The State Bank of Pakistan's Annual Performance Review 2011-12 indicates that sales tax refunds by the Federal Board of Revenue (FBR) increased by 54 percent. The increase, the report notes, was from 76.6 billion rupees in fiscal year 2011 to 118.6 billion rupees in fiscal year 2012.
As early as in February 2012, the Federal Tax Ombudsman (FTO) on a complaint filed by the Pakistan Apparel Forum and Site Association against the Revenue Division for unsettled refund claims noted that the issue of pending sales tax refunds had been reconciled but underscored the need for resolving issue of maladministration in the entire process. However, the FTO emphasised the need for expeditious disposal of bona fide refund claims. The emphasis on 'bona fide' refund claims was considered highly appropriate as there are numerous complaints that several companies are being refunded an amount greater than what was actually owed to them as refunds.
The FBR's Directorate of General Intelligence and Investigation of Inland Revenue Service (IRS) recently unearthed 2 billion rupee tax evasion on imports by only one company. One can safely conclude that the actual amount of evasion under this head is probably in hundreds of billions of rupees. This revelation surprises no one as it is well known that tax evasion inclusive of fraudulent sales tax refund claims by several companies continues. However, it is not possible for a company to file a false claim until and unless there is some complicity with the tax authorities. One by now much used method that is known to IRS involves commercial importers acquiring Goods Declarations (GDs) from Pakistan Revenue Automation Limited (PRAL) - an FBR subsidiary - filling out fictitious data and then selling these GDs to taxpayers against critical import documents to obtain input adjustment of tax refunds from the FBR. This scam was unearthed in April of 2012 when the IRS noted that four taxpayers registered in Karachi were using fake GDs of Peshawar Collectorate.
There is therefore an urgent need to cleanse PRAL system that is at present susceptible to abuse. It is strongly suggested that a detailed system audit of PRAL be undertaken on an immediate basis with the objective of plugging all existing and, in some instances of abuse, already identified loopholes in the system. It would be essential to also curtail the limit or access of individuals to make changes in the transactions on the computer network, though it is relatively easy to determine the name of the abuser as the PRAL system requires an individual specific password for every entry into the system. The overall aim of the system must be to ensure that an invalid refund demand is not validated and once the refund has been approved to re-invalidate it.
There are many issues with the country's tax system which need to be resolved on an emergent basis to ensure that the country is able to raise an appallingly low tax to Gross Domestic Product ratio through developing a tax system that is fair, equitable and non-anomalous. The blueprint for tax reforms has already been identified and was an integral component of the 2008 SBA with the International Monetary Fund. That programme ultimately stalled before it was suspended due to government's inability to meet two critical conditions with tax reform being one of them. As a consequence, the government has been unable to successfully persuade multilaterals to extend budgetary support which it sorely needs. Thus the rationale for tax reforms and plugging all loopholes is of all the more immediate relevance to turning the economy around.