Unlawful input tax adjustments: errors in generating ST data chief reason, FBR informed

The Federal Board of Revenue has discovered an astonishing fact that unlawful input tax adjustments are not due to any illegality, but were due to errors in generating sales tax data by the department. Sources told Business Recorder here on Saturday that a Chief Commissioner of Regional Tax Office (RTO) of Karachi has informed the FBR about the actual reasons responsible for illegal input tax adjustments.
This is a very unique report of the field formation that the errors in the processing of sales tax data are the main reasons of unlawful input tax adjustments. According to him, such kinds of illegal sales tax adjustments are not due to any illegality in the whole process of claiming adjustments. However, error in the sales tax data has resulted in generating reports showing inadmissible input tax adjustments. The data related errors during calculation of input tax adjustment have been reported by the field formations to the FBR for rectification. Since the last more than one year, the Board has been sending lists purporting to show unlawful adjustment of input tax taken by various registered persons.
In certain situations; analysis of data has revealed that unlawful adjustments are not due to any illegality, but were due to errors in generating the data, Chief Commissioner RTO-II Karachi added. According to the report, FBR is examining the issue of illegal tax adjustments and also considering proposals in this respect for the federal budget 2012-2013. A comprehensive report on the issue of unlawful adjustment and the phenomenon of fake and flying invoices which is causing recurrent losses of billions of rupees to the exchequer every year has been prepared by the Chief Commissioner RTO-II Karachi for consideration.
Analysis of data has revealed that unlawful adjustments are not due to any illegality, but were due to errors in generating the data, as enumerated below: Firstly, the section 7(1) of the Sales Tax Act, 1990 allows a registered person to claim an invoice within six succeeding tax periods if he could not claim it in the relevant period.
Secondly, the first proviso to section 8B (1) of the Sales Tax Act, 1990 requires a registered person to adjust input tax on fixed assets in twelve equal monthly instalments. Thirdly, a registered person is entitled to claim federal excise duty (FED) paid on services provided by banks, insurance companies, telecommunication providers and courier companies, which is collected in VAT mode according to SRO 478(1)/2009 dated June 13, 2009.
Fourthly, many suppliers working under Special Procedures usually do not file Annexure-C to the Sales Tax Return. Fifthly, certain other suppliers (such as utility companies like KESC, SSGC, Terminal Operators, etc), due to large number of buyers or some other reason, do not provide invoice data of each and every buyer.
These data related errors while calculating import of illegal input tax adjustment were brought to the notice of the Board from time to time, and some of the proposed changes in the Pakistan Revenue Automation Limited (PRAL) system reportedly have been made, but many corrections are still awaited. After such corrections are made, it is believed that a good enough proportion of the apparent unlawful adjustment will be eliminated, sources said.
Sources said that the phenomenon of unlawful adjustments is linked to the more serious issue of fake and flying invoices. The terms fake and flying invoices have not yet been defined, but commonly, "fake invoices" refers to the illegal activity where a person issues sales tax invoices without actually having sold any goods, while the term "flying invoices" is used when he sells goods to someone but issues invoices to someone else.
Sources further said that the phenomenon is not a new one and has been around ever since sales tax was converted to VAT-mode. However, it was not so wide spread earlier because (I) initially, only manufacturers were required to be registered for Sales Tax, and (ii) refund was given only against exports. However, over time, this phenomenon has mushroomed exponentially as more categories of persons got registered in sales tax (especially as commercial importers and wholesalers), as local zero-rating of supplies and other distortions in the Sales Tax Regime were introduced, and misguided "taxpayer-friendly" policies like banning of audit for several years were followed. Now it has grown to such huge proportions that it is seriously threatening national revenue collection as well as causing grave distortions in the economy.
Sources said that the extent of this phenomenon can be gauged by the fact that recent FIRs lodged by various FBR field formations show evasion of Rs 25-30 billion due to issuance of fake invoices. Similarly, it is estimated that the "hijacking" of Goods Declarations by fake commercial importers, evasion of Rs 25- 30 billion takes place. This phenomenon manifests itself in a number of different forms:
1. FAKE INVOICING: The simplest form of fake invoicing is where a person gets sales tax registration (or takes over an existing registration) and simply starts to issue invoices without any goods, against some commission. By the time such fraud is detected, substantial loss to the exchequer already takes place.
A slightly more sophisticated form is where the person creates a group of dummy firms which issue invoices to one another. By this strategy, the seller of fake invoices is not detected by the sales tax computer system as unlawful input tax adjustment. However, if the chain of suppliers is followed backwards, it will be found that no significant sales tax has been paid at any stage, sources maintained.
2. FLYING INVOICES: In case of flying invoices, the simplest form is where a commercial importer imports various goods on payment of customs duty and sales tax, including sales tax on 2% value addition. He sells the goods in the local market without issuing invoices, but sells the invoices to other persons who need to claim greater input tax adjustment, on payment of certain commission.
A similar activity takes place when dealers purchase goods from established manufacturers/suppliers (for example iron and steel from Pakistan Steel Mills; POL products from OMCs/Refineries etc), sell the goods to persons who don't want or need invoices and sell the invoices to other persons who misuse them.
Some persons registered as commercial importers do not make any actual imports but show fake imports, either without any fake GD numbers, or GD numbers belonging to other importers. Since the sales tax computer system does not cross-match sales tax registration numbers of importers with the GDs, they are not detected automatically by the system. This phenomenon is spreading fast, sources stated.
ACTIONS TAKEN BY RTO Karachi-II: This RTO has been taking vigorous actions against illegal input adjustment and fake and flying invoices in order to minimise and discourage the phenomenon and loss of revenue. Sources said that the monitoring of sales tax returns filed every month was a neglected activity in the restructured setup. Previously, there used to exist Processing and Assessment Divisions in the erstwhile Sales Tax Collectorates. These Divisions were responsible for monitoring sales tax return filing and to take action against non-filers and short filers, etc besides detection of suspicious and abnormal activities. In order to reactivate such monitoring, Processing & Assessment Cells have been created in each Zone of this RTO, which are showing appreciable results. The RTO have detected several cases of Sales Tax evasion involving fake and flying invoices, as reported to Board through various letters.
After detection of registered persons involved in fake and flying invoices, this RTO has taken prompt action, first to get them blocked to immediately prevent further loss of revenue, and thereafter getting them blacklisted after issuance of show cause notices.
Sources said that the seller of fake invoices is usually not traceable at the declared address. Even if he can be apprehended, it may not be possible to recover the full amount of tax evaded, as he has sold the invoices against certain percentage of commission and has not received the full amount. However, due to action taken, especially due to blocking of registration of buyers of fake invoices, many registered persons have approached this RTO for voluntary payment of Sales Tax involved in such invoices. The plea taken by many of these buyers is that they purchased the goods through a broker who provided the invoice, Chief Commissioner RTO-II Karachi report added.