Fraudulent sales tax refunds

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According to a Business Recorder exclusive, Federal Board of Revenue (FBR) identified 95 manufacturing units as filing fraudulent claims for sales tax refund amounting to 1.43 billion rupees in 2011-12. Or in other words, the refund claimants were successful in obtaining registrations and filing phony claims which remained unchecked by the installed Expeditious Refund System (ERS) and Sales Tax Automated Refund Repository System (STARR). The number of fraudulent claims and the total amount released under such claims as announced by the FBR are probably a small percentage of the total, tax experts maintain.

The actual amount is, in all probability, in several multiples of this, they further aver. Based on the massive leakages from the tax system, estimated at over 500 billion rupees per annum by the then Finance Minister, Shaukat Tarin, this claim carries a measure of credibility.

What is particularly disturbing about the recipients of refunds is the fact that many of these claimants were also on the same list a year ago. In short, inexplicably, there was no attempt to verify even those names on the list that had been declared as fraudulent claimants a year ago. It was also revealed that new claimants had been added to the list of those registered as 'manufacturers' last year, which would again have required a physical verification which obviously was not carried out.

The age-old debate is about whether tax fraud reflects complicity of FBR officials with the tax evaders or indeed was a measure of incompetence of the tax official based on indolence. That the sales tax refund fraud could not have been possible without complicity of the tax officials is evident given the ERS and STARR in place. One is, therefore, forced to conclude that the tax reforms that have been implemented at considerable cost to the country's taxpayers with the objective of taking away the discretion of the tax officials from the equation have been ineffective in this instance at least.

FBR's recommendation to its relevant departments namely the Central Registration Office and Pakistan Revenue Automation Limited is to investigate how such a large number of units got themselves fraudulently registered as manufacturers, which requires physical verification. The disturbing report also indicated that the menace of phony sales tax refunds was more evident in regional tax offices (RTOs) as opposed to LTUs.

In January of this year the FBR, cognisant of this fact, made it mandatory for all regional directors, in whose jurisdiction the registered individuals fell, to issue red alerts after prior approval of the Director General (DG) of Intelligence and Investigation Inland Revenue of the FBR. The function therefore of head office was envisaged to be vested with the Secretariat of the DG IR at the place of posting/Camp Office and the Secretariat was to be staffed with those under the direct supervision of the DG IR during their posting.

There is no doubt that red alerts are considered the most effective way to control bogus sales tax refund claims and is the first step towards identifying that a crime may be about to take place. And needless to add red alerts stop RTOs from processing, sanctioning and issuing bogus refund claims. It is not yet clear whether the new system put in place in January 2013 will ultimately be able to check the bogus claims; however, it is hoped that this new mechanism in place would end the menace once and for all.

Courtesy: Business Recorder

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