Fraudsters escape risk parameters to obtain bogus claims: loopholes in ST refund system unearthed

The Directorate General of Internal Audit Inland Revenue (IR) has unearthed loopholes in the sales tax refund payment system of the Federal Board of Revenue where fraudsters successfully escape the risk parameters in the system to obtain bogus refund claims.
It is learnt here on Saturday that Sajjad Haider Afzal Cheema, Director General, Directorate General of Internal Audit (IR) has submitted a comprehensive report to the Chairman FBR Tariq Bajwa on the overall performance of Inland Revenue and effective measures to check bogus refund claims.
According to the Director General, the special inspection of Central Registration Office (CRO) and Centralised Sales Tax Refund Office (CSTRO) is required to check loopholes in the refund payment system. In few instances, it has been observed that the fraudsters were able to escape the risk parameters designed in the system to check bogus refund claims. The CISTRO needs to be further strengthened by introducing stringent checks in the system. A detailed analysis of the system would ensure smooth processing of refund claims and plugging the leakage which exists in the system.
The directorate has also asked the FBR to provide access of all electronic and computerised systems containing taxpayers'' information. The directorate can accomplish the task only if it is empowered with necessary tools. It is therefore, requested that Inland Revenue Audit officers working in the office of DG Internal Audit (IR) may be given access to ITMS, TAMS, WeBOC, Smart, Taxsys, Regsys and Crest as no meaningful work is possible without access to these programmes.
The Sales Tax Audit has remained a neglected area ever since the merger of Income Tax, Sales Tax and Federal Excise. It is proposed that the inspection of Audit conducted by the LTU/RTO under section 25 & 38 of the Sales Tax Act, 1990, will be made to check, the quality of audit work. The discrepancies found during this exercise may be communicated to the field formations and Board as well. The exercise will not only help in enhancing the revenue generation capacity of the FBR, rather it will assist field formations in achieving their assigned targets.
DG has informed the FBR that the Directorate General of Internal Audit (IR) has been assigned Specific statutory functions/duties by the Board through different SROs, issued from time to time. The main objective behind creation of this particular directorate is to maintain internal control/check over the tax administration and ensure judicious application of tax laws, rules, procedures and instructions of the Board.
To discharge its functions, this directorate, each year, issues schedule of audit/inspection of field units covering the spectrum of activities to be performed by the audit/inspection teams. Since the inspection and audit schedules are generally restricted to routine activities at unit level, certain vital areas remain unattended or unchecked which needs special focus to check leakage of revenue in the working of field formations, Sajjad Haider said.
Sajjad Haider pointed out that during the meeting held in the Board it was decided that Directorate General of Internal Audit (IR) would focus on the inspection of work done by the field officers/offices. FBR has also been instructed to identify specific areas which need immediate inspection to bring qualitative and quantitative improvement in the working of field formations. This Directorate has identified certain areas where useful contribution can be made through inspection of filed formations working/output. Some of these are listed below under Direct Taxes and Indirect Taxes heads respectively:
DIRECT TAXES:
1. Broadening of Tax Base (BTB): The Director General, Intelligence and Investigation (Inland Revenue) has passed on very useful information about taxpayers to the field formations regarding maintenance of Bank Accounts, Purchase of Luxury Vehicles and Expensive Properties. Many cases have been disposed off by different Broadening of Tax Base units but surprisingly negligible amount of Revenue has been raised so far. There are many complaints of mal administration of BTB units. Inspection of work of BTB units may be carried out to ensure the accountability and correct application of Law.
2. Non-profit organisation (NPOs): This is a neglected area where huge amounts of receipts are declared but no tax is paid on account of claim of tax exemption. Huge revenue losses can be caused to the exchequer if exemption to the NPOs is allowed unlawfully and without proper scrutiny. To begin this exercise, profiling of the NGOs/NPOs will be made and the tax exemption certificates issued to such organisations will be examined to ascertain admissibility as per law. Specific cases requiring detailed audit will be taken up for examination, Sajjad Haider observed.
3. High Risk cases of with-holding tax audit: The cases of'' High Risk WHT Agents will be selected for inspection. If the Audit has already been concluded by the RTO concerned, further inspection of such case will be made on the basis of proceedings initiated tinder section 176 of the Income Tax Ordinance, 2001. If default is established, the loss will be retrieved and concerned officer will be identified for legal action.
