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ISLAMABAD: Directorate General of Internal Audit (Inland Revenue) has recommended a foolproof mechanism to the Federal Board of Revenue (FBR) to effectively tackle the growing menace of flying sales tax invoices mainly in sectors of commercial importers, petroleum and steel, involving revenue to the tune of Rs400-500 billion per annum.

Sources told Business Recorder here on Wednesday that the FBR has received a standing operating procedure (SOP) to deal with the cases involving fake/flying invoices.

Most of the frauds are taking place within the sectors of commercial importers, steel and petroleum sectors.

The FBR will implement the said SOP of the Directorate General of Internal Audit IR in the field formations to check cases of fake/flying invoices across the country.

According to the SOP, it has been observed that hundreds of fake/bogus firms are operating at present, and no effective action has been taken against them by the field formations.

Reportedly, there are only a few groups of persons who are creating these fake/bogus firms, filing returns on their behalf, and buying/selling invoices in the market.

These actual culprits operate the sales tax matters of dozens of fake firms from one office. Thus, even if a few fake firms are suspended/ blacklisted, these culprits easily create new firms to continue their illegal activity. In order to effectively close down their operations, the concerned officers of the LTO/CTO/RTO as well as the DG-I&I-IR must use field intelligence methods to locate and identify such persons.

Strict prosecution proceedings must be lodged against such culprits who are operating the fake/bogus firms.

The directorate has investigated that it is not possible that so many fake/bogus firms can keep operating openly, issuing sales tax invoices which are used by a wide range of beneficiaries to cause huge loss of revenue, without the knowledge and connivance of some officials of the department.

These may be officials posted in Local Registration Offices, those conducting sales tax audits, and those processing sales tax refunds.

The Chief Commissioners and Commissioners IR are therefore required to remain vigilant to detect any such activity, and to take strict action against any departmental official found involved or in connivance with such persons.

Moreover, whenever any widespread fraud is detected, responsibility should also be fixed on those officials who neglected to detect and report it earlier.

Under the procedure, the first step is the identification of fake/flying invoices.

In this regard, each Chief Commissioner IR shall dedicate at least one officer for the purpose of identification of fake/flying invoices and bogus firms in the respective jurisdiction.

This function should be done by the Assessment and Processing Cell, if already existing in the formation.

The said officers of the Cell should have access to ITMS, CREST, and other relevant data to enable analysis of sales tax returns and registrations.

The said officers(s)/Cell shall obtain data and scrutinise returns to identify registered persons who are issuing or purchasing fake/flying invoices.

The identification of fake/flying sales tax invoices can easily be made by detecting one or more of the following characteristics: High volume or value of transactions with little or no net sales tax payment; value of purchases and input tax are equal or greater than the value of supplies and output tax respectively; huge carry forward, with unrealistic levels of stocks; recent registration, usually less than 3 years, or start of transactions after a dormant period; address in low income, residential or remote areas; income tax returns are either not filed, or filed with very low income; no withholding tax deduction on huge transactions; nature of supplies is different from purchases (e.g. purchases of textile goods but supplies of iron scrap); many commercial importers, dealers/distributors of large companies and dealers of petroleum products are engaged in issuing flying invoices.

In such cases, a comparison of goods imported/purchased with the nature of business of the buyers will easily show that supplies are fictitious.

The procedure said that such persons usually operate in networks, so if one issuer of fake/flying invoices is identified, scrutiny of the forward and backward transactions, i.e. purchases and sales in Annex A and Annex C of their sales tax returns, will quickly reveal other such persons in the network.

After identification of the dubious/fake/bogus registered persons, their registration must be immediately suspended by the concerned Commissioner of Inland Revenue in terms of section 21 of the Sales Tax Act, 1990 and rule 12(a) of the Sales Tax Rules, 2006, and action be initiated for blacklisting.

The procedure has specified that all the actions required for blacklisting must be completed expeditiously, and show cause notice for blacklisting be issued within seven days as specified in rule 12(a)(vi) of the Sales Tax Rules 2006.

This should include physical verification, and a report showing the non-existence of the firm, stocks, or sufficient manufacturing facilities as the case may be, at the declared premises.

In many cases, fake firms are registered in the name of low-level workers or even unconcerned persons.

In such cases, a written statement of the owner to the effect that he did not make the supplies or file the returns should be obtained, wherever possible.

The Order for blacklisting must be issued in terms of rule 12(b) of the said Rules, within 90 days of the issuance of the show cause notice.

A common weakness in the suspension/blacklisting orders is that reasons are not clearly mentioned, which enables the persons to easily obtain relief from appellate authorities.

Henceforth, Commissioners IR must ensure that their orders clearly mention the reasons, including the fact of issuance of fake/flying invoices without actual supply of physical goods, non-existence at the declared address, lack of capital to hold stocks, etc.

The procedure said that mere suspension and blacklisting of some dubious/fake firms is not enough to stop the phenomenon of fake/flying invoices, because the fraudsters easily create new registrations to continue their illegal activities.

Moreover, usually no recoveries can be made from such bogus/non-existent firms, so the passing of orders u/s 11 of the Sales Tax Act, 1990 against them also proves to be a futile exercise.

Recoveries can only be effected from the beneficiaries, who are real and existing firms. Therefore, in every case, the buyers/suppliers of fake/bogus firms must invariably be identified through Annex A and Annex C of the sales tax returns.

If these buyers and suppliers are themselves fake/bogus firms, actions as specified above must be taken against each.

But where the buyer or supplier is a real and existing firm, it must be treated as a beneficiary of the fake and flying invoices.

Whenever fake/bogus persons are identified, action u/s 11 of the Sales Tax Act, 1990 must also be taken against the beneficiaries for recovery of the sales tax evaded.

The procedure stated that it will often be found that the buyers/suppliers of any fake/bogus firm will lie in other jurisdictions.

In such case, it shall be the responsibility of the officers A&P Cell (specified in para 1 above) to send intimation to the relevant jurisdictions clearly informing that such registered persons in their jurisdiction are engaged in buying/selling of fake/flying invoices, and that action must be taken against them in accordance with this SOP. Commissioners IR who issue orders for suspension/blacklisting should also endorse a copy of the order to the jurisdictions where the beneficiaries are located.

Copyright Business Recorder, 2021