The audit programme and arrangement for internal control at the collectors level
consist of :-
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(a) Programme covering collections and accounting
moneys received at counter and through post
receipts, custody and issue of receipts and revenue forms
franking machines and records
banking and transfer of collections
(b) It also involves scrutiny of monthly collection accounts for evidence of existence of
internal control
accounts and audit trails
accounting and banking
classification of revenue and reconciliation
return of revenue forms and receipts
(c) Audit programme covering the computation of taxes which encompasses the
evaluation of the procedures and ascertainment of evidence relating to:-
filling of returns and collection of evidences by revenue department
investigation of facts and application of the law to compute the tax base
determination of deductions exemptions and reliefs
calculation of tax
(d) System oriented review of selected functions. This involves analysis and evaluation
of the existing procedures for compliance and effectiveness
(e) Special studies of selected operations. This involves analysis and evaluation of
current operation for effectiveness.
13.2. Legislative Accountability
13.2.1. The Audit Act, 1957 provides for the Reports of the Auditor General on the
Federal Government to be tabled in Parliament while those relating to the various states
be tabled in Parliament and the respective State Legislative Assemblies. Officials of both
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the Inland Revenue Board and the Royal Customs and Excise Department have, on
several occasions, been summoned to appear before the Treasury and the Public
Accounts Committee to clarify matters relating to revenue administration as reported by
the Auditor General.
14. Collection And Accounting
14.1. Inland Revenue Board
14.1.1. Income taxes are assessed in branch offices situated around the country.
However, collection of income taxes is centralised in Collections Branches located in
Kuala Lumpur, Kota Kinabalu (Sabah) and Kuching (Sarawak). In addition to tljese three
centres, income taxes may also be paid via the branches of Bank Bumiputera Malaysia
Berhad (with effect from 1995). Taxpayer records maintained in the Collection Branches
are computerised. While taxable incomes are computed manually, taxes payable are
calculated using the computer which also updates the taxpayer records simultaneously.
Collection details, however, are updated by batch-processing.
14.2. Royal Customs and Excise Department
14.2.1. Assessment and collection of indirect taxes by the Royal Customs and Excise
Department are carried out in branch offices located throughout the country. The
assessment and collection is carried out manually except in the Klang Valley where the
assessment and collection of import duties is partially computerised. The Department
plans to extend the computerised system throughout the country in the near future.
15. Revenue Audit As An Instrument Of Change 15.1. Legislative
15.1.1. The National Audit Department has on several occasions been instrumental in
bringing about important legislative changes in revenue administration, especially income
taxes. Examples are as follows :-
i) A review of the income tax provisions relating to life insurance business revealed
several weaknesses in the existing procedures that allowed the businesses to claim certain
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tax exemptions on expenses more than once. This rendered such businesses practically
tax free with large accumulated tax losses even though they all achieved substantial
accounting profits. Consequent to this review the Government introduced several
amendments to the Income Tax Act, 1967 to eliminate the weaknesses identified by the
Revenue Auditors.
ii) A review of the Customs Act revealed that while importers were required by statue
to declare their imports within 30 days, there was no provision as to when the resultant
duty had to be paid. This led to abuse by several importers who delayed payment of
duties by several months. As a result of observations raised by the National Audit
Department the Customs Act was amended requiring importers to make payment within
14 days of the import.
15.2. SYSTEMIC
15.2.1. Several systemic changes in the administration of revenue laws have also been
made as a result of Audit findings. Examples are as follows :-
i) A review of the effectiveness of desk auditing of income tax returns, conducted by
income tax assessors, led to the establishment of a field auditing unit in the Inland
Revenue Board. This Unit now visits the premises of selected taxpayers to ensure
compliance with the various provisions of the revenue laws. In addition such visits also
enable the tax assessors to evaluate the scope and nature of the business more accurately.
ii) Another review which involved comparing particulars of owners of luxury vehicles
maintained by the Road Transport Department with their income tax returns revealed
several glaring discrepancies. As a result, the Inland Revenue Board, now routinely
receives information of purchasers of expensive vehicles from the relevant department to
identify possible cases of tax evasion.
16. Conclusion
16.1. Revenue Audit
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16.1.1. Scope of revenue audit is confined to areas where the audit mandate allows the
Auditor General to undertake audits. The continuous efforts made by the government to
improve its revenue collection machinery have succeeded in increasing revenue without
having to raise the tax rates. This has allowed the Government to maintain a balanced
national budget. Nevertheless, revenue auditors should keep abreast with developments
especially in information technology to improve and modernize auditing techniques.