Tax scam of Rs53b surfaces in FBR

Nearly 8,000 taxpayers illicitly avail tax adjustments against cotton ginning

ISLAMABAD:

An astounding tax fraud amounting to over Rs53 billion has been uncovered in the Federal Board of Revenue (FBR), with nearly 8,000 taxpayers illicitly availing tax adjustments against cotton ginning, despite not being textile manufacturers or traders of the commodity.

The quantum of money lost in this tax fraud is a staggering 77% higher than the Rs30 billion in additional taxes that the government aims to recover from salaried individuals, increasing their tax burden in the current budget.

The revelation has exposed weak internal control within the FBR and a possibility of connivance. The unauthorised adjustments against tax payments were made in regions where cotton ginning is not possible due to commercial reasons, and the adjustments were granted even when taxpayers had not fully paid their sales tax.

Official documents indicate that the FBR failed to timely detect the fraudulent claims of Rs53.3 billion in illegal sales tax adjustments against ginned cotton. These adjustments were made in 7,951 cases, as per the detailed records.

Sources within the FBR suggest that the extent of the fraud could be even higher than the reported Rs53 billion, a matter that can be ascertained during a comprehensive investigation.

An interesting aspect of the illegal tax adjustments is that they were granted to entities outside the textile sector, indicating irregularities in the past two fiscal years.

Regarding refunds, the FBR makes direct payments, whereas adjustments allow taxpayers to offset their liabilities against refund claims. Despite the difference in the process, both scenarios result in the money leaving the government’s treasury.

In the last two fiscal years, the FBR paid a total of Rs540 billion in sales tax refunds, and the adjustment amounts to a couple of trillions. Had these taxpayers not claimed the adjustments, they would have contributed Rs53.3 billion to the FBR’s revenue.

The fraud was brought to light when the FBR analysed the tax returns of these individuals.

The scrutiny of data from taxpayers who claimed ginned cotton invoices in their monthly sales tax returns revealed that numerous non-textile entities had fraudulently claimed input tax invoices, mentioning ginned cotton as the purchased item, according to the FBR documents.

This scandal exposes the weaknesses in the FBR’s internal systems, including an inadequate information technology setup that fails to timely detect and prevent such fraudulent activities.

According to the documents, the FBR’s IRIS automated system, where buyers show input tax on ginned cotton as an item description in their online sales tax return, does not cross-match input tax invoices with the output tax invoices of suppliers, enabling taxpayers to illegitimately claim input tax.

Out of the total data of input tax claimed on ginned cotton, a massive Rs53 billion in tax amounts is prima facie inadmissible, as the taxpayer profiles indicate that they are neither involved in textile goods manufacturing nor have they deposited sales tax.

The data further reveals that the Corporate Tax Office of Karachi granted the highest illegal adjustments, totalling Rs27.9 billion, in 468 cases. This accounted for 53.3% of the total fraud amount in Karachi’s jurisdiction, leading to a loss of Rs28.9 billion.

The second-highest amount in illegal adjustments was permitted by the Regional Tax Office in Lahore, where Rs16.2 billion was lost in 793 cases, representing 30.3% of the total losses incurred.

Quetta presented a unique scenario, where the FBR allowed Rs2.4 billion in illegal adjustments in 255 cases. The losses in Quetta’s jurisdiction exceeded those in Faisalabad, the country’s textile hub, where the FBR granted Rs799 million as illegal tax adjustments in 78 cases.

Similarly, in Peshawar, the FBR allowed Rs1.1 billion worth of illegal sales tax adjustments in 515 cases. Additionally, Bahawalpur saw Rs2.2 billion in illegal tax adjustments in 59 cases.

A senior FBR official revealed that the FBR itself detected the fraud and that the matter will be taken to its logical end. The year 2023-24 has been declared a drive against fake input tax adjustments, he said.

The official acknowledged that “prima-facie it was a fraud”, but further investigation and responses from the concerned field formations are awaited.

The FBR has directed its field formations to recover the lost amount from the fraudsters and initiate criminal proceedings against them.

As the Chairman FBR, Asim Ahmad, reaches the age of superannuation and retires today (Thursday), the government is in the process of selecting his successor. The primary objective for the incoming chairman should be to unearth the culprits involved in this fraud, including any complicit FBR officials, and ensure the matter is taken to its logical conclusion.

FBR Version

In its official response, the FBR stated that, during a routine desk audit of monthly sales tax returns, it came to light that several taxpayers had claimed input tax invoices with the description “ginned cotton”.

The FBR forwarded the data of these taxpayers to concerned field offices to determine the veracity of the input tax adjustments, as prima facie, the claimed input may stand inadmissible. The FBR clarified that the profiles of these taxpayers indicate no involvement in textile goods manufacturing or trading.

However, this will be verified through an audit to ascertain whether the claims resulted from system glitches, inadvertent errors, or intentional fraud.

The FBR confirmed that these adjustments were made between December 2021 and May 2023. It also clarified that no refunds had been issued by field formations, as the sales and purchase declarations were made by taxpayers on a self-assessment basis through online sales tax returns, without intervention from any field formation. The FBR asserted that the involvement of FBR officers was not a factor in this case. Instead, the role of FBR officers would be to recover the lost revenue caused by the fraudsters.

Published in The Express Tribune, July 27^th, 2023.

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