KARACHI: The Federal Board of Revenue (FBR) has started scrutinizing the cement sector after imposing a hefty penalty on one of country’s prominent cement manufacturers, for allegedly claiming input tax against fake coal purchase invoices.
The case revealed an intricate web of blacklisted companies and paper transactions designed to evade sales tax payments.
Sources said that this case has intensified FBR’s efforts to crackdown on fake input tax claims in Pakistan’s cement sector due to its broader implications.
They said that the tax authority was now scrutinizing similar transactions across the sector and the LTO, Karachi has also started conducting audit of another big cement manufacturer.
In the latest development in this case, the Large Taxpayers Office (LTO) Karachi, has issued an assessment order finding that this prominent cement manufacturer had claimed input tax of Rs 14,686,443 against allegedly fake invoices issued by a blacklisted company during September 2022. The investigation was initiated from information provided by Internal Audit Inland Revenue (IAIR), Karachi, which flagged suspicious transactions in the company’s tax returns.
The IAIR, Karachi claimed that this top cement company was identified as a significant beneficiary of this fraudulent chain, allegedly showing fake purchases amounting to Rs 1.6 billion, providing a financial shock of Rs 316 million in sales tax to the national exchequer.
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The modus operandi of this tax fraud, what the IAIR, Karachi revealed that the fraudsters created a chain of fake purchases and sales between multiple companies and then claimed input tax adjustments based on these fake transactions, which the sources termed as a violation under section 73 of the Sales Tax Act 1990 by failing to provide a proper money trail for transactions.
Moreover, it said that they exploited the “active” status on FBR’s portal to lend credibility to their operations and used “withholding adjustments” and “fake credit notes” to generate fraudulent input tax claims.
The assessment order outlined a comprehensive financial penalty structure. The top cement company must repay the principal amount of Rs 14.68 million, face an equivalent penalty for tax fraud, and pay an additional Rs 734,322 as a 5% non-payment penalty. A default surcharge will be added to these amounts at the time of payment.
The order further described the case as a complex supply chain fraud, involving multiple layers of suppliers, disclosing that neither the primary supplier nor any businesses in its supply chain had actually imported coal or purchased it from mining companies.
After examining import data, the tax authority also confirmed that no coal import by any of the involved parties.
Sources said that the investigation has so far identified 12 companies in the supply chain and all of them were already blacklisted by different Regional Tax Offices (RTOs) across the country.
They further said that the tax department had provided multiple opportunities for hearings to this top cement manufacturer since December 26, 2023, but their response was limited to a single request for a 15-day extension through their tax consultants.
Moreover, this cement manufacturer has failed to provide all required documentation including purchase invoices, weight receipts, delivery challans, bank payment proofs, consumption reports, production records, stock registers, and the ports’ gate passes that showed the release of imported coal.
Therefore, it is evident that this cement manufacturer has not followed section 73 of the Sales Tax Act, 1990, which requires payments to be made through proper banking channels.
In addition, this top cement manufacturer could neither provide evidence of physical movement of goods nor documents, showing the coal’s utilization in their manufacturing process, they added.
Copyright Business Recorder, 2024
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