Cherry picking in FBR refund system

Increasing cost of doing business is genuine concern of business community, particularly of exporters. Blocking genuine refunds by the Federal Board of Revenue (FBR) is indeed an aggravating factor. The FBR responds to such assertions in a typical mother-in-law style who would always complain of not being served properly. “If government can’t provide fodder then it should stop milking us,” is counter-argument of exporters.

Are both sides indulging in blame game or there is more than what meets the eye? This deserves an objective analysis. As exports dwindle, basic understanding of the refund system and its bottlenecks is also important and that’s could be the way forward. The FBR handles refunds of sales tax, income tax and customs duty. The major chunk of exporters’ refund relates to sales tax.

To begin with, in General Sale Tax (GST) in VAT mode, as is practiced here, the tax paid on raw material is liable to be refunded in two cases: (1) when the finished product is exported; (2) the tax has been zero rated at domestic supplies. The refund is also due in cases where the tax paid on the purchases exceeds the tax liability such as Discos and IPPs or tractors sector whose sale price is subsidised by the government.

On payment of sales tax refund, it is relevant to mention that during the process of automation, the FBR (then CBR) had compiled the data of sale and purchase on the diskette in the-then introduced STARR software instead of leaving it to the applicant to furnish manually. One way or the other, it worked without much changes till electronic filing was introduced in 2007, which has undergone changes on the yearly basis till today.

In association with the World Bank consultant Carlos Salvani, the FBR lunched Expeditious Refund System (ERS) in 2009 that was designed to process the claims electronically under certain risk-based parameters for manufacture-cum-exporters in major export- oriented sectors. The relevant tax offices process other claims as well as those not meeting the criteria of ERS, manually.

In July 2013, Ishaq Dar claimed to have inherited a legacy of huge refund amounting to billions of rupees from the previous government. This was termed yet another “circular debt”. In order to liquidate the pendency transparently, the FBR introduced the “first-come, first-served” principle in processing and payment of refund. A novel method of releasing tranche of refunds in instalments was in practice. Every year the FBR has paid refunds of around Rs35 billion as per its published data against the yearly claims of Rs40 billion.

Let it be made clear that genuine refunds are not subsidies rather it is the amount exporters deposited with the state exchequer, which is bound to be paid within 45 days. Its payment in no way should affect the total collection. However, what happens in reality is they are rather withheld in order to create an artificial “topping of collection”. Recently, the FBR released refunds of around Rs25 billion.

Just a cursory look at the refund data will expose the fallacy of transparency as well as violation of first-come, first-served policy. Many well-connected business houses got their refunds out of turn. The FBR in 2016 transferred claims filed in ERS to the field offices for proper scrutiny instead of systematic processing. This granted discretion to the field offices in selecting claims at will instead of following queue. Eventually, unnecessary delays occurred. The FBR turned out to be non-serious as a lot of such refunds claims are still pending after the passage of more than a year.

It may be added that the tax officers are assigned targets on the basis of net collection who adopt a go-slow policy particularly on claims that don’t fall in the “privileged club”. Before 2009, the targets used to be assigned on gross collection and as such payment of refunds did not reflect adversely upon their performance no matter how much amount was paid.

On a question of putting big houses on fast track, a few important tax officers attributed to their organisation skills in expeditious furnishing of cleansed requisite data. However, this stance did not find favour with the majority of the refund claimants who alleged greasing the palm and using the political clout for putting the process on fast track. A premier body of tax professionals pointed out that cherry picking has always been there in the refund system but is much noticeable when the FBR started paying the refund on discretionary basis.

Another expert, well conversant with the VAT system, pointed out strange logic in ERS to reject “risky claims” when they are approved in manual processing. The head of an exporters’ association questioned as to why the FBR could not liquidate huge pendency, which Ishaq Dar alleged to have inherited from the previous government. In this context, another researcher pointed out that even the FBR’s published data indicated that refunds would not have accumulated it they were paid in time.

There is no denying the fact that the FBR is not pursuing the matter expeditiously and in transparent manner. Discretion in the system to process claims manually is one bad gift of this government at the cost of creating liquidity crunch for exporters in competitive timings. It may be noted that amount involved in refunds accounts for 18 percent of the total cost whereas the margin of profit can hardly be more than 3 percent on the turnover. The government has lackadaisical approach towards exports if is not marred with limited capacity in putting an effective transparent refund payment system in place.

It will also be very difficult for the FBR to purge the tax machinery from committing any acts of impropriety. However it’s not conceivable as to why it is not revamping electronic system after removing glitches given the fact that it has acquired needed expertise after more than a decade of running the system. A concerned FBR officer had pointed out lack of any ownership and scarcity of resources which is holding up its refund auto system. On question whether the system can handle all sale tax refunds, the apt answer was it is doable provided the FBR bureaucracy is ready to give up the discretionary powers it has assumed for itself.

One consultant, who has worked for many countries, pointed out that the refund is paid once the goods are exported without even waiting of export proceeds. Currently, the FBR capture all the information electronically with the monthly sale tax return and the same is sufficient for processing any refunds claimed in the returns automatically. Instead of reinventing the wheel of change, all that FBR needs to do is upgrade its ERS and make it applicable to all refunds. Claimants may be intimated through system any discrepancy noticed in the data. On questions that how the automatic system can check the inflated amount of refund, the relevant expert pointed out that the percentage of refunds as of export can be worked out after calculating value addition as well as the adjusted average of saleable inputs in different sectors. The auto system, after approval, can transmit refund to the State Bank as is now being done for crediting the claimant, which will consequently account for the export proceeds.

The FBR should not withhold refunds after they are sanctioned. In fact, the AG office should hold chief account officer of the FBR accountable where it finds that collection has been made on account of withholding the refunds. There is nothing extraordinary in this approach. To sum it up, let it once again be added that refund processing system should be centralised without any in-built discretion, risk based, and its payment should be automatic subsequent to approval by the electronic system. It would help the genuine exporter and will bring good name for the FBR suffering from trust deficit.

The author is fiscal analyst and can be reached at Shafqatanand@gmail.com on twitter @Chafqat