Federal Board of Revenue (FBR) Monday categorically declared that processing of the case may take time but it is certain that all refund cases are audited and subjected to scrutiny. According to the FBR's response to the allegations of issuance of refunds without any scrutiny, the FBR claimed that it has almost resolved the issue of fake invoices.
In different reports issued in the past, the Federal Tax Ombudsman (FTO) had blamed tax officials' involvement in issuance of inadmissible refunds and frauds. The Auditor General of Pakistan (AGP) had also expressed serious concern over the issuance of huge amount of sales tax refunds without verification under Federal Board of Revenue's Expeditious Refund System (ERS) by the Centralized Sales Tax Refund Office (CSTRO).
The FBR has explained that two processes are being used to deal with refund cases. The first is the processing of refunds through automated system for the exporters. In this process, the audit of the refund is conducted after the issuance of refunds. The other system of refund issuance has been devised for the taxpayers not associated with the export sector. The refunds issued through this mode are called the "carry forward refunds." Such refunds are issued once in a year. The audit is conducted before the issuance of such refunds.
The FBR has clarified that taxpayers involved in presenting the wrong invoices are dealt strictly and recovery is made from them. Moreover, penalty and default surcharge is also imposed to curb this practice. Sometimes, the audit process of refunds takes longer period of time which may cause problem of liquidity for the exporter, in case of delayed issuance of refunds. To avert liquidity crunch for the businesses, the refunds are issued and the scrutiny is conducted afterwards.
There are certain inbuilt checks within the system to match the input claim by one person with output claim by another person. To avoid revenue loss, the FBR has almost resolved the issue of fake invoices. Sometimes, it becomes a little cumbersome and lengthy to check the flying invoices but the scrutiny is conducted in all the cases. The FBR has computer analytics system of CREST.
It is baseless to assume that FBR does not conduct the scrutiny. The processing of the case may take time but it is certain that all refund cases are audited, the FBR added.
According to the special audit report on Centralized Sales Tax Refund Office (CSTRO) for 2018-19 issued by the AGP, during special audit of CSTRO, FBR, it was observed that sales tax refunds in huge quantities were processed and sanctioned through the ERS without checking/verification of compliance with the said provision of law, which is a legal requirement.
After discussion with the management and studying the admissibility parameters built in the system, auditors had the considered view that there are no checks and controls placed in the system to stop or defer the refund against the input tax paid on the goods and services used for any purpose taxable supplies made.
Similarly, there are no checks/controls available in the system to stop or defer the refund against the input tax paid on buildings and construction materials, paints, furnishing and office equipment, etc. The lapse eventually resulted into questionable sanctioning of refund claims due to non-verifications of compliance with the said provisions of law while processing of refund claims through the ERS.
The AGP has strongly recommended that the Refund Rules may be amended by inserting a new rule to conduct post refund audit of each claim sanctioned through the ERS.
During special audit of CSTRO, FBR, it was observed that the then chief CSTRO issued sales tax refunds in huge quantities to various refund claimants through the ERS during 2016-17. After introduction of CSTRO by the FBR, only a few cases of sanctioned refund were being selected by the FBR on risk-based selection through computerized post refund scrutiny for conducting post refund audit.
The AGP has the considered opinion that post refund audit is a legal requirement for each refund claim so that the detailed verification is carried out of all input tax payments against which refund has been issued to the selection and a large number of claims sanctioned through system escape the process of verification as provided in the law and refund cases should be deemed to have processed and paid without conforming/adhering/following the controls prescribed in rues and law in an environment with higher risk of malfeasance, the AGP added.
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