The Sales Tax Automated Refund Repository Computer System' (STARR) of the Federal Board of Revenue (FBR) has issued fraudulent sales tax refunds to the tune of Rs 4.7 billion in the past, pointing towards third-party audit of the system to check the authenticity of the program.
Sources told Business Recorder on Wednesday that the FBR has compiled a report on the performance of STARR, reflecting serious loopholes in the refunds payment system. Despite serious problems with the system, the FBR is still using this system to verify refund data before issuance of sales tax refund. The STARR, most widely used system, which was launched in 2002, replaced manual checking of documents.
It has over 30 checks to clear a refund case. The system failed to check the fraudulent payment of refunds. In 2003-04, persons who obtained refunds of Rs 1739 millions disappeared in 2004-05. These refund claimants are untraceable, who widely misused the STARR system. Similarly, persons, who obtained more then Rs 3.0 billion as refund stopped their business activities in 2005-2006. In most of the cases refunds were obtained on fake invoices and claimants are untraceable.
The FBR has recommended a system-based third-party audit to thoroughly analyse the data to check the loopholes in the refund payment system of STARR. The FBR report has clearly said that the STARR system failed to check the fraudulent payment of sales tax refunds. The system-based third-party audit would also check the authenticity of the system, the FBR report added.
When contacted, a tax expert said that the FBR now seemed to be seriously analysing this STARR system to take corrective measures in payment of sales tax refund. Before 2002, sales tax refund claims were processed manually. When general sales tax (GST) in VAT mode was introduced in 1996, quite a large number of exporters declared huge stocks on which they received refunds. It was considered that manually processing is time-consuming.
Another view was that since it was a lengthy process and as such was not serving well the greedy elements in the department as well as in trade. Keeping in view this background, tax managers decided to capture invoices on the diskettes, they built around 58 checks relating to returns import data and export data. This system was given name STARR. The STARR checks were reduced from 58 to 30 from time to time. Those checks were shared with the stakeholders.
The team which initially developed the system was IT developers who have since the departments. It has been alleged that inadmissible refunds were issued in connivance of the tax officials by ignoring STARR objections. Most of these officials have left the department.
According to an estimate, during 2002-2005 the refund amount increased from Rs 20 million to Rs 50 million per annum. The increase in refund should have been in accordance with the increase in export sales. The export sales during this period registered a growth of around 15 percent whereas refunds growth was not less than 50 percent over the previous year.
In this period, a hit-and-run mischief was visible. The people issued the invoices and would then disappear. The data available with FBR shows that the blacklisted people had issued invoices involving sales tax of Rs 20 billion. No empirical data has been made available to show how much refund was already issued on these invoices. It is interesting to note that all major refunds scams surfaced when the STARR system was introduced.
It is claimed that everything is electronically processed but amazing the addresses of the supplier and the refund claimants and their buyers bank account are not available or have not been investigated who obtained refund fraudulently. The department merely blacklisted such people but did nothing to recover the amount, the expert said.
The expert was of the view that the board had not given any warnings to the STARR managers or investigated massive misuse of STARR due to unknown reasons in the past.
In 2005 the government sensing the defective STARR system took out of the box solution and introduced zero-rating in 2005. With zero-rating it was hoped that refund issue would seize to exist. Contrary to this, the refund worth billions of rupees continued to be filed by the zero-rated sectors and many claims were deferred by the department.
The expert claimed that all powers pertaining to STARR system had been given to the computer operators in Collectorates and those sitting in the Pakistan Revenue Automation Limited (PRAL). Despite all the scams, STARR has not been redesigned to block the bogus refunds. At the same time, there is a need of administrative changes to depute new STARR managers for supervising the system.
With the reform process in a high gear and redesigning the administration designed, professionals expect the FBR to make a viable dependable electronically processing of refund if the concerned people are not the beneficiaries of STARR, the expert added.
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