Introduction of institutional & systemic reforms; FTO asks FBR to explain its failure

The Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to explain on March 19, 2020 why the tax authorities failed to timely introduce institutional and systemic reforms including risk management framework to check misuse of registration of "manufacturers".

In this regard, the FTO Office has issued instructions to the FBR members, relevant chief commissioners and directors of intelligence and investigation Inland Revenue, and Customs, here on Tuesday.

While expressing displease over the FBR's attitude, the FTO office said that under Section 11(2) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000, the FBR was required to inform the FTO within the specific time about the action taken on FTO's recommendations.

The record shows that the own motion case was investigated by the FTO office and issued findings and recommendations on May 15, 2010.

So far, the FBR has not informed about the final action taken on the recommendations.

Now, the FTO has fixed the matter for hearing on March 19 to check the status of the implementation of the recommendations of the FTO.

The FTO has directed the FBR to develop a comprehensive risk management framework in the working of IRIS-based Sales Tax Registration Rules and revisit the approved risk engine and scores to mitigate the possibility of any misuse of "manufacturer status" by the registered persons.

The FBR has been directed to arrange audit of all manufacturers, who availed the benefit of SRO 1125(I)/2011 to find out whether "manufacturer status" was granted after fulfillment of requisite conditions and in cases of irregular approvals of "manufactures status" fix responsibility on the dealing staff for proceedings under E&D Rules and take necessary measures under law/rules for recover) of losses caused to government revenues.

The FBR should direct PRAL and directors to Reforms and Automation (Customs) to develop and implement system/software for live date synchronization with WeBOC regarding sales tax registration to ensure blacklisted and suspended registered persons (RPs) are not able to import and get undue benefit of SRO 1125(1)/2011 and direct all commissioners to conduct half yearly physical verification of all units registered in their jurisdiction as 'manufacturer' to verify existence of manufacturing facility of all such units.

The FTO took notice of reported news that ghost entities registered as manufacturers with fictitious addresses, being setup only for tax evasion by claiming benefit of the SRO 1125(1)/2011 December 31, 2011.

These fraudulent entities not only evaded sales tax in respect of imported fabrics but were involved in issuance of fake invoices for claiming sales tax refund as the FBR had failed to build a robust system whereby such fake registration could have been avoided.

Once these fraudsters are registered as 'manufacturers' by the Local Registration Office of the RTO concerned, the benefit of SRO 1125(1)/2011 dated 31.12.2011 is extended by the Customs Department at the time of import on the basis of profile available on FBR's website.

The Federal Tax Ombudsman (FTO), Mushtaq Ahmad Sukhera, has held the Federal Board of Revenue's systems and rules responsible for massive misuse of sales tax zero-rating facility available to manufacturers-cum-exporters under the SRO 1125(I) 2011.

In a major move to check misuse of zero-rating regime by manufacturers-cum-exporters sectors, the FTO has further directed the FBR to conduct audit of all manufacturers, who availed the benefit of SRO 1125(I)2011 to verify their manufacturing status.

In case of own motion, investigation of FBR's systemic maladministration, the FRO has further directed the FBR to introduce institutional and systemic reforms in the zero-rating regime, and address failure of the FBR to timely check registration of persons misusing the 'manufacturing status".

The FTO has categorically declared that the Inland Revenue authorities have totally failed to take timely action in integrating the registration module in IRIS system, thereby providing opportunity to the unscrupulous elements to take advantage of the weaknesses in the registration procedure of the sales tax department.

The FTO has further held the FBR responsible for review of sales tax registration rules and risk parameters used for granting registration, which lead to misuse of manufacturer' status by registered persons.

According to the findings of the FTO, the review of Sales Tax Registration Rules and risk score weighted assigned to the risk parameters employed in the registration process, which lead to misuse of manufacturers status by registered persons for the purpose of tax evasion.

The FBR vide SRO 494 (1)/2015 dated 30th June, 2015 showed that the IRIS based Sales Tax Registration module failed to timely incorporate the provisions of revised registration rules. The requisite changes in IRIS were incorporated after nine months vide SRO 227 (1)/2016 dated 21st March, 2016. The FTO observed that the FBR had failed to take timely action in integrating the registration module in IRIS system thereby providing opportunity to the unscrupulous elements to take advantage of the weaknesses in the registration procedure of the sales tax department.

Moreover, modification in the registration module was carried out after nine months of the revision of Sales Tax Registration Rules, but evidently no exercise was carried out by the field formations to verify that the existing manufacturers were registered in conformity with the provisions of the revised rules, the FTO added.