FBR unearths fake accounts used by industrialists for tax evasion

Updated May 30, 2019

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Sugar and textile players in lead role in the scam. — AFP/File
Sugar and textile players in lead role in the scam. — AFP/File

ISLAMABAD: The Federal Board of Revenue (FBR) Directorate General of Broadening of Tax Base has unearthed massive sales and income tax fraud through a network of fake accounts in sugar and textile sectors.

The racket involves a chain of ghost entities in sugar and textile sectors who are allegedly involved in fake sales leading to evasion of taxes worth billions of rupees.

Documents available with Dawn show that, textile and sugar companies have been found evading billions by showing fake sales to individuals who are apparently drivers transporting goods for them.

Sugar and textile players in lead role in the scam

“So far affidavits have been filed in around 20 cases by the persons whose CNICs have been misused for showing fake sales on their names”, an official source in the FBR told Dawn on Wednesday.

He added that these individuals have submitted their affidavits stating that their CNIC’s have been misused and they have never conducted any business transactions which have been unearthed against their particulars.

The scam was unearthed after FBR cross examined withholding statements and computerised payment receipts submitted by various manufacturers.

The examination revealed that manufacturers deducted tax under Section 236G&H of the Income Tax Ordinance 2001 and deposited the same in the name of freight drivers coming to pick goods onwards for delivery and daily wage workers.

“This — is an attempt to conceal transactions resulting in income of manufacturers, dealers and distributors in addition to evasion of sales tax of the entire supply chain”, the document shows.

The FBR added that the initial scrutiny has revealed fake sales worth billions of rupees in more than hundred companies.

He added that these companies showed fake sales to misguide the tax department to evade taxes.

“This way, these manufacturers are concealing the profit from wholesaler to the retailer”, the official said.

Sales splitting

Another FBR official said the practice is also a case of shifting profits through sales splitting.

In most of the cases, the practice was adopted to conceal the identities of their directors who are allegedly running the distribution companies.

By doing so, the entire chain is successfully evading the income tax as well as the sales tax, the source added.

He explained that if an individual shows sale of sugar at Rs35per kg to a registered person, then it becomes his verifiable sale as he also withholds tax on it.

But, the investigation into the case shows that, the chain ends here as this person who is a ghost entity would not file any return and the department would not challenge company’s return as the sales are to a verifiable person whose tax is also withheld.

However, contrary to this, the individual sold the same quantity of sugar to the retailer at Rs55 per kg through his own distribution company being run in the name of director.

Subsequently, the distribution company would earn additional income of Rs20 per kg, which would not come under tax net and remain hidden under the cover of fake sale.

Following these revelations, Directorate General of Broadening of Tax Base forwarded letters to all chief commissioners to apprise them about the scandal and to sensitise manufacturers about this malpractice.

According to the letter, chief commissioners were informed that these practices are tantamount to abetment/connivance in tax evasion and liable to prosecution under the Income Tax Ordinance 2001 and Sales Tax Act.

“FBR is in the process of investigating this fraud and strict action will be initiated against persons involved in tax evasion”, the letter said, adding that manufacturers may be advised to refrain from such actions in future.

The letter added that sales returns of manufacturers may be revised in retrospect to deposit true picture of their dealings to avoid launch of criminal proceedings.

Published in Dawn, May 30th, 2019