The Federal Board of Revenue (FBR) has yet to implement a key recommendation of the Federal Tax Ombudsman (FTO) to devise an effective automated online system for registered sales tax persons to proceed against tax employees involved in perpetration of fraud.
Tax experts told Business Recorder here on Sunday that in a past case the FTO had observed that PRAL and Intelligence and Investigation (I&I) appear to have failed to devise an effective automated online system for registered sales tax persons. Complicity and collusion of rogue Tax Employees with outside criminal elements is also not ruled out.
In the past, FTO had recommended restructuring of the PRAL transforming them into proactive agents of sales tax fraud prevention and detection and set up a task force to investigate all aspects of sales tax fraud. To proceed against tax employees found involved in perpetration of fraud, particularly those in higher ranks the FTO has given these instructions in a public interest complaint titled Waheed Shahzad Butt Versus Secretary Revenue Divisions reported as 2014 PTD 1424.
Tax experts said that FBR had neither preferred representation before the President under Section 32 of the FTO Ordinance, 2000 nor any review has been filed before the FTO for reversal of findings/recommendations, however, despite lapse of reasonable time implementation on the crucial recommendations issued by the FTO remained unimplemented.
FTO has asked the FBR to set up a task force to investigate all aspects of sales tax fraud and propose effective countermeasures. The board has also been asked to review Investigation and Intelligence staffing policy and ensure that only highly qualified professionals with demonstrated expertise in uncovering cases of online crime could be assigned key investigative roles. The FBR has also been asked to enable prospective buyers to deal only with legitimate sellers.
The complainant has termed the procedure for blacklisting and listing inactive which must be telescoped so that doubtful firms do not remain in the field to dupe innocent buyers. The complainant has referred to the role of PRAL as suspected. Moreover, it is reported that a many accounts of existing registered sales tax persons may have been deliberately created as dummy entities for use in input tax scams.
During the investigation, the FTO found that sales tax fraudsters in Pakistan have become adept at targeting the online system of claiming input tax credit. Lack of sufficient pre-registration checks is a critical reason why criminal elements get so many dummy entities registered with relative ease. As online registration is the first step for a participant in the automated sales tax system, it is only reasonable to expect that due attention is paid to build effective checks in the system. Investigation & Intelligence kept suspected registered persons active long after their fraud was discovered.
The complainant mentioned that a feature of the existing e-FBR Web Portal is the categorisation of registered sales tax persons as active and inactive. This categorisation is meant to act as a ready reckoner for the purchasers of goods to determine whether there was any risk attached to making purchases from the registered sales tax persons listed as suppliers of goods. In other words, a person involved in issuance of fake invoices would have to be listed as inactive. In practice, however, the system does not work in such a manner as to be of any practical assistance to intending purchasers of goods. This is because many registered persons, who are known to have indulged in tax fraud, manage to remain listed as active taxpayers long after their fraudulent practices have been discovered. Resultantly, numerous innocent purchasers of goods end up interacting with them. By the time they discover that their sales tax payments are not getting deposited into the government account, it is often too late.
The complainant further pointed out that it is not a simple case of hacking into a system. The deliberate creation of dummy entities, for instance, illustrates that all this cannot happen without insiders' involvement.
According to the FTO decision, when confronted, both PRAL and Investigation & Intelligence responded to the points raised by the complainant. PRAL emphasised the important role it had played in setting up a complex, electronic system to facilitate fraud-free transactions involving payment of sales tax. It claimed to have created the right tools to detect tax fraud within the e-FBR system. Downplaying the complainant's suspicions of PRAL's involvement in aiding and abetting criminal elements in sales tax fraud, it was pointed out that PRAL was only a technology provider and a responder to departmental requirements by design, implementation and maintaining e-systems according to given specifications. It had no direct role in the day-to-day working of field formations. Investigation & Intelligence also did not provide any insight on how the fraud could have been perpetrated on such a scale without access to passwords, pin codes and user IDs that are created and maintained by PRAL, FTO order added.