4. Income Tax Audit/Inspection of Income Tax Audit: It has been observed that most of the amendment orders in respect of cases selected for total audit are not lip to the mark. While passing such orders all aspects of the cases are not taken into consideration and passed without proper application of tax laws. Inspection of all Income Tax Audits completed by the RTOs for Tax years 2011, 2012 and 2013 will he carried out with a view to judge the quality of audit and correct application of tax laws and revenue risk areas ignored during the course of audit by field formations, Sajjad Haider said.
5. Non-Resident Taxpayers: This is a high risk area where huge amounts of funds are transferred without payment of Income Tax under various provisions of Double Taxation Treaties which at times are misinterpreted or the facts are misrepresented before the tax authorities. Such instances occur in payments to non-residents on account of transfer of business profits, fee for technical services, royalties etc.
6. Inspection of claims of exemptions u/s 65D etc: The scheme of section 65D has imposed various restrictions on claims of exemption. The admissibility of such exemptions needs to be ascertained to plug revenue leakage.
7. Exemption certificates or reduced rate certificates: Law provides and binds the issuing authority to get subsequent compliance from the taxpayers when such exemption/reduced rate certificates are issued. To avoid leakage/loss of revenue in this area, special inspection can be conducted and field formations may be assisted to follow given guidelines in letter and spirit.
8. Appellate Offices (CsAIR): The offices of Commissioner (Appeals) will also be inspected with reference to timely disposal of appeals, proper application of law and procedures and usage of ITMS introduced for the disposal of appeal will also be examined. Discrepancies detected during the course of inspection will be communicated to the officers concerned and Board will also be informed accordingly. This exercise will be helpful in improvement of the qualitative aspect of the Appellate authorities.
9. Amendment of assessments u/s 122(5A): The most important area of work in RTOs is amendment of assessment under section 122(5A). In order to check the qualitative and quantitative disposal of amendment of assessments and evaluate the performance of the officers, cases finalised under 122 (5A) of the Ordinance need special inspection. Inspection of such cases may result into detection and retrieval of loss of revenue caused due to inefficiency, negligence and misapplication of rules and procedure. The name of the respective officers shall be communicated to the Board for appropriate action.
10. Inspection of work of I&I: The inspection of work done by the directorate general of I&I units will be carried out in order to examine the correct application of laws, rules and procedures. The deficiencies identified will he reported to the Board for further improvement of their work, Sajjad Haider maintained.
INDIRECT TAXES:
1. Inspection of new Registrations: It is a well known fact that a very large number of units registered under Sales Tax Law are bogus. They are involved in the issuance of fake invoices causing huge loss of revenue to the exchequer. The bogus registration has been obtained with the connivance of the field formations. The Inspection of Registered units is paramount of importance to pre-empt Tax Fraud. This office can assist to examine such cases ultimately resulting in plugging revenue leakages. The name of officials responsible for verification of particulars of bogus units could he communicated to the Board for appropriate action, Sajjad Haider stated.
2. Expeditious refund system (ERS) and non ERS Refunds: After obtaining refunds through ERS, refund claimants are bound to submit the hard copy of refund file to the concerned field formation for scrutiny/verification.
Unfortunately in most of the cases no hard copy of refund has been submitted to the concerned field formations to check the genuineness of the refund sanctioned, Director General observed.
Moreover, the ERS cases will be examined for ascertaining the correctness of the decisions made by the system while sanctioning refund. On ground checks will be made to un-earth fraudulent cases. Similarly refunds issued manually can also be checked randomly and it will be ensured that all such cases are subjected to P.R.A. Post Refund Audit of high-risk case can also be conducted by this office to overcome the possibilities of bogus refunds.
3. Special inspection of CRO/CISTRO: In few instances, it has been observed that the fraudsters were able to escape the Risk parameters designed in the system to check bogus refund claim. C.I.S.T.R.O needs to he further strengthened by introducing stringent checks in the system. A detailed analysis of the system would ensure smooth processing of refund claims and plugging the leakage which exists in the system.
4. Blocking and de-blocking of cases: The blocking/de-blocking of registered persons is a daily affair at the field formation. It has been noticed that a particular person was blocked for some reason and was later un-blocked without proper inquiry. This practice not only cause harassment but also invites complaints of extortion. The procedure undertaken while blocking/de-blocking needs to be examined for bringing transparency and predictability to avoid complaints of harassment and extortion by field formation.
5. Audit of selective high risk cases: To plug the revenue leakages, high risk revenue cases will be audited under section 25 & 38 of the Sales Tax Act, 1990. This exercise will help in enhancing the revenue of FBR, and will also help the field formations in achieving their assigned targets.
6. Desk audit: Desk audit of cases will be conducted on the basis of data available on the web-portal of the FBR, Haider added.