The Directorate-General of Intelligence and Investigation, Customs and Excise, has initiated criminal proceedings against 14 industrial units of Punjab for claiming illegal sales tax refund on bogus invoices.
Sources told Business Recorder on Sunday that the DG Intelligence had unearthed this mega scam on reports about massive use of fake/flying invoices in different cities of Punjab, particularly Gujranwala. Fraud took place two years ago when commercial exporters claimed illegal refunds on forged documents.
The seriousness of the fraud is evident from the fact that several arrests have been made at the initial stage of investigation. DG Intelligence has also pointed towards involvement of sales tax officials in the scam. Presently the concerned collectarate of the sales tax is fully co-operating with the investigators.
Sources said that the Directorate has invoked the harshest provisions of Sales Tax Act, 1990 to arrest the owners of the units, allegedly involved in obtaining illegal refund claims. In this regard, powers available under section 37A (power to arrest and prosecute) of Sales Tax Act, 1990 have been used to frame cases against the fraudulent units.
Details of the scam show that DG Intelligence had credible information about certain units who claimed refunds on fake sales tax invoices. The Directorate had collected necessary information from various sources to verify the fraudulent activities. When the Directorate was firm about the fraud, it approached the Federal Board of Revenue (FBR) for obtaining permission to carry out detailed scrutiny of tax record of the suspected companies.
On obtaining clearance from the board, the DG Intelligence started investigative audit, examination of record and data analysis of Sales Tax Automated Refund Repository computer system (STARR) resulting in criminal proceedings against the units under the Sales Tax Act, 1990.
So far, four persons and a senior auditor involved in obtaining illegal refund on fake invoices have been arrested, and further investigation is under way. As the investigation is at the very initial stage, the exact quantum of illegal refund would be ascertained in due course of time. However, the Directorate has compiled a list of 14 suspected units, along with their sales tax registration numbers and suspected value of fraudulent refund claim.
According to sources, the DG Intelligence had unearthed serious procedural irregularities during scrutiny of refund claims record filed by 14 units of Gujranwala. One of the major discrepancies was that objections raised by STARR detecting abnormal behaviour was overruled by the concerned officials.
Another astonishing aspect was that exports and supplies had not been physically verified before issuing refund to these units. In the same manner, data verification including profit analysis of suppliers in case of refund issued to commercial importers was also not done properly.
The DG intelligence strongly recommended to FBR Chairman to immediately constitute a fact-finding committee to ascertain the role played by sales tax staff in issuance of illegal refunds, and fix responsibility on the involved officers.
About the legal status of the scam, sources said that the Directorate, on the basis of material evidence, has reason to believe that units have committed tax fraud, including offences warranting prosecution under Sales Tax Act, which resulted in arrest of these persons. All arrests made under Sales Tax Act have been carried out in accordance with the relevant provisions of the Code of Criminal Procedure, 1898 (Act V of 1898).
Under Sales Tax Act, where the person suspected of tax fraud or any offence warranting prosecution is a company, every director or officer of that company whom the authorised officer has reason to believe is personally responsible for actions of the company contributing to the tax fraud shall be liable to arrest. Provided that any arrest shall not absolve the company of the liabilities of tax payment, default surcharge and penalty imposed.
The detection of this scam is pointing towards the flaws in the sales tax refund system. It seems that the sales tax frauds are still committed due to loopholes in the system and phenomenon of fake/flying invoices had remained unchecked during the last few years.
Sales tax officials had claimed in the past that fake invoices were no more applicable in the field due to following reasons: First, the system clears only those invoices where input tax payment has been verified. Second, sales tax zero-rating of five major export sectors had made the business of refund claims on fake invoices less attractive. Third, the board had issued instructions to the field formations to remain vigilant for controlling the menace of fake invoices in their respective collectorate.
Contrary to this, the recent tax fraud cases in Gujarnwala clearly point towards system's flaws, which help in creation of bogus refunds.
In the past, it had been found that the STARR had failed to check the refund claims filed on the basis of forged documents/fake sales tax invoices. Most of the verifications, calculations and processing was done through computer. The software called STARR refund automation program was enhanced with the introduction of 'STREAMS' (Sales Tax Risk Evaluation and Management System). It was found that refunds were even issued in cases where the computer program had detected discrepancies in the documents submitted by the exporters.
Referring to past cases, sources said the STARR program rejected the refund claims, but the same were issued after obtaining clearance from the auditors.
It is important to mention that the FBR has tried to control the menace of fake/flying invoices using 'risk based analysis system' and blocked the suspected refund claims of fake suppliers operating in all the four provinces. The claims filed on fake invoices were thoroughly scrutinised time and again. The board had busted several organised gangs involved in filing bogus refund claims during last 1-2 years. Suppliers showing sketchy documents in all four provinces were detected during the period under review.
It was brought to the notice of the board that a number of suppliers involved in business of fake invoices were scattered all over the country. The analysis of data revealed that the supplies of certain persons suddenly increased 10 times after zero-rating of five sectors. The supplies of 8-10 million took jump to over Rs 90 million, which promoted the authorities to investigate the matter. It was done to claim bogus refunds on fake documents, showing extraordinary supplies. In most of the cases, the suppliers did not exist, as collectors were unable to trace their permanent addresses.
During the exercise, it was detected that a number of fake invoices were issued from Faisalabad, Lahore, Rawalpindi and Gunjranwala for claiming sales tax refund. The scrutiny of tax record along with check on STARR enabled the authorities to check the bogus claims.
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