Outside the tax net

Tax scams can only be countered through a permanent commission, representing the people of Pakistan

By Huzaima Bukhari and Dr Ikramul Haq

The Federal Board of Revenue (FBR), even after eight years of Tax Administration Reforms Programme (TARP) symbolizes an institution which has failed to deliver. The persistent episodes of tax scams: fake refunds, flying sales tax invoices, rampant smuggling, under and over-invoicing, clearance of goods without duty and excessive payments of export rebates, just to mention a few, confirm the existence of an alliance between corrupt tax officials and unscrupulous businessmen that is depriving the nation of billions of rupees and criminally shifting the incidence of taxes to the poor.

According to a Press report, the FBR on December 27, 2010 blacklisted some 102 companies, allegedly involved “in minting money on fraudulent sales tax refund claims”. It is revealed that the Office of the Directorate of Intelligence and Investigation, Islamabad, received a tip-off that some 102 registered units were getting fake sales tax refunds, with the connivance of tax officials. The loss of revenue is estimated to the tune of Rs. 1 billion.

In recent years, FBR has been making tall claims about its automation efforts. Chairman FBR has informed the public time and again that after introduction of automated procedures in all departments, possibilities of tax fraud were countered effectively. On the contrary, figures show that since 2005 after introduction of computerized procedures, the incidences of tax frauds increased many a times as compared to the days when manual procedures were in vogue. It shows that before going for automation, system analyses were not properly conducted and human resource development was completely ignored. Increases in tax scams testify to the fact that there is complete failure on the part of FBR to implement pre-emptive measures against possible tax frauds.

Tax frauds recently surfaced and reported in Press have been detected by the Directorate-General of Intelligence, FBR or teams of Auditor General of Pakistan. These represent only a tip of the iceberg. The actual number of tax frauds committed during the last 20 years and quantum of tax involved are yet to be determined. The government must immediately form a commission comprising of anti-corruption officials, judges, auditors and tax experts to thoroughly probe the record of the last 20 years of all the tax departments and unearth all cases of tax frauds. Retrieval of public money through this commission would substantially increase tax collection for the current year, which is already adversely affected due to recession and devastating floods.

Summary of major tax frauds recently reported in the Press seem to establish criminal culpability of the staff and high-ups of FBR:

On December 14, 2010, Directorate of Intelligence and Investigation, Lahore, registered an FIR against 32 tax evaders, involved in claim of illegal input tax adjustment on the basis of fake sales tax invoices, issued by a cartel of deceivers. The quantum of evasion detected in this scam was Rs.  613 million.

On August 1, 2010, the Directorate General, Intelligence and Investigation, Karachi, unearthed a tax fraud involving millions of rupees, against some prominent importers of low carbon wire rods. The action was taken on a tip-off, which said that some importers, with the connivance and collusion of their clearing agents and the concerned customs staff, were involved in clearance of imported consignments of low carbon wire rods, at nominal value, through Model Customs Collectorate.

During 2009-10, Directorate General, Intelligence and Investigation, Karachi alone detected tax fraud cases involving Rs. 1.377 billion revenue. There were 35 customs seizures of Rs. 38.79 million, while the anti-smuggling organisation wing made 245 seizures of Rs. 490.56 million. Statistics further revealed that 9 tax fraud cases of the federal excise and sales tax involving Rs. 237.96 million were detected.

On 14 January, 2008, Directorate-General of Intelligence and Investigation detected an organised tax fraud in Punjab involving a gang of income tax officials, who issued fraudulent refunds to fake government contractors. According to details, “the nature of this tax fraud was entirely different from the modus operandi of the income tax gangs recently busted in Enforcement Zone, Companies-IV, Karachi and Lahore”.

On 5 January 2008, a report was published in leading newspapers disclosing that FBR unearthed a scam in Lahore involving a senior income tax official (Grade-20), who allegedly issued bogus refunds of over Rs. 103 million in 39 cases on forged documents during 2003-2007. Earlier a similar scam was reported in Karachi.

On 22 October 2007, Directorate-General of Intelligence, Customs and Excise, instituted criminal proceedings against 14 industrial units of Punjab for claiming illegal sales tax refunds by filing bogus invoices. The fraud took place two years ago when many commercial exporters had claimed illegal refunds on the basis of fake documents (FBR took two years to take notice of the crime). Obviously, the beneficiaries were giving huge bribes to concerned officials, who are still working without any fear of accountability.

On 14 May 14 2006, the apex court rejected the bail application of one Raja Zaraat, “who had been wielding far larger financial clout than originally estimated” in getting billions of rupees as tax refund on forged documents (according to a Press release of FBR). FBR disclosed that although the first compliant against the accused was received by it in December 2005 yet no action was taken till 4 May 2006 when the accused was arrested in Islamabad. It is obvious that this colossal tax fraud was not possible without the connivance of tax officials.

It is strange that on the one hand tall claims about improvements in integrity levels under the TARP have been made and, on the other, blatant acts of tax fraud and fraudulent refunds have increased manifold. The refund scams and tax frauds unearthed in Karachi, Lahore and other parts of the country during the last few years are a slap in the face of FBR high-ups who have been misleading the nation by claiming that “wonders” have been achieved under the TARP.

The increased number of refund scams and unfettered tax evasion confirm that nothing has changed. It is a sad reflection on FBR’s top management. The corrupt and resourceful are still holding key posts and are issuing refunds on forged documents. They are still encouraging profit-hungry traders and businessmen not to pay taxes by just giving them their due ‘share’. In the mornings, they sit in offices while their evenings are spent in rendering ‘professional’ services. It is beyond any doubt that the prevalent mass-scale evasion of taxes is not possible without the connivance of tax administrators.

Tax-evaders and tax administrators together constitute a mafia that has made Pakistan a haven for tax dodgers and plunderers of national wealth. Tax officials holding key posts are directly connected with these people. They design and get implemented policies for mutually-beneficial relations between them while the whole nation watches as a silent spectator. The outcome is total destruction of our socio-economic system (ever-increasing rich-poor divide, chaos and lawlessness).

The indomitable civil-military complex, mighty politician-cum-industrialists and tax evaders are ruling Pakistan.  The policies of appeasement towards politician-cum-industrialist, unscrupulous traders and businessmen are obviously not without any personal interest. In such circumstances, tax scams and tax evasion can only be countered through a permanent commission, representing the people of Pakistan, which should probe the cases and release reports in the Press on a monthly basis while the judiciary, taking suo motu action should give exemplary punishments.

The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences (LUMS)

NOTE:This is a cross post.

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  • Globe Trotter  On January 2, 2011 at 6:29 am

    The Federal Board of Revenue (FBR), even after eight years of Tax Administration Reforms Programme (TARP) symbolizes an institution which has not failed to deliver. Rather they’ve done a commendable job by engineering a system, just to facilitate the privilaged lot to safely make use of it.
    Can anyone point out a single law that works for the National Interest.

  • Inam Khan  On January 2, 2011 at 4:20 pm

    Poor nation has rich robbers?…………………..Inam khan

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