Identity-related frauds in sales tax

December 09, 2019

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Value-added tax or sales tax regimes are prone to frauds of many kinds. These include undertaking taxable business activity without registration, falsifying sales tax invoices, underreporting taxable supplies to understate tax liability and overstating entitlement to tax credit or tax refunds to cause a loss of tax revenue.

In an economy with large informal sectors, unregistered suppliers commonly offer inputs of similar quality for lower, tax-exclusive prices — a practice that leaves registered suppliers uncompetitive in the market.

Even the registered taxable persons do not always operate within the limits of sales tax legislation. They frequently acquire fake purchase invoices to boost deductible input tax as well as under-declare taxable supplies to reduce output tax and overall sales tax liability.

Some registered persons claim input tax on purchases that are not even related to their business activity or supply chain. In a judgment delivered on Oct 24, the Lahore High Court held that taxable persons are not entitled to input tax on goods that are not part of the supply chain and are not directly related to taxable supplies.

Fraudsters declare bogus purchases of hefty amounts in sales tax returns. Then they generate fake invoices to help suppliers claim input tax or refunds

In the recent past, authorities unearthed many cases of sales tax–related identity frauds. In such frauds, fraudsters use stolen user IDs, pin codes, passwords, sales tax registration numbers (STRNs), national tax numbers (NTNs) and/or computerised national identity card (CNIC) numbers of other taxable persons to file fake or bogus sales tax returns.

Furthermore, to enable their suppliers applying for input tax deduction relating to the invoices for more than Rs50,000 to receive payments through prescribed banking channels, these fraudsters have opened bank accounts using identity documents and signatures of persons other than actual beneficiaries, such as employees of the firms. Therefore, sales tax–related identity frauds involve a series of fraudulent acts on the part of conspirators and include the stealing of other firms’ identifying information such as user IDs, pin codes, passwords, STRNs and NTNs.

Other acts involve opening bank accounts using their own or other irrelevant persons’ identifying information, filing fake and bogus sales tax returns, routing suppliers’ payments through bogus bank accounts, establishing fictitious firms using identifying information of persons other than actual beneficiaries, enabling other registered taxable persons to either avoid sales tax on account of supplies made to unregistered persons or claim refunds on the strength of fake and flying invoices, and receiving certain percentages of the fraudulent amounts concerning input tax or refunds.

Sales tax–related identity frauds differ from other forms of frauds where taxable persons make taxable supplies without obtaining registration or under-declare taxable supplies to suppress sales tax liability.

In many cases, taxable persons filed affidavits with the tax authorities that their user IDs, pin codes and passwords had been stolen and fraudsters misused their identities to file bogus sales tax returns. The fraudsters declared bogus purchases of hefty amounts in the returns to generate fake and flying invoices to help suppliers claim input tax or refunds. Sales tax profiles depicted huge fictitious purchases whereas the actual taxable persons had denied making any purchases.

An in-depth enquiry revealed that gangs of fraudsters, including suppliers in some cases, had filed bogus online sales tax returns from different locations using the identity of legitimate taxable persons and declared fictitious purchases to generate fake and flying invoices.

In many cases, the fraudsters in connivance with the suppliers also opened bank accounts using fraudulently the identity of the taxable persons to enable the suppliers to fulfil the condition of routing payments of more than Rs50,000 through banking channels.

In the textile sector, several fake/dummy firms were registered with the connivance of suppliers. This was done to avoid sales tax by declaring supplies in the fake and bogus sales tax returns of these dummy registered persons. In a number of cases, the authorities recovered further tax from the suppliers who had misused the identity of fake/dummy firms.

Massive fraudulent refund claims were also flagged prior to processing. A sales tax evasion scam of Rs2.1 billion was unearthed in the recent past. An enquiry revealed that the fraudster was operating 20 fictitious firms using different identities to generate fake invoices. In this scam, the number of fake suppliers was more than 110 and the actual beneficiaries were around 1,785.

In 2011, a sales tax–related identity fraud of Rs 9.8bn was unearthed in which the fraudsters from different locations across the country used the fictitious company identities to claim refunds and input tax adjustments on more than 146 fake and flying invoices.

Another sales tax–related identity fraud was detected in 2014 whereby the fraudsters with the connivance of tax officials received sales tax refunds of more than Rs9bn by using bogus company identities. The refunds were processed with the connivance of tax officials who charged 40-50pc of the value of the refunds.

A scam of sales tax–related identity fraud of Rs762 million surfaced in 2014-15. An enquiry showed that a firm closed down in 2009 but a gang of fraudsters consisting of spinning mills’ agents misused its identity (name, STRN, NTN etc) and opened bogus bank accounts in private banks to route payments. The fraudsters filed fake and bogus sales tax returns between 2009 and 2015 when the firm was inoperative. As many as 51 co-conspirators (spinning units) were identified as beneficiaries of the scam. n

The writer serves as additional director of Intelligence and Investigation (IR), Federal Board of Revenue

Published in Dawn, The Business and Finance Weekly, December 9th, 2019