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Must the taxpayers pay additional tax just because the Auditor General's report shows "beruju"?

Though a taxpayer might have cleared all his tax liabilities by going through all the processes specified in the various tax laws—Income Tax Law, VAT Law, Customs Law, Excise Law etc.— there is no assurance that he can relax. He may suddenly receive a letter from the tax authority asking him to pay an additional amount as tax liability. This may be due to the Auditor General’s (AG) report that states that more money is to be paid, irrespective of the fact that in many instances the assessments are time barred or the files are closed by the Settlement Commissions.

Yes. It is ridiculous, but it is the reality. The tax laws are quite comprehensive and have a complete system of reviewing and auditing the tax returns. If there is any dispute between the taxpayer and the tax officers, there is a system of an administrative review. If the taxpayer or the officer is not satisfied by the outcome from the administrative review, s/he can approach the Revenue Tribunal by way of appeal. The case can be moved up even to the Supreme Court. There is an opportunity for the parties to furnish explanations clarifying their positions. Thus the system in principle has all the necessary ingredients (despite some shortcomings) for a balanced review and it is in line with the principle of natural justice.

The AG in many cases is however, not honouring the sanctity of audit and judicial review. This is clearly a reflection of the attitude and prejudice against the taxpayers. This is in addition to the problem created by parallel laws in this field. Apart from the various tax laws, there is another law related to the Revenue Investigation Department. This has created an injudicious system as both the Revenue Investigation Department and the Inland Revenue Department have the same authorities because of the duality of the law. I have already explained the problem in greater detail in a previous issue of this magazine (Nubiz May, 2005 “Laws of Convenience”). The funny implication of this duality of the law is that the same “offence” is treated by one department as an economic issue whereas the other treats it as a criminal offence. Tax jurisprudence simply fails at this in Nepal.

A still more injudicious system is ruling this field because of the AG’s auditing, which is practically (though neither constitutionally nor legally) placed above both of these departments. I call such an audit by the AG as “Unauditable Audit” by which the AG requires the tax authorities to collect (or extort?) money from taxpayers, totally going against the principle of natural justice and the due process of law. There are ways for judicial remedy if the party concerned is not satisfied by the decisions of the two departments. But there is no system to review the auditing by the AG. As per the procedures laid down in the law, the AG submits the report to His Majesty the King. From there it is sent to the Parliament. But the Parliament does not analyse it or look into its legality. It just issues orders, again, to recover the amount mentioned as “beruju” (which means not properly accounted for in the books) in the AG’s report. There are hundreds of court decisions still not implemented by the tax authorities. But such orders by AG and the Parliament are promptly implemented. Never ever have I seen the AG reporting that the tax authority should apply those precedence in general.

By law, there is no direct official relation between a general person and the AG. The AG is not involved in tax assessment. When the AG’s report shows “beruju” saying that a tax officer has collected a lesser amount than is due, the tax officer issues an order to the taxpayer asking him to pay the balance amount, whether the Parliament issues such an order or not. No procedures of the Income Tax Act or other tax laws are followed for issuing this sort of order and collecting the amount. Simply stamp it “beruju” and extort the money by hook or crook, especially from those who fear to challenge such an order. Thus these laws are rendered meaningless piles of paper.

The sources of authority of the AG are the Constitution, the Auditing Law and the law that prescribes the procedures for the financial administration of the government. But none of these or other laws shows any direct relationship between the AG and the taxpayer. As per these different laws, the only duty of the AG is to report the irregularities in the government offices after checking if the revenue earned and the expenditures incurred by the state are accounted for properly and if there are any irregularities in these accounts. Nowhere do the laws mention that it is the AG’s duty or authority to assess the tax liability of the taxpayer and to order collection of such tax. The AG has forcefully assumed jurisdiction over this matter. It is unconstitutional as the Constitution does not allow anybody, with no legal authority, to impose and collect any tax.

The laws also state that the tax officers have judicial rights, an authority equivalent to that of the Court. Officers are exercising these quasi-judicial rights, and it is said to be done in a judicious manner. When the party concerned is not satisfied with the decision of these officers, there is a due process of judicial remedy. So, it is strange that the AG’s “beruju” attempts to revoke, even after tens of years, the decisions finalised by going through the process of tax assessment or tax settlement. And there is no provision for appeal or any judicial remedy against the AG’s order. Strangest of the strange is that there is no system developed to audit the report of the AG and the auditors working under the AG get away with all their wrongdoing. The courts too are confused, especially in revenue matters. The complexity of the tax laws adds to the confusion. Once the court had ruled the AG’s order as illegal after hearing a case about a cigarette company (see box) but that precedence was not honoured. Also our “honourable” MPs blew that verdict of the Supreme Court in a manner which gave the impression that the judges had committed a sin.

