FIRs against tax officials

The Federal Board of Revenue (FBR) has decided to lodge FIRs (which is the first step towards initiating criminal proceedings) against tax officials involved in sanctioning illegal Sales Tax refunds in mega scams unearthed by the Directorate-General of Intelligence and Investigation.
Viewed in the wider perspective, the decision to start criminal proceedings against the officials involved, is reflective of how serious the problem must have become that called for resort to criminal law to set things right, instead of departmental action.
Sources have told Business Recorder that FBR is currently engaged in finalising list of sales tax officials who had verified bogus documents and fake invoices for issuance of huge refunds to the organised gangs of exporters. (Does this mean that there are "organised gangs" of exporters operating in collusion with the unscrupulous elements in FBR?)
The DG Intelligence is said to have reported several such cases to FBR from time to time in which Sales Tax officials had issued refunds even to non-existent companies! Such cases mostly relate to Karachi, NWFP and Punjab. According to a directive issued to the Member, Sales Tax, legal proceedings should be started in all cases of illegal ST refund, forwarded by DG Intelligence where fraud has been reconfirmed through audit.
The FBR has further directed that the Sales Tax Wing should immediately lodge FIRs against claimants of illegal refunds as well as against the Sales Tax officials involved in such scams. The Directorate General of Inspection and Internal Audit has reportedly detected 37 companies in Karachi which claimed illegal sales tax refund of over Rs 2.2 billion on the basis of fake documents.
Meanwhile, the DG Intelligence has confirmed issuance of illegal sales tax refunds of around Rs 7.9 billion to another 26 companies on forged/fake documents. Investigations have revealed that these 26 companies had obtained illegal sales tax refund in 2005 on the basis of fake invoices. It has also been confirmed that the Sales Tax officials were involved in the scam.
Further, certain units are said to have claimed bogus refunds in Karachi against non-existent supplies, fake/flying invoices and misuse of Sales Tax Automated Refund Repository Computer System (STARR), which incidentally was supposed to be a foolproof system.
While we highly appreciate FBR's decision to initiate at long last criminal proceedings against companies and officials involved in defrauding the national exchequer of billions of rupees, why such action was not taken earlier remains a mystery. Secondly, it is nearly impossible to execute such "inside" jobs without the high-ups being unable even to get a whiff of it.
Who were the officials who shielded the wrongdoers - both the exporters and the Sales Tax officials - for so long, and why? It is true that tax authorities have fashioned methodologies from time to time to plug the loopholes that allow for tax evasion. One of the methods adopted in 2006 was the compulsory filing of special monthly returns.
The operating principle was that the field formations would compare the data provided in the "special returns" with the actual market information, to detect sales tax evasion. But it did not work to the department's satisfaction. Another ingenious methodology most tax evaders employ, obviously with the help and blessings of the "insiders," is to seek fresh registration at collectorates where the record of their past malpractices is not available.
They also use CNICs of different individuals to avoid being traced out. The compilation of a "cleansed" NTN Master Index containing 2.2 million national tax numbers had raised the hope that such malpractices at long last would come to an end, or would be drastically curtailed.
However, the exercise has not achieved success. Incidentally, sales tax has become one of Pakistan's key revenue generators. Starting with a negligible contribution of 1.7 percent to GDP in 1990-91, Sales Tax had by 1999-2000 grown to nearly 4 percent of the GDP, and it must have quadrupled since then. It is true that the taxation system has since been restructured, streamlined and made more taxpayer friendly, but such massive frauds continue to take place nonetheless.
Incidentally, legal loopholes in tax laws can only be exploited in collusion with the "insiders." If the FBR succeeds in putting its own house in order, the chances of taxpayers, whether companies or individuals, committing such mega frauds will be minimised, if not totally eliminated.
Sources have informed this newspaper that in some cases the tax officials did not carry out the profile analysis of suppliers while sanctioning refund claims to commercial exporters under the Refund Rules 2006. Did any FBR high-up take notice of the illegality? Secondly, the scams were detected as far back as 2005, but the action is being contemplated now after three long years. The mystery needs to be explained by FBR high-ups.