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Billions lost in bogus sales tax refunds

Updated March 16, 2014
— File photo
— File photo

ISLAMABAD: In connivance with tax officials, bogus companies owned by influential fraudsters have received more than Rs9 billion in sales tax refunds against bogus documents in the current fiscal year.

These fraudsters are facilitated by tax officials who tamper with sales tax records.

Although the Federal Board of Revenue (FBR) intelligence has identified one of the men in the refund mafia who allegedly secured billions in fraudulent refunds, it is hesitant to take him on because of his political clout.

So difficult is the task that intelligence personnel were taken hostage by staffers of the Regional Tax Office (RTO) in Karachi when they went there in pursuit of the wanted man.

But for the chairman of the FBR, Tariq Bajwa, this is a routine matter. “I receive several letters every day and it is not possible to remember all the cases,” he remarked. However, he knew about the case because Mr Bajwa said that one of the inspectors of the Inland Revenue Service had already been suspended.

“We are investigating the issue,” he said.

The FBR has already lowered its annual revenue collection target to Rs2,345bn from the budgetary target of Rs2,475bn, a straight shortfall of Rs130bn. However, FBR officials believe there will be further shortfalls of Rs45bn.

A well-placed source in the Karachi RTO told Dawn that the main suspect in the scam had been identified but he could not be arrested because of his political connections. The FBR chairman said he did not believe in such associations, but he ignored the fact that three months had lapsed but the man had not been arrested.

Tax officials concede that the settlement of refund claims against fake invoices has been rampant for many years. Some estimates project losses as high as Rs20bn a month on this count incurred by the government.

Official documents available with Dawn show that a comprehensive investigation report was submitted to the FBR in 2009, which established the involvement of the suspended inspector in fake refund claims. The probe into the fraud was conducted by a former member of the taxpayers’ audit, the late Hafiz Muhammad Hafiz. The same inspector, who was suspended on Nov 5 last year, was found involved in the issuance of bogus refunds in the earlier report.

Instead of the FBR initiating disciplinary action against the officer, it has initiated a fresh inquiry to prolong the issue. The report of the earlier committee is already rusting on the racks.

It is not understandable why, in the wake of such a comprehensive report, no concrete measures have been taken to prevent the identified person from causing further dents to the national exchequer.

Conversely, on Dec 17 last year, the Inland Revenue intelligence deputed a team comprising four officials to arrest one of the main identified persons with respect to bogus refunds/cheques unearthed in FIR ST/AD-A/2013, which was lodged on Sept 2, 2013.

The investigating team was assaulted and abused by more than a dozen tax officials of the RTO, Karachi, to prevent it from entering the premises to arrest the accused, who was reportedly present there at the time. The document further reveals that the intelligence officials were locked up in the premises of the RTO and their release could only be secured after police assistance was sought.

Six officials involved in the attack were identified and their names were sent to the FBR but it has yet to take action against them.

The intelligence directorate has sent several letters to the FBR for taking action against the accused, but the board has yet to do this.

How it’s done is quite simple. Bogus companies, which exist only on paper, issue fake invoices. They then claim a refund from the sales tax department on raw material that was never purchased. Flying invoices are used by registered taxpayers for claiming refunds.

The only option the FBR has tried so far is the installation of various computer programs in the tax system for tracing and thwarting the illegal payment of refunds. These were successfully circumvented by the unscrupulous people involved in the scam.The claims for refund were made in connivance with tax officials who charged 40 per cent to 50pc of the value of the refunds in Karachi, a tax official told Dawn.

Another senior official, who also requested remaining named, said one of the reasons behind the illegal refunds was the expeditious electronic clearance of refund claims. The current system for the clearance of sales tax refunds does not have any inbuilt mechanism to determine whether the applicant is a genuine taxpayer.

There are two areas where fake invoices are issued and for claiming undue refunds. Some fraudsters operating in the zero-rating sector (no duty, no refunds) claim refunds on raw material used in export proceeds on paper only. In most of the cases, tax officials have not fixed a ratio between input (raw material) and output (finished products), which also provides a sufficient cushion to taxpayers for claiming undue refunds.

As a result, the consumption of raw material used in the same product by different taxpayers varies, which shows that some of the taxpayers are drawing undue refunds from the tax department. Tax officials believe that the only option the government has is for parliament to enact a law seeking the enforcement of value-added tax from retailers to manufacturers.

For the detection of fake invoices, the government would have to revive the audit of taxpayers and fix the input-output ratio which would automatically discourage the practice.