There is a need to apply the principle of due process in all the business laws, not only the regulatory arbitrage. But this is not being done, at least in case of the AG’s orders. I feel that the AG’s office is using extra-constitutional powers, a clear instance of “bad governance”. And it is derogative in the sense that there should be a scope for the taxpayer to expect at the beginning of the year the likely liabilities of his actions during the year. The taxpayers can predict to some extent how the tax authorities decide in certain cases as they have to work according to the law and forecasting their behaviour is easier as they follow a particular trend in interpreting the law. The precedents set by the judicial review are to some extent mature ones, despite their own sets of shortcomings. But the AG report on tax “beruju” does not consider that. There are instances when settlement made by the Tax Settlement Commission empowered by the law to settle the long-drawn tax disputes (and whose decisions are regarded as final as per the law), are questioned by the AG. The system of the AG’s report revoking all these decisions, and the AG being not accountable to anyone for its wrongdoing, keeps the dispute always open and the taxpayers in an uncertain position. Lawyers and taxpayers want a system with a limit at which the case will be finally closed. They also want that the tax issues should be dealt with by one authority. In the absence of such a limit businesses are always open to unexpected and huge “beruju” tax liabilities and confusion as to the judicious resolution of such dispute. I have even seen a case of “beruju” noted by junior auditors of AG’s office in an account of a state enterprise where the audit was performed by the AG itself—a classic example of confusion about who rules whom and who ultimately suffers.

The AG's forceful involvement in the auditing of private enterprises and determination of their tax liability has caused a lot of confusion in the due process of law and administration of justice. This is more serious in manufacturing sector public enterprises, such as government-owned sugar mills, cement factories etc. There were delays in audit of these enterprises due to delays caused by the AG's office and, as a result, there were delays in submitting the tax returns of these enterprises and meeting other compliance requirements. This resulted into unnecessary revenue liability on these enterprises in the forms of late fee and fines. There are also cases in which the tax officers show discrepancy in accounts audited by the AG and impose higher taxes. Thus it is going through a circle and the ultimate sufferer is the taxpayer.

In other countries, as per my knowledge, the AG's audit does not directly affect the accounts and tax liabilities of the taxpayers. The AG's sole duty is to point out the mistake/shortcomings/lapses of the tax officers. Hence, before the matter is referred to the taxpayers the relevant authorities have to either clarify their position or accept their mistakes. They cannot simply pass-on the instruction for the execution of the AG's report, they must follow the due process of law before passing such an instruction. If the tax officers made a mistake in their earlier assessment, the due process prescribed by the specific tax law cannot be set aside and a new tax assessment made so easily. The provisions of the law must be complied with and the recovery of any shortfall in revenue can only be through the process clearly prescribed by the relevant tax law, not by simply issuing a letter calling for the payment of the money within a time never prescribed by any tax law.

The absence of any instance of the AG pointing out if a tax officer has assessed higher tax than he should have done (all the reports say that the tax collected should have been higher than what was actually collected) shows that the AG's actions are not balanced and not in conformity with the principles of equality. Just because the AG is a constitutional authority does not mean that this institution can deviate from the due process of law and impose revenue liability under the pretext of "beruju".

Cigarette Company Case: Excise “beruju” in AG Report not based on reasonable ground

One example about a cigarette company’s case shows how the AG is not respecting even the precedence created by the Supreme Court. The Supreme Court has categorically stated that the AG’s “beruju” should be based on reasonable grounds. While auditing the revenue collection from this company, the AG referred to a norm for the input-output ratio of tobacco and cigarettes and ordered the revenue office to collect Excise Duty based on the anticipated production of cigarettes in ratio of the tobacco (raw material) used by the factory.

Actual input-output ratio depends on the process followed, machines used, skill of workers, climate condition and quality of the raw material and the type of product produced. Even the Ministry of Finance was of the opinion that such a tax determination on the basis of the expected input-output ratio was not in conformity with the excise law and that such a provision in Finance Act was irrelevant, inappropriate, unnecessary and contradictory. When the dispute reached the Supreme Court, it was declared that the action of the Public Accounts Committee of the Parliament, which instructed the recovery of the anticipated excise duty as per input-out ratio “beruju” of AG was not an independent “quasi-judicial” decision as per law and hence a gross violence of law. However, the decision was limited to this cigarette factory alone and the AG continued its “un-judicious beruju terror” with other factories. The Supreme Court’s decision thus failed to change the attitude of the AG or of the revenue authorities.

The cigarette company’s case has had another adverse repercussion as well. It was a clear threat to the independent judiciary. The Apex Court stated in its ruling that such “taxing matters” should be governed by a substantive law and not by procedural law. But it was questioned by some of the Members of Parliament and there was a political as well as media debate over it. In my perception, this adversely affected the judiciary’s morale, resulting in the judiciary’s attempts to avoid addressing fundamental issues in tax disputes and resorting to technicalities, lest the decision get scandalised. A similar delivery of justice in other “beruju” matters is eagerly expected still today. (SC Writ No.2825 of 2053, decision dated 2054.12.26 BS).

I think most of the "beruju" (which means the amount is not properly accounted for and thus unacceptable) declared by the AG in the matter of revenue collection will become "ruju" (properly accounted for and acceptable) if an independent auditor is employed to check them. If the principles of natural justice and the due process of law are applicable in any murder or rape case, if such criminals can resort to judicial process of appeal etc., why can't such "beruju" cases go through a similar process? Once the AG declares the account "beruju" there is no clear mechanism to review the "beruju" through a judicial process, except through the extra-ordinary jurisdiction of the Supreme Court. In many instances such "beruju" amounts are practically impossible to recover, unless through an "arm twisting" exercise by the tax authorities. This is one of the reasons why "beruju" amount is piling up year after year giving an impression that the country is really going to be financially rotten. Legally speaking, especially in revenue matters, the actual situation is fortunately not as is shown in such audit reports.