Treasury and Inland Revenue Department officials are seriously considering the implementation of a recently- patented IT system to detect VAT.

This system known as Digital Payment Processing Facility (DPPF) was developed by the local company Mechanised Business Applications (Private) Ltd.

They claimed that the shortfall of VAT collections will be greatly resolved if the solution is implemented by the Inland Revenue Department (IRD). It is estimated that there would be a shortfall of Rs. 20 billion this year, and the figure may continue to rise if action is not taken now. The estimated total VAT collection for 2003 is around Rs. 120 billion.

The main promoter of the DPPF project, S. R.Vickneswaran said the gap between estimated and actual revenue exists because some of the 20,000 VAT registered businesses may be under-declaring their dues, and many liable businesses have not registered for VAT.

According to him, the new system will collect detailed information of all debits/credits and payment information from each company and not just the quantum payment.

The shortcoming in the current system is that it requires a very detailed audit to reveal if the business itself is paying the due amount. To identify those businesses that do not pay at all, a far more detailed, and impossibly widespread audit will be necessary. This is because only summary information is collected.

In the current system, each business submits a return giving a total of the outputs' and inputs'. Around 2000 large companies – whose annual turnover is over Rs. 30 million- submit the return monthly while the balance 18,000 send the return every quarter. The payment due from each is the difference between the 'output' and 'input.'

The patented DPPF solution, developed by engineer Darrel C. Perera and Nishan Wijegoonewardene, does not seek to replace the existing system in the IRD, but rather to supplement it. The concept behind it is claimed to be simple and the solution relatively easy to implement.

Perera, who is the Chairman and Managing Director of Mechanised Business Applications, said the new system is largely foolproof and quite speedy.

He explained - "The vast majority of business houses pay their taxes legitimately. Once all their transactions are recorded in the data bank at IRD, any other business that has had a transaction with one of these, and failed to register it, will be immediately identified. This is because one company's input VAT credit is another's VAT output."

The main features of the DPPF system can be summarised as follows:

The DPPF software will capture details of all VAT outputs and inputs directly from the clients' computer systems. Since each client has different computer and accounting systems, their software will be customised to suit each system.

This data will be transferred directly from the client's computer system to the Inland Revenue computer system. No manual intervention would be required. Each client will have the opportunity to review the data before it is transmitted. This is the same data that the client now sends in summary form. The DPPF format will include the VAT numbers and companies as well as VAT output and input.

Biometric scanners at the client's end will ensure that only those authorised by the client will have access to transmit data to the IRD.

All data transactions to and from the client will be encrypted for maximum security and integrity.

System vendors have no access to tax payers' information as the entire data information is between the tax payer's computer system and the Inland Revenue computer system. By this process, confidentiality and secrecy are maintained.

The information collected is stored in a proprietary data structure that facilitates rapid storage and sorting while allowing the multi-dimensional links between VAT debits and credits and outputs to be searched for quick retrieval. This process is generally termed 'data warehousing.' The standard reports will provide compliance assurance statistics, and exception information such as the presence or absence of entities from a filing cycle, a value variance, etc. The thresholds for the alerting on an exception report will be customizable parameters. This will enable the IRD to closely monitor VAT collection in a timely manner, thus ensuring far higher collections.

According to Perera, the implementation of this system will not lead to the retrenchment of IRD staff, as has been speculated.

It is claimed that the DPPF solution will ease the burden of collection and give more time for IRD officials to pursue tax dodgers. It will also enable the authorities to identify business sectors that are not duly contributing towards revenue collection.

Vickneswaran, who is also the Managing Director of Corporate Consultants Consortium Private Ltd., and a director of several other companies, felt the system once implemented would act as a deterrent whilst widening the tax net.

He said that once the DPPF system is in place, the IRD will have a system similar to those available in developed countries. It was also claimed that the process could be easily adopted for collection of EPF and ETF, where the information will flow from computer to computer without manual intervention.

To reveal the efficiency of the DPPF system, it is proposed to launch a pilot project with a conglomerate engaged in diverse trading activities.

By Asgar Hussein
The Sunday Leader