ISLAMABAD: Bookings of new cars in dealers name has emerged as a source of claiming billions of illegal advance tax refunds, aside from additional earnings from re-selling cars at a premium.

Intelligence department of the Federal Board of Revenue is investigating cases where dealers of locally assembled cars have been found claiming advance tax from customers, even though they had already paid this tax at the time of booking.

The same dealers, after collecting the amount from the customer, then went on to claim a refund from the tax authorities. The customer, on the other hand, ends up having to pay the advance tax one more time when they go to get their car registered because they do not have original proof of tax payment made to the dealer.

Under section 231B of income tax ordinance 2001, every assembler of a motor vehicle will collect the advance income tax at different rates on the basis of engine capacity at the time of sale. These rates range between the lowest Rs50, 000 in case of 1301cc to 1600cc commonly in use, to Rs100, 000 for cars in the range of 1801cc to 2000cc. These rates go up to a maximum of Rs250, 000 in above 3000cc vehicle.

The advance tax rates are almost double for non-filers of tax returns.

As per the investigation, the dealers booked cars in their own name in bulk and deposited the advance tax with the manufacturer. On reselling of these cars, these dealers not only recover the tax amount which they paid to manufacturers from the buyers, but also collect exorbitant premium over and above the factory price.

More than 46,000 auto sales by dealers to be served tax notices over “own money” collections

The initial inquiry conducted by the FBR into the scam reveals that dealers of Toyota cars themselves booked 46,500 vehicles in the last three years across the country alone. These cars were then sold to customers on premium along with recovery of advance tax.

According to an FBR source with direct knowledge of the inquiry, data on the details of bookings by dealers were provided by the auto assembler, which has of late been cracking down on the practice of premiums on its cars. Dealerships are totally separate entities from the auto assembler.

Indus Motor Company, the local assembler of Toyota cars, began an awareness campaign against the menace of “own money” last November, and announced that it had cancelled more than 1,100 advance bookings by “dodgy corporates” as well as individual customers after conducting a close examination of the details provided at the time of booking of the car. The practice of trading in new cars by dealers has been a menace for the auto assemblers as well as for the customers.

However, when reached for comment, Mr Ali Asghar Jamali, CEO of IMC denied all knowledge of the inquiry by tax authorities against the dealers.

The total amount collected as advance tax, according to the FBR source, ranges between Rs2bn to a maximum of Rs4bn. The actual amount will be clarified after serving notices to these dealers, the source said.

The premium ranges between Rs200,000 to Rs500,000 depending on the engine capacity of cars. The advance tax is also being included in the premium amount, the source said.

“We are investigating the quantum of illegal refunds”, the source said, adding it will be difficult to assess the quantum of premium because it was not documented.

Instructions have been sent to regional tax offices around the country, along with details of all the dealers in their area who are subject to the inquiry, to serve notices and begin proceedings. According to details from the letters, Karachi and Lahore alone account for 68 per cent of all the cars booked in dealers names, at 16,442 and 14,997 respectively.

The number of cars booked by dealers in Faisalabad stood at 4121, Multan 3,252, Sargodha 1472, Islamabad 938, Rawalpindi 914, Gujranwala 969, Quetta 827, Hyderabad 649, Abbottabad 513, Peshawar 446, Sahiwal 481, Bahawalpur 292 and Sialkot 201.

The tax intelligence department has found that in the majority of these cases, dealers of these cars applied for refunds and secured the amount in connivance with the tax officials. “We are also looking to identify those tax officials who issued these illegal refunds to dealers” the source said.

The FBR is now preparing to broaden its investigation to dealerships of the other two auto assemblers as well, Honda and Suzuki, where unscrupulous practices by dealers, such as “own money” are also rampant. “We have asked the RTOs to investigate the dealers’ tax profiles of other brands as well”, the source said.

According to the tax department, the RTOs have also been instructed to scan the income tax returns of these dealers whether they have declared the amount equivalent to the amount they used in the booking of these cars in the last three years.

The official could not confirm whether they pay income tax on their profits or not.

Genuine customers of new locally assembled automobiles often have to wait for months to get delivery of their car, while the registered dealers of the local manufacturers usually have multiple bookings of cars to earn profits in the shape of premium and illegal tax refunds.

Published in Dawn, May 27th, 2018