‘War on tax fraud’: Pakistan faces revenue gap of Rs3.4tr due to tax evasion & fraud, says finance ministry

Pakistan is currently facing a tax gap of Rs3.4 trillion accounted for by tax evasion and tax fraud, according to a study conducted by the Federal Board of Revenue (FBR), with the government resolving that a massive enforcement crackdown has been planned and would be implemented in coming weeks.

Finance Minister Muhammad Aurangzeb along with Minister of State for Revenue and Chairman FBR conducted on Thursday a press conference to brief about the study regarding sales tax evasion across different sectors of the economy, labelling the impending crackdown on tax evasion as a “war against tax fraud”.

“It has been found that there exists a tax gap of Rs3,400 billion accounted for by tax evasion and tax fraud,” a press note shared by the Finance Division after the press conference stated.

Massive enforcement crackdown has been planned and would be implemented in coming weeks.

The note added that many of the registered entities were also involved in misreporting of turnover, excess input tax claim, and use of fake and flying invoices.

Fear comes alive: all salaried persons earning over Rs50k a month to bear higher taxation in FY25

“The sales tax in Pakistan is collected in VAT [Value-Added Tax] mode as per best international practices. Under this mode trust is reposed in business entities for collection of sales tax from the buyers. It has been observed that this trust is being breached at massive scale.”

According to the note, the finance minister shared the findings of the study pertaining to iron and steel, cement, beverages, batteries, and cement sectors.

“It has been found that the malpractices prevail all across the business sectors. It was also observed that majority of the entities are claiming input tax in-excess of industrial benchmarks and best industrial practices.”

IMF briefed about tax gap, revenue collection position

It was also apprised that due to the huge prevalence of tax evasion, enforcement measures including arrests, and registration of criminal cases along with improvements in the reporting system were intensified during last financial year, resulting in significant decrease in the claim of fake input tax in FY23-24 across all the sectors.

“However, despite these efforts massive evasion still persists.”

To counter the evasion, the note said more intensified enforcement measures had been planned.

Evasion can be gauged from the fact that only 14% of 300,000 manufacturers liable to be registered are registered.

The finance minister apprised that the FBR had already identified and gathered evidences of tax fraud in different sectors which included 11 cases of battery sector, 897 cases of iron and steel sector, and 253 beneficiaries of fake input claims on the purchase of coal.

FBR transformation plan, digitisation: Business groups, tax compliant cos taken on board

“Large number of cases have been identified for criminal proceedings on account of sales tax fraud inclusive of above-mentioned sectors.

“The persons in the supply-chain of these cases have manipulated the input tax adjustments, debit and credit notes and other means to defraud and dodge the return filing system. The total amount of sales tax fraud committed is Rs227 billion.”

The finance minister also stated that sales tax fraud is a criminal offence and carries strict action under law which includes arrest and imprisonment of up to 10 years other than heavy penalties and fines.

Action would be taken against owners of the business, incases of sole proprietorships, partners incases of firms (association of persons) and directors, CEOs, CFOs and other authorised persons of the company.

The press note also shared sector-wise findings in the FBR study.

Iron and steel

It was observed that out of the 33 large businesses engaged in iron and steel sector, representing more than 50% of total reported sales, were found in evasion of sales tax by claiming excess input tax of Rs29 billion.

“The major source of fake and dubious input tax is claim on the purchase of scrap metal and coal,” it said.

Batteries

The study of the 6 active cases across the battery sector, representing 99% of total reported sales revealed that a major part of the sector had claimed excess input tax adjustment of Rs11 billion than best practices within the industry.

“The major source of fake and dubious input tax is claim on the purchase of lead,” the note said.

Cement

The study of the 19 active cases across the cement sector found that a part of the sector had claimed excess input tax adjustment of Rs18 billion in FY23-24 than best practices within the industry.

The major source of fake and dubious input tax is claim on the purchase of coal, according to the study.

Beverages

The study of the 16 active cases engaged in the manufacturing of aerated water, representing 99% of the total reported sales of aerated waters revealed that some of these cases had claimed excess input tax adjustment of Rs15 billion in FY23-24 as compared to industrial benchmark of the sector.

“The major source of fake and dubious input tax is claimed on the purchase of sugar, plastics and services,” it said.

Textile

The segmental study of the 228 active cases engaged in spinning, weaving and composite units found that many of the cases had claimed excess input tax adjustment of Rs169 billion than best practices within the industry.

“The major source of fake and dubious input tax is claimed on the purchase of services, chemicals, coal, packaging and other irrelevant materials,” the press note said.