Sordid story of tax frauds - I

February 01, 2013

HUZAIMA BUKHARI AND DR IKRAMUL HAQ

0 Comments

A leading tax expert based in Karachi in the wake of publication of our article Beyond Reform [Business Recorder, December 14, 2012] suggested that "another interesting topic for consideration will be "hyped up" claims that are made by Federal Board of Revenue (FBR) of detection of frauds in billions (it is always billions) eg in September [2012] FBR claimed to have detected a fraud of Rs 2.3 billion in shipping on account of sales tax evasion. Fair question is what happened?" He is absolutely right. If we scan the Press reports since 2005, tax frauds involving billions of rupees have been reported, but FBR has never informed the public about remedial measures, quantum of recoveries and number of persons punished.

There are numerous reports of tax scams involving billions and then hushing up of the matters. In a recent news item, it is revealed that "billions of rupees scam was hushed up...without penalising anyone after passing of several years". The report says: "According to an inquiry report...conducted by three-member committee...top officers were held responsible...and the inquiry committee submitted its findings before the then Chairman FBR, Sohail Ahmed, on October 30, 2009, but no action has been taken against anyone....the officers who were held responsible in this inquiry report claimed that they were completely clean and reports [against us] never proved at appropriate forums".

The news item raises a very pertinent question "if the report was wrong then what action was taken against those who produced wrong inquiry reports? But, if the report proved correct then why no action was taken against those who were responsible for this scam?" The news item reveals that "both who wrote report as well as all those who were held responsible were not only promoted but also no responsibility was fixed to penalise anyone, exposing how scams were hushed up in the FBR"! This is the most common modus operandi of FBR - it creates hype about detecting (sic) tax frauds of billions and then entire tax machinery starts hushing up the matter to save the culprits.

Since the introduction of the World Bank-funded Tax Administration Reforms Programme (TARP), FBR has been making claims of automating all procedures. All the chairmen of FBR, who headed the apex revenue authority since 2003, have been assuring the public from time to time that after automated procedures under TARP, the possibilities of tax frauds had been effectively countered. But the facts and figures show that in the wake of so-called automation, the incidents of frauds have increased manifold as compared to the period when manual procedures were in vogue.

A report published in Business Recorder on December 10, 2012 revealed that Sajjad Akbar Khan, Additional Commissioner of Large Taxpayer Unit (LTU), Karachi, sent a letter to the Chairman FBR, accusing "14 officers of processing and sanctioning bogus refunds worth Rs 77.5 million despite the issuance of the red alerts by the intelligence and investigation of Inland Revenue Service (IRS)". Till today no follow up is reported.

According to him, a well-organised mafia, colluded with the top guns of the tax machinery executed multibillion rupees of refunds to the bogus business enterprises. This was a serious allegation, but the higher echelons of FBR responded as usual - a committee to probe the matter was constituted! It confirms the pathetic state of affairs prevailing in the apex revenue authority. According to the complaining officer, fake business enterprises were registered and declared to be located in the areas inaccessible - addresses of these units are in Baldia Town, Sher Shah, Orangi Town, etc. These fake units, he alleged, either did not exist or in some cases were in rented premises with some junk/scrap machineries - these were not even registered with any utility company like gas or electricity and the racketeers used fake or stolen computerised national identity cards to show ownership of a typical ghost factory.

The FBR officer who, according to press reports, demonstrated unprecedented courage to expose mafia, asserted: "The mafia has strong influence in hiring, posting, transferring, and firing of the tax officials in RTO Karachi, FBR Headquarter, Investigation and Intelligence wing of Inland Revenue (IR) and any other office". He further alleged that "any unwanted officer is sent to Legal/IP Division or TFD, which are infamous as the eternal dumping grounds for unwanted officers". The officer further alleged: "though earlier the mafia was working indiscreetly, now they have become powerful to threaten the officials openly".

The officer who lodged a written complaint with Chairman FBR of what he called 'fraudulent tax refunds' was amongst the 13 officers who refused to serve in the National Accountability Bureau (NAB) on deputation taking a plea that it had become an arm of the government to protect the looters of national wealth and nobody could work there independently. The negative images of FBR and NAB need no further elaboration as majority of the officers working in both the organisations is showing complete distrust - the honest and competent officers are totally disillusioned, rather disgruntled.

