Input tax adjustment claims: strict monitoring saves FBR Rs 44 billion in two months

The special monitoring team of the Federal Board of Revenue (FBR) has saved huge amount of Rs 44 billion during two months of May-June (2012), as input tax adjustment claims drastically reduced due to strict checks and chain audit of different sectors, barring fraudsters to file inadmissible claims.
Sources told Business Recorder here on Tuesday that the saving of Rs 44 billion by preventing illegal input tax adjustments during two months of May-June (2012) has been instrumental in crossing the psychological barrier of Rs 1915 billion for 2011-2012. The exercise initiated by the Special Monitoring Team of FBR and chain audits carried out by field formations in pursuance thereof, also had a significant deterrent effect so far as input tax credit is concerned.
Earlier, up to April, 2012, Rs 115 billion at an average was claimed as input tax credit during a month, whereas during May and June, 2012, input tax adjustment of Rs 89 billion and Rs 97 billion was claimed respectively, which means Rs 44 billion less during the last two months of the fiscal year 2011-12 in comparison to the average input tax adjustment claimed during first ten months of this period.
The reduction of input tax adjustments from Rs 115 billion in April 2012 to Rs 89 billion in May and Rs 97 billion in June, reflects a saving of Rs 44 billion. The performance of the Special Monitoring Team of FBR reflected that Rs 44 billion less input tax adjustment claimed during May and June 2012.
The contravention cases of Rs 9.424 billion has been made out against various taxpayers consequent to pointation of FBR Special Team The recoveries of Rs 608.24 million has been made consequent to the pointation of FBR Special Monitoring Team. The Special Monitoring Team of the FBR comprises Dr Muhammad Zubair, Chief FBR, Khalid Mahmood Second Secretary FBR, Mian Muhammad Ibrahim Second Secretary FBR, Muhammad Azhar Kayani Second Secretary FBR and Irfan Zubair Second Secretary.
Details revealed that Input tax adjustment/credit is considered a lynchpin in tax systems in VAT mode, all across the globe. In Pakistan also, this has been a "Grey Area", which somehow remained neglected by tax authorities. It has been observed that average net tax payment remained below 4%, and resultantly trivial net tax payment due to hefty input tax adjustment, which exceeds Rs 1150 billion during first ten months of current fiscal year.
Chairman, FBR, sensing the importance of establishing backward linkages in respect of hefty input tax credits claimed by various manufacturers & exporters, constituted a Special Monitoring Team at FBR. The Special Monitoring Team, while conducting desk / digital audit of taxpayers registered in various categories identified key areas where there is a suspicion that inadmissible/excess input tax credits could have been claimed to suppress output tax liability and thereby causing loss to the exchequer to the tune of billions of rupees.
Firstly, the wholesalers/ suppliers are generally believed to be a "weak link" in the supply chain, as they make very trivial net tax payment, and usually adjust entire amount of output tax against bogus/ fake input sales tax. These wholesalers, at the time of obtaining ST registration, declared their capital as Rs 1 million or less, but make taxable supplies in excess of Rs 20 million during a fiscal year. The Team identified 4500 such wholesalers during last three fiscal years. The expected revenue yield is Rs 15-25 billion.
Secondly, the commercial importers-cum-suppliers making supply of imported inputs in the "same state". However, Customs Database of PRAL does not show any import GD, which transpires that they claimed input sales tax against fake I bogus import documents. The expected revenue yield is Rs 500 million.
Thirdly, the section 8-B (1) of the Sales Tax Act, 1990, restricts a "Manufacturer" from deducting input tax as in excess of 90% of their output tax liability. However, snap audit conducted by the FBR Team revealed that a large number of "Manufacturers" have claimed input tax credit much in excess of 90% of their output tax liability. The expected revenue yield is Rs 30-50 billion, reflecting a major achievement.
Fourthly, the taxpayers falling within the jurisdiction of Large Taxpayer Units (LTUs) are declared withholding agents of Sales Tax. The snap audit conducted by the FBR Team revealed that a large number of NTN holders, despite having deducted Income Tax @ 3.5% of the gross value of supplies, did not deposit sales tax @ 1% of the value of taxable supplies. The expected revenue yield is Rs 150 million.
Fifthly, the government/semi-government organisations and autonomous bodies are required to withhold 1/5th of the amount of sales tax due against the supplies received by them, at the time of making payment to respective suppliers. However, in a number of cases, either the 1/5th of the sales tax amount has not been withheld by procuring agency or the same has not been deposited by them in the government treasury. The expected revenue yield is Rs 500 million.
Sixthly, the Special Monitoring Team identified a number of professional refund claimants who had switched-over to export of items/commodities other than textiles after zero-rating of textiles and inputs relating thereto. Likewise, the FBR Team identified a number of cases where there is a "Mismatching of Buyers and Suppliers invoices", especially in textile sector, to avoid payment of 4% sales tax payable on supplies made by a textile unit to another.
Seventh, the FBR Team identified hefty input tax credits claimed by Paper industry, despite that majority of their inputs are non-tax paid. Consequent to the pointation made by the Special Monitoring Team of FBR, the field formations, pursuant to Board's instructions, started audit of taxpayers registered within their jurisdiction under the aforesaid categories. As a result of detailed chain audit, the field formations have so far made out contravention cases involving an amount of Rs 9.4 billion, out of which more than Rs 608 million has been recovered till June 30, 2012.
The exercise initiated by the Special Monitoring Team of FBR and chain audits carried out by field formations in pursuance thereof, also had a significant deterrent effect so far as input tax credit is concerned. Earlier, up to April, 2012, Rs 115 billion at an average was claimed as input tax credit during a month, whereas during May & June, 2012, input tax adjustment of Rs 89 and 97 billion was claimed respectively, which means Rs 44 billion less during the last two months of the fiscal year 2011-12 in comparison to the average input tax adjustment claimed during first ten months.