Audit and Adjustments for the purposes of Value Added Tax (VAT) and its impact on Income tax in the West Bank

This study is aimed at identifying inspection, adjustment, and audit procedures followed by the VAT Department and its impact on the income tax in the West Bank. This study addressed the importance of imposing the value added tax and its characteristics, objectives, advantages, and flaws. As well as identifying how inspection and adjustment operations are conducted and to illustrate its impact on the income tax through applying these procedures on a variety of active sectors registered at the Tax Department, in addition to identifying the compatibility of the inspection procedures and processes with the VAT system and instructions applied at the State of Palestine, and illustrate the impact of these measures on income tax revenues. By looking at previous studies it was clear that there is an apparent shortcoming in addressing this issue. These studies did not address inspection and adjustment procedures in a way that reflects the reality of these procedures and the extent of their impact on income tax. In order to achieve this objective, the relevant literature to the research had been reviewed which helped in developing the theoretical framework, in addition to developing a questionnaire and verify its authenticity and consistency factor, and then it was distributed to a random sample consisting of ( 98 ) respondents from the staff of income tax and value-added tax departments and the auditing and accounting offices, who make up the study’s community. The questionnaire was processed using the Statistical Package for Social Sciences (SPSS). The study reached a set of results in terms of the different paragraphs and variables of the study. The paragraphs of the questionnaire show that the effect percentage of the audit and adjustments for the purposes of value added tax on the income tax in the West Bank, according to the paragraphs combined is 60.2 %, which is considered moderate. In terms of the study variables, following are the results that were reached: Firstly: The results on the effect of variables independent from variables measuring the impact of audit and adjustments for value added tax purposes on the income tax in the West Bank: No statistically significant differences at the level of (a = 0.05) when exploring the impact of the audit and adjustments for the purposes of VAT and on the income tax in the West Bank. This is due to the variable of applying the VAT law, planning the audit process, tax inspection requirements, goals of tax inspection, objectives and reasons of tax inspection, the extent to which the staff of the income tax department rely on data provided by the value-added tax department, and how the estimation officer handles customs classifications. This is because the significance level is higher than (a = 0.05). Secondly: Key results that have been reached are: 1. The Income Tax Department relies greatly in its work on the adjustments and files of the VAT department and not the other way around. 2. Any error that appears in the accounts of a licensed business in VAT will most likely be followed by an error in estimating the financial status for the purposes of income tax. 3. There is a directly proportional correlation between income tax and VAT, where the final estimation of income tax is greatly based on the taxpayer’s work that appears through the VAT department. 4. There aren’t any significance level differences in terms of significance level (alpha = 0.05) in the effect of audit and adjustments for VAT purposes and its impact on the income tax in the West Bank, due to the variables of academic qualification, age, years of experience, specialization, and the nature of work . 5. The study shows that there is tax audit and tax adjustments at the department of VAT which are always resorted to when law is violated or when taxpayers do not completely and properly declare transactions. Thirdly: Key recommendations that have been reached are: 1. Stakeholders must seek to unify the income tax and customs and excise department and the value-added tax for all businesses so that they become one department similar to senior taxpayers department. 2. The tax inspector should possess extensive knowledge in tax legislations and instructions, in addition to relevant legislations, and should also carry extensive knowledge in the bookkeeping system. He/she should have integrity and self-confidence, and should be objective, intelligent, logical, and patient, and shall efficiently utilize time and be able to work within a group . 3. There should be great coordination between departments and the general administration when developing instructions or applying certain legal provisions, and not rely only on the general administration; because it is those departments that interact with the taxpayers not the general administration. 4. In order for the tax inspection process to be effectively conducted, it should rely on a group of elements such as: the employee should be qualified, and the inspection process shall be conducted according to the rules of tax legislation. 5. The tax inspector should collect data and information about the facility subject to inspection both from within the tax administration, from external sources, or through extensive private investigations before conducting the inspection process.