Govt incurs cost of Rs15b to pay compensation

Payment made to banks to compensate for taking advance tax to inflate revenue

ISLAMABAD: The government has incurred a cost of Rs15 billion to pay compensation to four commercial banks for using their money to inflate its tax collection during the past three years - a cost that could have been avoided by timely clearing their genuine tax refunds.

The Federal Board of Revenue (FBR) paid the compensation against over Rs60 billion advances it obtained during ‘crises’ to bridge a shortfall against revenue collection targets, said sources in the tax machinery. The compensation against over Rs60 billion advance income tax exposes the authorities’ lack of concern for taxpayers’ money.

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The government does not have a plan to clear these income tax refunds, as it will only pay back sales tax refunds and those too only to the exporters.

The compensation amount has been worked out by analysing the audited financial accounts of four commercial banks for the period of 2013 to 2015.

Since 2010, the FBR has paid Rs21.4 billion by exploiting a section of the Income Tax Ordinance of 2001 that allows payment of compensation on delayed payments of income tax refunds.

Out of Rs15 billion, the maximum compensation of Rs8 billion was given to NBP from 2013 to December 2015, revealed the audited financial statements of the state-owned entity. It also highlights the fact that being a state entity it was prone to pressure exerted by the FBR headquarters and the Q-Block.

The sources said that outstanding refund payments of the NBP were in the range of Rs21 billion to Rs22 billion. Since 2010, the FBR has paid Rs14.4 billion in compensation to NBP and out of that Rs8 billion pertains to the PML-N era. Out of Rs14.4 billion, the NBP has already received Rs11.4 billion, showed its financial statement for year 2015.



The MCB booked Rs2.5 billion in compensation in its accounts - all in the PML-N tenure. ABL booked Rs2.8 billion from 2013 till December 2015, again in the PML-N tenure. HBL booked Rs1.7 billion.

The banks have clearly mentioned in their balance sheets the compensation they received on account of delays in payment of tax refunds, showing that it was the FBR that was responsible for the loss to the exchequer.

Only the Chief Commissioner of the Large Taxpayer Units (LTUs) can answer why they made huge payments on account of compensations, said Dr Mohammad Iqbal, the FBR’s spokesman.

Section 171 of the Income Tax Ordinance authorises the FBR to pay compensation on admissible due refunds equivalent to Karachi Interbank Offered Rate plus 0.5%. The compensation rate was 15% till 2014 which the then FBR Chairman Tariq Bajwa lowered.

However, tax experts argue that this section does not apply here as the FBR’s intention was to inflate revenue collection. There are legitimate questions over the government’s claim to achieve last year’s Rs3.104 trillion tax collection target due to revelation that it took Rs250 billion as advances.



The government has recently set up a Special Purpose Vehicle (SPV) to borrow money from banks to return refunds. However, it does not have a plan to return income tax refunds despite paying billions of rupees in compensation to the banks. The government is also facing criticism against retiring refunds by borrowing money. Legally, refunds have to be paid out of tax collection, as borrowings cannot be used to inflate revenues.

The latest report of the IMF showed outstanding refunds at Rs205 billion as of June 2016. A footnote in the report states, “the total stock of outstanding tax refunds claims increased to Rs205 billion in June 2016, from Rs200 billion in June 2015”.

The government will not return Rs72 billion that are outstanding as income tax refunds. The issue of outstanding sales tax refund was grave as compared to income tax refunds, said Dr Iqbal. He said that the income tax refunds will be cleared in routine.

A circular of the FBR bars its commissioners from paying compensation on refunds. The same circular also stops the FBR officers from rejection of genuine refunds.

Published in The Express Tribune, October 22^nd, 2016.

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