Taxpayers’ refund: Govt halves compensation it pays for blocking refunds

Will amend income tax law; amount to be reduced to KIBOR plus 0.5%.

Our Correspondent April 09, 2015
Rs14.7b has so far been paid in compensation to banks on over Rs50 billion tax refunds by the FBR, showed the audited statements of these financial institutions. DESIGN: CREATIVE COMMON


The federal government has decided to amend the income tax law to halve the compensation amount it has to pay to taxpayers for blocking their refunds.

It is planning to amend Section 171 of the Income Tax Ordinance through the upcoming Finance Bill 2015-16 in order to reduce the compensation amount. The compensation on admissible tax refunds will be reduced to Karachi Interbank Offered Rate (Kibor) plus 0.5%, said Federal Board of Revenue (FBR) Chairman Tariq Bajwa.

The government has sprung into action only after the issue of heavy compensation to the tune of billions of rupees was highlighted by media.

The three-month Kibor benchmark stood at 7.98% and by adding another 0.5%, taxpayers will be getting 8.5% in compensation. The Kibor is linked with the policy discount rate of the State Bank of Pakistan. At present, the FBR is paying 15% compensation on admissible due refunds.

According to the Income Tax Ordinance, where a refund due to a taxpayer is not paid within three months of the date on which it becomes due, the commissioner will pay to the taxpayer a further amount by way of compensation at the rate of 15% per annum.

But this clause is fully exploited by both FBR and commercial banks – the latter has emerged as the single largest beneficiary of the FBR’s unlawful move of inflating revenues by taking income tax in advance and blocking refunds.

It has so far paid Rs14.7 billion in compensation to banks on over Rs50 billion tax refunds, showed audited statements of these financial institutions. The National Bank of Pakistan remains the single largest recipient that has got Rs9.9 billion in compensation.

The National Assembly Standing Committee on Finance and Revenue has already taken notice of this abuse of power by the FBR and is investigating the matter.

A circular of the FBR bars its commissioners from paying compensation on refunds. It states that the commissioner will issue the refund voucher within three months from the date the refund order is made and compensation must be avoided under all circumstances. The same circular also stops FBR officers from rejection of genuine refunds.

Reliance on others

The latest figures show that the tax authorities have not yet abandoned the practice of using refunds for inflating revenues.

According to the FBR’s documents, the tax authorities paid only Rs77.8 billion in tax refunds from July through March – which were Rs3.7 billion or 4.5% less than the comparative period’s refunds.

The negative growth in refunds does not commensurate with 11.4% growth in net revenue collection for the period of July-March. The FBR collected Rs1.766 trillion in taxes from July through March –higher by 11.4% over the previous year’s collection.

The FBR, for the second time in a row, has also missed the IMF’s determined indicative collection target of Rs1.846 trillion by a wide margin of Rs80 billion. This shows that even three-time revised annual collection target of Rs2.691 trillion cannot be achieved, as the IMF’s ceiling was worked out on the baiss of the thrice revised target.

The sources said the Large Taxpayer Unit Karachi of FBR created over Rs30 billion a fake tax demand against Pakistan State Oil in March in a desperate attempt to bridge shortfall against the revenues. After the PSO’s hue and cry, the LTU Karachi reduced the demand to Rs2 billion, they added.

FBR spokesman was not available for comments.

Published in The Express Tribune, April 10th,  2015.

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Karachi 3 | 7 years ago | Reply Well well researched article. FBR has become dysfunctional and according to one reliable estimate;FBR has unpaid Sales tax Refunds of Rs 115 Billion,Income Tax Refunds of Rs 70 Billion and Custom duty draw-backs of Rs 30 Billion. These withheld refunds are on one hand slowing down the economy and on the other hand showing Inflated Tax Collections which is masking FBR in-efficiency. On urgent bases FBR should be put under and Independent Board and every one in FBR should be held accountable. FBR has become inefficient and dysfunctional
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