ISLAMABAD: The International Monetary Fund (IMF) has recommended amendments to the Sales Tax Act, 1990 to check “missing trader fraud arrangements” used within the sales tax regime to evade sales tax.

Sources told Business Recorder that the IMF has recommended that the “missing trader fraud” arrangements defraud the government of sales tax.

It involves a supplier (or “missing trader”) deliberately failing to account for the sales tax charged on such supplies made by the supplier, while businesses along the supply chain continue to claim input tax or sales tax refund from the tax authorities.

The IMF understands anecdotally from the FBR that missing trader fraud arrangements present a considerable problem in Pakistan, especially in the construction sector and reprocessing of used raw materials.

The IMF recommended that the Sales Tax Act, 1990, should be amended to discourage missing trading fraud arrangements.

While the Sales Tax Act, 1990, currently, makes it an offence to commit, cause to commit, or attempt to commit tax fraud, or abet or connive in the commissioning of tax fraud, this would likely be applicable only to persons who are active members of a missing trader fraud syndicate, as the “mens rea” required for fraud and abetment is a high one.

The Sales Tax Act 1990 could be amended to preclude a business from claiming input tax on purchases that the business knew or should have known to be part of a missing trader fraud arrangement.

This encourages businesses down the supply chain to take reasonable steps to ensure that a supply is not part of such an arrangement before claiming input tax to avoid penalties or prosecution, sources quoted the IMF recommendation.

Copyright Business Recorder, 2024