Huge losses through taxes evasion: FBR unearths unique techniques used by importers

The Federal Board of Revenue (FBR) has unearthed the unique techniques used by commercial importers for committing massive evasion of sales tax and income tax, causing huge losses to the national kitty.
Sources told Business Recorder here on Tuesday that Abdul Wadood Khan, Advisor to the FBR Chairman, has compiled a special report on evasion techniques used by commercial importers and recommended immediate amendments in the tax laws to check revenue leakage from this potential area.
Advisor has strongly recommended to the FBR to make 2 percent value-addition by the commercial importers as non-adjustable. Moreover, the commercial importers who have been indulging in massive tax evasion through different malpractices and also cause adverse balance of trade do not deserve any kind of incentives. As a second option, the rate of 2 percent may be reduced to 1 percent non- adjustable through amendments in the relevant law. The proposals would be taken up in the next Board in Council meeting for consideration.
According to the FBR report, commercial importers have been involved in massive sales tax and income tax evasion, in an organised manner. The management of a good number of evasion-prone units has adopted various kinds of methods to evade huge tax liability.
One of the techniques used by commercial importers is to seek a single registration by merging registrations of the same product units or same owners and filing a single return by under-declaring their tax liability in an Regional Tax Office (RTO) and Large Taxpayer Unit (LTU) away from the location of the units concerned which indulge in massive evasion with impunity.
By moving one's return filing from the actual place/jurisdiction of the RTO or LTU concerned in the name of so-called convenience of their manipulated Head Office premises away from the original jurisdiction to another RTO or LTU. For example, factories/units operating in Faisalabad, Gujranwala, Sialkot, Rawalpindi shifting their filing of return in Lahore. Similarly, shifting of their jurisdiction from Quetta, Hyderabad or elsewhere to Karachi in the name of facilitation and indulging in huge evasion with impunity. The change in jurisdiction has been done to avoid submission of records and actual tax papers to evade the authorities.
Thirdly, this phenomenon, allowed by FBR and assisted by field formations over years in the name of taxpayers' facilitation, has caused weakened and ignorant enforcement. These tax evaders seemed to be totally ignored by the tax officials. It is shocking to note that in certain instances even the Collector, Additional Collectors and Deputy Collectors/Additional Collectors are just not aware of the actual behaviour of the massive tax evaders as they lose effective physical controls and monitoring of the tax evaders, the report said.
The same also applies to the Direct Taxes enforcement. This practice needs to be discontinued forthwith in view of heavy revenue potential in case original jurisdictions are resorted at the earliest. Details showed that a special procedure for payment of sales tax by importers has been promulgated vide SRO 480(I)/2007.
According to the said SRO tax on account of minimum value-addition (value-addition tax) shall be levied and collected at import stage on goods as specified aforesaid @ 2 percent of the value of goods in addition to the tax chargeable under section 3 of the Sales Tax Act or a notification issued thereunder.
The value-addition tax paid at import stage shall form part of input tax and the importer shall deduct the same from the output tax due for the tax period subject to limitations and restrictions under the Sales Tax Act for determining his net liability. The excess of input tax over output tax shall be carried forward to the next tax period as provided in section 10 of the Sales Tax Act. The excess input tax over output tax which is attributable to the tax paid at import stage shall not be refunded to a registered person.
The computer profiles of commercial importers were obtained from the computer wing of FBR for comparative analysis of the payment of sales tax for the year 2007-08 visa-a-vis 2008-09 and it was observed that the sales tax paid during the year 2007-08 stood at Rs 2.548 billion as against total output of Rs 22.347 million whereas, input for the said period amounted to Rs 21.173 million which is almost 95percent of the output for the period under review. The sales tax payment for the year 2008-09 stood at Rs 3.4 billion out of total output of Rs 48.213 billion whereas input claimed during under reference period is Rs 48.928 billion which is almost 101.5 percent of the output tax.
The report further highlighted that the referred figures depict a dismal picture besides it is pertinent to mention here that vide section 8B of the Sales Tax Act 1990, it is stipulated that a registered person can only adjust input tax to the extent of 90 percent of the output tax and the rest of the input tax shall be carried forward which inter alia means that in any case 10 percent of the output tax is to be deposited in the national exchequer. However, the commercial importers have been excluded vide SRO 647(I)/2007 from the purview of section 8B due to which the commercial importers can fully adjust their input tax. It would not be out of place to mention here that the 2percent value addition tax is adjustable and is not serving the purpose of the tax collected on the value addition.
In the light of the above-stated legal and factual position it is recommended that 2 percent value-addition tax should be made non-adjustable in order to boost the government revenue so badly needed. Moreover, the commercial importers who have all along been indulging in massive tax evasion through different techniques do not deserve any incentives. In the alternative, the rate of 2 percent may be reduced to 1 percent non-adjustable, if found suitable the proposal may be discussed in the next meeting of the Board in Council, as this may result in substantial increase in revenue collection during 2009-2010.