According to experts, tax frauds recently surfaced and reported in press are only a tipof the iceberg. The actual numbers are enormous and yet to be determined. The experts, media and civil society as a whole have been asking the Parliament to constitute a committee to thoroughly probe the frauds of the last ten years of all concerned tax departments and unearth all cases of loss of revenues, but their voices fell of the deaf ears.

The members of Parliament during their tenure of five years showed little interest in retrieving tax losses through specially constituted committees or public accounts committee, though this could have substantially increased tax collection of Pakistan and helped in promoting tax culture and improving voluntary compliance. The tragedy is that about 70% of members of Parliament did not bother to file their tax declarations as required under the law. The FBR instead of taking action against them defended them saying that "they were paying tax on their salaries regularly". The issue is not that of withholding of tax (which is automatic and duty of payer) on emoluments they receive, but violation of mandatory provisions of law requiring them to e-file tax returns and wealth statements. FBR has not given any justification for their non-compliance and its non-action (see details in 'Tax delinquents', Business Recorder, January 4, 2013).

While FBR officials are now at war with each other and mafia's operations are becoming more and more apparent, Transparency International Pakistan has been agitating against the proposed amnesty schemes-it has repeatedly asked for recovery of tax losses of billions from tax evaders rather than giving them legal cover to decriminalise their ill-gotten wealth. In its letter of December 8, 2012, it demanded recovery of Rs 119.6203 billion from Malik Riaz, Dr Arsalan Iftikhar and Ahmed Khalil on account of alleged tax evasion determined by Federal Tax Ombudsman (FTO). The FBR till today has taken no action rather is advocating for an amnesty scheme with full vigour that would extend a helping hand to both the gentlemen and many others of their like to get immunity by just paying 1% of the amount of tax evaded in their entire life! This is FBR's response to all the honest officers and millions of taxpayers who have been paying taxes diligently.

In November 2012, Transparency International Pakistan claimed to have received complaint of over Rs 8 billion tax frauds due to alleged collusion between officers of FBR and 16 cosmetic manufacturing units operating in district Swat. As per law existing at the relevant time and even now, if sales of cosmetics are made in Swat these are tax free, but if they are made outside Swat, federal excise duty has been chargeable, but it was not collected for many years. Non-deposit of tax deprived the national exchequer of billions of rupees when the government was borrowing from commercial banks at the exorbitant rate of 12 to 13 percent.

On September 10, 2012, it was reported in Business Recorder that the Directorate-General of Intelligence and Investigation Inland Revenue (IR) unearthed "massive sales tax evasion worth Rs 2.34 billion by the ship-breaking industry on the import of 503 vessels between July 2007 and June 2012 and launched recovery proceedings in co-ordination with tax departments in Karachi and Quetta". Till today no report of recovery is made public.

On September 15, 2012, the then spokesperson of FBR claimed that refund scams worth billions of rupees were unearthed. However, she admitted having no information about "any action taken against the involved persons". She referred to another scam where sales tax refunds of Rs 2.5 billion was issued to the Karachi Electric Supply Corporation (KESC) at a time when the privatised company had to pay Rs 1.8 billion to the national exchequer. While the FBR initiated an inquiry into the 'pre-emptive refund' case, no action was reportedly taken against the culprits.

Another case surfaced in the Regional Taxpayer Office III in Karachi, where an officer of Inland Revenue Service who was retiring from service on August 12, 2012 allegedly issued refunds of Rs 220 million to some taxpayers before the due date for filing tax returns. The same officer was also allegedly involved in another refund scam in the plastic sector but then Chairman FBR instead of taking any action just transferred the officer. The Directorate General Intelligence and Investigation (I&I) of the IRS Wing, it was claimed, had already issued a 'red alert' after unearthing the plastic sector scam, which was worth Rs 2.25 billion, but FBR high-up preferred not to take any action.

(To be continued tomorrow)