The government on Thursday delayed the implementation of its initiative aimed at checking Rs3.4 trillion worth of annual sales tax fraud by seeking personal guarantees of the heads of finance department of the corporate sector after it faced a serious backlash.
The Federal Board of Revenue (FBR) decided that the filing of affidavit by the chief finance officers (CFOs) of companies would not be required for return filing for the tax period September 2024, which would be filed in October.
Finance Minister Muhammad Aurangzeb announced at a press conference last week that companies were committing Rs3.4 trillion worth of tax fraud annually and affidavits would be taken from the CFOs to curb the illegal practice.
The FBR would receive alternative proposals from the stakeholders till October 31 to deal with the falsified sales tax returns, said a statement issued on Thursday. The FBR said that it may also modify the particulars of affidavit, where valid concerns of the stakeholders existed.
FBR Chairman Rashid Langrial visited Karachi on Monday to sensitise the CFOs of companies to their existing liabilities under the law for false statements.
However, the chartered accountants and the companies bitterly reacted to the move and decided to knock at the door of courts.
According to a draft of the affidavit, the CFOs will testify that “no fake and flying invoices have been entered in Annexure-A by immediate vendors and subsequent tiers in supply chain”.
The companies objected that the FBR seemed to be extending the scope of joint liabilities wherein the burden of proof was being shifted from the revenue board to the taxpayer.
Likewise, the CFOs were asked to testify that “no invoices have been entered in Annexure-A, which are not related to taxable supplies entered in Annexure-C”.
But the FBR was of the view that during a data-driven analysis of the sales tax returns of major businesses, it was observed that significant fraudulent practices were employed by some of their authorised representatives and CFOs, and they were not exercising due diligence.
The FBR stated that even the analysis within sectors and sub-sectors showed huge discrepancies. It is noteworthy that such discrepancies could not occur if the authorised representatives and CFOs of companies exercise due diligence.
In this backdrop, it was decided by the FBR that CFOs or their authorised representatives would submit an affidavit along with sales tax return regarding its correctness.
The FBR said that a number of representations had been received from trade bodies including the FPCCI that the affidavit about the correctness of sales tax return in terms of Section 26 of the Sales Tax Act, 1990 has caused hardships.
The FBR said that the affidavit was only introduced to sensitise the authorised representatives and CFOs to the existing provisions of the Sales Tax Act. The affidavit reiterates the legal obligations of the persons filing return and informs them about the criminal liability if such returns contain false information.
The FBR made it clear that no new legal obligation arose out of the affidavit and the registered taxpayers should always be cognizant of the fact that the declaration of fake or flying invoices and the suppression of sales was a cognizable offence and all registered persons should exercise extreme caution while filing returns to avoid pecuniary and criminal liabilities under Section 33 of the Sales Tax Act.
Independent legal experts said that the government’s claim of Rs3.4 trillion worth of fraud lacked details about how the figure was calculated. It would be prudent to question the transparency of methodology and seek clarification on the assumptions and data sources, they added.
Field experts also challenged the official claim that only 14% of 300,000 companies were registered for sales tax payments. This data is incorrect as the number of companies registered with the SECP as of December 2023 was 209,604.
The major concern of businesses was that the FBR had highlighted them for claiming a higher input tax than the benchmark. Companies argued that the assumption did not account for legitimate business activities such as capital expenditures and fluctuating raw material costs, which could naturally lead to variations.
It would be important for the FBR to clarify how those legitimate factors had been factored into their assessments. The FBR has cited the benchmark 7% input tax-to-sales ratio, but how the percentage has been computed is unknown. Apparently, the FBR is assuming that industries are making 157% profit margins under the present economic conditions, they added.
Likewise, the benchmark input tax ratio of 3.7%, 4.5% and 3.5% is mentioned for textile spinning, textile weaving and textile composite, respectively. This has been compared with all other textile spinning, weaving and composite industries without realising the fact that some companies with a low ratio would be using the Export Facilitation Scheme where input tax is reduced due to the import of goods without sales tax.
After the failure of track and trace system and Tajir Dost Scheme, under which only 575 traders were registered, the FBR is now attempting to save its face by harassing the documented sectors, which will further hurt investor confidence, said the business community.
The All Pakistan Textile Mills Association also decried the FBR’s claim of fraudulent activities. The benchmark input tax-to-sales ratio used by the FBR in its analysis of the textile value chain was inaccurately low and did not reflect the actual ratios observed in industry practices, according to Aptma.
“The analysis is misleading and has contributed to an incorrect narrative, suggesting that the textile sector is involved in extensive sales tax fraud,” complained Aptma to the FBR.
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