A major taxpayer using Enterprise Resource Planning (ERP) and accounting software package was recently audited by the Internal Revenue Commission (IRC) and was found to have deliberately manipulated their declarations claiming millions of Kinas in Goods and Services Tax (GST) credits. Â
The IRC Audit revealed that the taxpayer intentionally manipulated their ERP systems for their own benefit to evade tax and by making false declaration to benefit from GST Credits for the periods January 2016 to August 2019.
It was revealed that the taxpayer, a large retailing/wholesaling and merchandising business, incorrectly applied tax coding/treatment of trading stocks of taxable items as non-taxable and thereby understating taxable sales. For instance, trading stocks for which 10% GST should be applied were incorrectly coded (classified) into their ERP system as non-tax. In such a setup, the taxable sales are understated; resulting in less GST collected and the net effect would be in a refund position.
As a direct result of incorrect tax coding/treatment of trading stock in their system, the taxpayer was in a credit position of more than K10 million in GST, of which K8 million directly resulted from incorrect tax treatment on the trading stock.
The audit has corrected the incorrect coding/ tax treatment and made an establishment of more than K23 million in audit discrepancy for the same period netting off the credit and resulting in additional tax payable of more than K64 million, inclusive of a penalty charged at 300%, as additional tax in case of evasion.
The IRC is now adopting tools to better detect and punish taxpayers who fail to operate and maintain an ERP and accounting system within the tax rules will be heavily penalized. Where a taxpayer defaults with intent to cause an unqualified refund, section 100 of the Goods and Services Tax Act 2003 renders the taxpayer liable for additional penalties up to 300% the amount of deficient tax.
Making false and misleading declarations to IRC is a serious offence with a jail term of not more than four years. The IRC will prosecute not only the taxpayers but also those who are responsible for manipulating systems and making false declarations to the IRC to reduce their tax liability.
The forgone tax revenue in such a scheme owed to the Government deprives our people of necessary infrastructure, health, education, and other public goods and services. This is yet another example of IRC increasing its audit focus across all flourishing business sectors yet paying little or no taxes to the Government.
This is the second big case involving a major retail business. The other case was last year where a taxpayer involved in manipulating and falsely declaring K61m was caught and penalised.
This is one of many examples currently the focus of IRC’s compliance and enforcement efforts. Anyone who purposely submits false declarations or tampers with computer systems will face prosecution under the Income Tax Act, GST Act, and the Criminal Code.
