RTO Karachi Chief Commissioner's proposals: FBR will finalise policy to check sales tax frauds

The Federal Board of Revenue (FBR) will finalise policy to check sales tax frauds on the proposals of Khawaja Tanveer Ahmed, Chief Commissioner Regional Tax Office-II (RTO) Karachi by shortlisting existing sales tax registrations through abnormal profiles scrutiny and surprise visits to the declared premises.
Sources told Business Recorder here on Friday that the Board is seriously considering proposals of Khawaja Tanveer Ahmed by placing checks in the sales tax registration regime. The RTO-II Karachi has blacklisted sales tax registrations of 810 units (from 2011 to date), involved in fraudulent activities such as business of fake/flying invoices under section 21(2) of the Sales Tax Act, 1990.
The presentation of Chief Commissioner Regional Tax Office-II Karachi is an eye opener for the entire tax machinery which exposes all internal loopholes and fraudulent techniques adopted by fraudsters to commit tax frauds. The changes in the central sales tax registration system on the basis of above proposals would check the frauds at the initial stage of registration.
According to the proposals, there were four major Sales Tax Registration Issues, ie, people get registered as manufacturer without manufacturing facilities. The registrations were obtained in the name of rented premises which are practically "No-Go" areas. The sales tax registrations were obtained in the name of employees by misusing their CNICs. The sales tax registration profiles are changed after tax frauds.
Top sales tax expert informed the FBR that different methods were being adopted by unscrupulous elements to commit tax frauds. Refunds have been claimed on fake or flying invoices and refund claimed by dummy firms, or against invoices of dummy firms and there are cases of misuse of zero-rating facility. The weak registration issues allow dummy companies to obtain sales tax registration. On the other hand, the weaknesses in STARR system do not detect such fraud. There are instances where the rejected refunds were later allowed by appellate authorities.
Under the short-term measures proposed by Khawaja Tanveer, the existing registrations would be short listed through abnormal profiles scrutiny and be physically verified through surprise visit of teams from concerned Regional Tax Office, Director Intelligence having jurisdiction, FBR's own central registration team and trade body officials on behalf of its head/chairman. The FBR will assign which of the above teams shall carry out physical verification in new and existing cases. Another important area is that all existing active registrations should be verified and re-confirmed by the representative Trade Associations. The existing registrations would be cross checked by PRAL for deduction/payment of withholding taxes on all purchases and filing of monthly statements and returns under the income tax/ sales tax.
Chief Commissioner RTO-II Karachi has also proposed that no new registration be allowed without certificate from the relevant Trade Association. The major areas in the income tax frauds included refunds through fake claims/claimants, double refunds through bogus verifications by real claimants, refunds not legally admissible - like presumptive tax regime (PTR) cases- commercial importers converted to manufacturers, claiming inadmissible tax exemptions, misclassification and mis-declaration of business costs and suppression of taxable receipts.
Referring to a case study of multiple cheques refund fraud, Khawaja Tanveer Ahmed informed that the 3000 small refunds cheques each of less than Rs 100,000 were deposited in a single bank. The total refund of approximately of Rs 80 millions was involved and refunds were allowed on the basis of claims on the face of returns.
Sharing short-comings of Income Tax Refunds management, Chief Commissioner RTO-II Karachi informed the Board that the existing manual scattered processing is prone to duplicate issuance of refunds. The PRAL system does not verify prior refund issuance of a taxpayer on all Pakistan basis. Moreover, the taxpayers CNIC or Company's registration number is now mandatory but business bank account details are still not required. The integrated tax management system (ITMS) neither reflects payment of refund on the e filed refund applications nor on e filed return used for refund leading to possibility of duplicate refund.
Giving solution to the income tax frauds, Khawaja Tanveer stated that the ITMS may be amended to provide reporting of refunds issued on the Refund applications and returns. There should be verification of refund issued on all Pakistan data processing center (DPC) basis in a single query. The Board may direct the field formations to mention taxpayers Business Bank accounts on the manually issued refund vouchers.
Under the medium-term proposals to address the income tax frauds, a team of selected officers be constituted to prepare RSD (requirement specification document) by 30th June 2013 for a fully automated refund system of Income Tax. All national level IT companies including PRAL may be allowed to participate in Open Tender for the system, Chief Commissioner RTO-II Karachi added.
Among many case studies, Khawaja Tanveer Ahmed pointed out a case of mis-declaration by the registered person. During last four years, the taxpayer has imported various items to be utilised for construction of hotel and has claimed exemption of sales tax in terms of SRO 575(I)/2006 dated 05-06-2006. Whereas, it was revealed by examination of audited accounts, that they are not engaged in setting up of hotel (3 Star or above) but rather involved in the construction of shopping mall. The exemption on sales tax was inadmissible. Total sales tax payable / recoverable is worked out at Rs 58,215,895 and proceedings under section 11(3) of the Sales Tax Act, 1990 are under way against the unit.
Referring to another case study, Chief Commissioner RTO-II Karachi stated that the unit was registered in 2003 but started showing huge transactions suddenly in 2011. The old STRN having dormant status was suddenly made active without the knowledge of the owners. Modus operandi is to obtain a new NTN with a dummy person but having same business name. The unit was enrolled and started filing huge returns showing fake imports and local purchases running into millions of rupees. Khawaja Tanveer raised a question that who from within FBR gave the User ID & password is to be investigated by PRAL. It should provide the IP address from where the returns were uploaded to reach the real culprit. The PRAL should maintain its own log of events taking place and identify the personnel who made changes in the profiles of above taxpayers. PRAL should improve its security-wall, he added.
Another case study revealed that the unit obtained refund of Rs 4.557 million in October 2011 against exports of only Rs 800,000 under the expeditious refund system (ERS). The discrepancy revealed that the unit has declared exports of cotton waste but claimed input of Plastic granules.
The ERS allowed refund without Quantitative check (mis-match of exports and input consumption) as well as without Qualitative check (commodity exported and input commodity were different.) The examination of ERS data resulted in detection of the scam. The FIR was registered by RTO-II, Karachi.
The unit availed amnesty in June 2012 and paid principal amount. The IT Solution is that the option to enter Pakistan Customs Tariff (PCT) codes of the invoices be made compulsory in order to create a Qualitative check. Goods consumption report should be synchronised with refund processing.