Bogus tax refunds not possible without involvement of FBR officials: FTO

ISLAMABAD: The Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to initiate action against persons involved in preparing fraudulent tax refunds and their facilitators in the FBR who processed and sanctioned them.

The FTO has observed that a countrywide investigation against the issuance of bogus refunds was carried out by the Directorate General I&I-IR (FBR). But after a painstaking exercise, the I&I-IR researched many cases, where with the connivance of the FBR staff fake identities were registered, who later on claimed a refund on the basis of fake and flying vouchers and paper transactions and in many cases got away with a fraudulent refund, causing colossal loss to the already cash-starved exchequer.

According to the FTO report, FBR got suspicious with most of the purchases by the people making fake registration as they had no relevance to the business activity of the units.

“Red Alerts” in such cases were issued by Directorate General I&I-IR (FBR) to the field formations for conducting physical verification of the units, investigative audit to verify suspicious purchases, supplies and determination of exact tax liability, immediate suspension of STRN of fake registered persons, recovery of evaded tax and initiation of criminal proceedings against the persons and officials involved in the unlawful activity.

However neither any action was initiated against the fake claimants and their connivers in the department who were involved in bogus registration, processing and sanctioning of fraudulent refund and issuance of refund cheques, nor was any action proposed against the related officers of the relevant bank branches and PRAL management.

Evidently, the department blacklisted the STRNs but no investigations were carried out to verify the genuineness of input tax claimed by the registered persons, despite the fact that in the blacklisting order, it was mentioned that sales tax registration was obtained with the mala-fide intention to cause loss to the national exchequer by getting unlawful input tax adjustment/refund.

The FTO has observed that the department did not grasp the gravity of the state of affairs, and except blacklisting; no serious effort was made to unearth and apprehend the culprits who were involved in sales tax registration of the registered persons. This is evidently a case of gross maladministration where, except blacklisting the registered persons, the department has failed to initiate any proceedings to verify the genuineness of the input tax or locate the RP.

Pointing towards a particular case, the FTO has stated that it was noted that the CIR, Zone-VI, Corporate RTO Karachi suspended STRN of a registered person on 14.11.2019 after more than four years of physical verification. The order-in-original against the registered person was issued on 25.02.2015, for recovery of Rs410.495 million. The FTO has stated that even after starting the investigation by the FTO office, the FBR seemed disinclined to take any action. It also sounds strange that the Directorate of I&I-IR, after detecting fraudulent activities and issued letters of Red Alerts to the field formation, but did not pursue the matter to its fruition.

In all such cases of Red Alerts, the FTO has recommended to FBR to direct the concerned chief commissioner-IR, to investigate and identify the officials involved in registration of fake RP and initiate disciplinary and criminal action against those involved. The FBR has been asked to identify the officers involved in processing on the basis of fake and flying vouchers and issuing a refund of sales tax and take appropriate criminal or disciplinary action against them. The FBR was asked to initiate appropriate action including criminal proceedings leading to the prosecution of RP and recovery of the refund amount swindled from the public exchequer. The FBR has also been asked to initiate an investigative audit on the basis of the income tax return filed.

On fake refunds issue, the FBR issued an official response on FTO finding and explained that two processes are being used to deal with refund cases.

The first is the processing of refunds through the automated system for exporters. In this process, the audit of the refund is conducted after the issuance of refunds. The other system of refund issuance was devised for the taxpayers not associated with the export sector. The refunds issued through this mode are called the “carry forward refunds.” Such refunds are issued once in a year. The audit is conducted before the issuance of such refunds. The FBR has clarified that taxpayers involved in presenting wrong invoices are dealt strictly and recovery is made from them. Moreover, it said, penalty and default surcharge is also imposed to curb this practice. Sometimes, the audit process of refunds takes a longer period of time which may cause the problem of liquidity for the exporter, in case of delayed issuance of refunds. To avert liquidity crunch for the businesses, the refunds are issued and the scrutiny is conducted afterwards.

The FBR said there are certain inbuilt checks within the system to match the input claim by one person with output claim by another person. To avoid revenue loss, it said, the FBR has almost resolved the issue of fake invoices. “Sometimes, it becomes a little cumbersome and lengthy to check the flying invoices but scrutiny is conducted in all the cases.

The FBR has a computer analytics system of CREST. It is baseless to assume that FBR does not conduct scrutiny. The processing of the case may take time but it is certain that all refund cases are audited,” the FBR concluded.