The Federal Board of Revenue (FBR) is probing an abnormal phenomenon in the Electronic Refund Claim System (ERS), as sales tax refunds paid through the system have shown a steep increase of 220 percent against export growth of 62 percent during some patches of 2010-11, showing serious problem in the ERS.
Sources told Business Recorder here on Saturday that abnormal trend in payment of sales tax refunds through the ERS has been detected by Muhammad Raza Baqir, Chief Commissioner, Regional Tax Office, Karachi. In this regard, he had submitted a detailed report to the FBR last month which is presently being investigated by the Board. The report hinted at possible misuse of the newly introduced ERS by claiming fake refund. The data showed abnormally high growth in refunds of zero rated sectors, which needs to be investigated.
Secondly, the percentage of refunds paid on packing materials, chemicals, spares and accessories increased considerably with no logic behind such extraordinary increase in refunds. The abnormalities in the ERS as mentioned by Chief Commissioner Regional Tax Office Karachi clearly indicates that the concerned authorities dealing with the ERS are totally unaware of the on-going abnormal trend in the ERS and have failed in placing an effective check to control the misuse of the ERS.
According to sources, the FBR has taken the report of the RTO Karachi very seriously and investigations are underway with the help of regional authorities to check the authenticity of data as reflected in the report. The extraordinary difference between the amount of refunds paid and actual exports during the period under review has pointed towards some serious problems in the ERS.
The FBR has received a recommendation of the concerned RTO that the refund claimants under the ERS should not be allowed to change or alter the invoices, information or data which is once fed to the system. Similarly, all entries must be captured by the system to watch the manipulation by the claimants.
According to the report, the Electronic Refund Claim System was introduced by the Board by inserting Rule 26A in the Sales Tax Rules, 2006 vide SRO 211(1)/2010 read with the Sales Tax General Order No 19/2010. Subsequently, electronic refund system was extended all over the country and post-refund desk (digital) audit followed by comprehensive audit of risky cases were prescribed vide SRO 1042(I)/2010 dated November 15, 2010. The desk audits of electronic claims have not yet been conducted anywhere in the country due to non-availability of complete details of all refund claims on the desktop of the auditors and lack of training to the tax functionaries to conduct audit of cases available electronically only. This laisse faire to the refund claimants is fraught with risks to the federal revenue. To safeguard interests of the exchequer, RTO Karachi, co-ordinating with the concerned officers of Pakistan Revenue Automation Limited (PRAL), has ventured to conduct desk audit of a few ERS claims despite capacity constraints and non-availability of complete access to information available only on computer. During this electronic scrutiny of claims the following observations have been made:
--- With the introduction of ERS, quantum of refund, exports and local zero-rated supplies of certain exporters have registered abnormal growth which casts doubts about genuineness of claims.
--- Analysis of data shows that refund through ERS has surged by 220 percent as against the growth of 62 percent in exports during July-October 2010 and November-February 2011. The report further said that there was abnormally high growth in refunds of zero rated sectors which makes the veracity of claims doubtful. The correct Pakistan Customs Tariff (PCT) headings of commodities are not being shown and most of the materials including packing material are shown under "miscellaneous" head to hoodwink the system. Moreover, the percentage of refunds of tax paid on packing materials, chemicals, spares and accessories have considerably surged for no concrete reason.
In order to forestall possibilities of bogus/fraudulent sales tax refunds, the ERS may be restricted to only those claimants which have computerised accounts and provide electronic access to their digital accounts to the RTO / LTU concerned.
Sources said that the Custom Collectorates' data of exports be electronically analysed/cross matched before sanction of each refund claim to preclude possibility of refund in case of short shipment, which is a common trade practice. The month-wise summary of consumption of raw material, packing materials, chemicals and utilities in exports may be obtained from the claimants and refund may be sanctioned against the actual consumption of these materials in accordance with the industrial benchmarks.
It is also necessary that the refund of packing materials and chemicals should be capped in consultation with the relevant associations of trade and industry. The ERS should provide for checking partial consumption of raw materials, packing materials, chemicals and utilities in zero-rated and taxable supplies before sanction of refund.
Referring to the report, sources stated that the claimants should not be allowed to change or alter the invoices, information or data, which is once fed into the system. Similarly, all entries must be captured by the system to watch the manipulations by the claimants. At the same time, the claims declaring incorrect headings or clubbing them in "miscellaneous" head should not be entertained. The refund claims data should be electronically forwarded directly to the concerned audit division of RTO immediately after sanction of refund.
Sources said that the Audit Officers should be imparted special training by PRAL for conducting electronic audit of refund claims. The quarterly feedback on the satisfactory performance of ERS may be obtained from field formations, so that the weaknesses of the system may be removed and the interests of exchequer be safeguarded, sources added.