A unique tax scam

The FBR has unearthed a unique ring of sales tax officials at Karachi, involved in a mega scam in that the racket was entirely self-operated without "outside intervention" of the companies whose documents they had forged, submitted for refund claims and encashed refunds of millions of rupees.
A Karachi based source has informed Business Recorder that the "gang" used to obtain huge refunds on the strength of fake documents prepared by them of top business establishments which were totally unaware of the flagrant misuse of the data they had submitted to the tax department.
This is the first case of a mega scam in which tax officials themselves were using the names of Karachi-based multinationals and top business units to fraudulently file, process and cash refund claims by feeding information, including the sales tax registration numbers of the companies concerned. An intriguing aspect of the whole affair is that none of the affected companies knew that the tax officials were committing fraud in their name.
The well-knit gang also included some bankers and officials of the STARR computer system. Sources have informed this newspaper that the gang included a deputy collector, an assistant collector, a senior auditor, a deputy superintendent, an inspector and a UDC.
The fake claims were prepared at the residence of one of the key members of the gang, and the data was entered at the Refund Receipt Counter, but the original files were kept at the residence of the inspector. It has been further learnt that the gang became active only when things were favourable for encashing fraudulent refunds. The inspector and the UDC are said to have been the masterminds of this unprecedented racket. The UDC, posted at the STARR counter, transferred the record of such cases on behalf of the inspector. Some other unscrupulous elements were also reported to have prepared fake claims amounting to around Rs 35 million, and were ready to file more fraudulent claims.
In addition, preliminary work for refund of the deferred amount of Rs 50 million in the case of 12 units had also been done to file more fake claims. Interestingly, even the export figures were not genuine because fake/forged shipping bills were prepared by the gang members in connivance with some officials of the Export Collectorate.
Above all, according to sources quoted in our report, some officials of even the Enforcement Collectorate, the main watchdog, were working in sync with the gang! Needless to add here that this could well be the tip of an iceberg.
The gang's well co-ordinated functioning, and its hush-hush modus operandi provide a disturbing peep into the enormity of misuse of official data committed for defrauding the exchequer of millions of rupees, particularly at a time when FBR high-ups have been thinking up novel methodologies to increase revenue generation. According to a recent news report, moves are already afoot to increase the revenue target set for FY 2008-09 from Rs 12.5 trillion to 13 trillion, by setting an additional target of Rs 50 billion, to bridge the widening gap.
Mounting liquidity crunch in public sector has meanwhile resulted in a huge intra-departmental circular debt that is threatening to bring governance to a halt, or at least to irretrievably dent the government's credibility. Analysts have been warning governments of the mounting threat of default if they do not exercise the requisite level of financial discipline.
(Transparency International, on the basis of its internationally recognised Corruption Perception Index (CPI) had last year ranked Pakistan 142nd among 163 countries.) If such scams as the one our report has highlighted go unchecked, it will further lower our tax-to-GDP ratio which at approximately 9.5 percent, is already one of the lowest in the world.
It should be mentioned here that tax administration reforms, initiated about five years ago with a $150 million World Bank grant, have failed to produce a tangible impact because our tax-to-GDP ratio remains below double digits, which is way below the ratio set by IMF for low-income states like Pakistan. This means that we do not measure up even to the minimum criterion set for a low-income state. Can the country afford such scams and that too at the hands of functionaries who are supposed, instead, to increase revenue through maximum collection?
The major causes of this sad state of affairs in Pakistan include tax evasion (with or without insiders' help) and the partially or untapped sectors of economy such as agriculture, etc. Such financial scams, particularly at the lower bureaucratic levels, do not see the light of day in Pakistan largely because of the age-old principle of "peti bandi." (This is discernible also at higher echelons in the form of "old boy" clubs - an unsavoury vestige of our colonial past.)
Sources quoted in our report have suggested that the most credible test for checking genuineness of such claims is that the agents should be asked to produce the original CNICs of owners/proprietors as well as the original sales tax registration certificates of the claimant companies/units.
Secondly, the verification of bank accounts, identification of the account holders and their relationship with the actual owners/proprietors of the registered companies/units should be done to ascertain genuineness of the claim. Thirdly, a fair and full tracking of exports declared in such cases can also help check the accuracy of the claims.
While we believe that implementation of these suggestions can produce results; but this will be possible only when rules and regulations are scrupulously observed. In a "gang-ish" environment these suggestions may not work as smoothly as the sources suggesting them have indicated.
We propose that a more rigorous system of checks and balances should be set up by FBR high-ups to obtain results. This calls for the weeding out of the blackest of the black sheep, but without any resort to a witch-hunt, to set the taxation system right, as many other fields of the national economy should be at the same time. Instead of adopting a hush-hush approach to the scam as FBR high-ups have reportedly done, they should order an open inquiry into the mega scam.