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Beyond reform?

Since the start of World Bank funded Tax Administration Reforms Programme (TARP), FBR has been making tall claims about its automation efforts. All the chairmen of FBR, who headed the apex revenue authority for the last 10 years, have been assuring the public from time to time that after introduction of automated procedures in all the departments, the possibilities of tax fraud had been effectively countered. But the facts and figures show that since 2005 when computerised processes were introduced, the incidences of tax frauds increased substantially as compared to the days when manual procedures were in vogue. This means that before going for automation, neither system analyses were properly conducted nor quality and training of human resource employed was assured.

The number of tax scams surfaced since 2005 and huge quantum involved testify to the fact that there is a complete failure on the part of FBR to implement pre-emptive measures against tax frauds. 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)”.

According to him, “a well-organised mafia has colluded with the top guns of the tax machinery to execute multibillion rupees of refunds to the bogus business enterprises”. This is a serious allegation and its leakage to the Press should be a serious cause of concern for the higher echelons of FBR – it indicates total collapse of the command system within the organisation as well. 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 alleges, either do not exist at all or in some cases are in rented premises with some junk/scrap machineries – these businesses are not even registered with any utility company like gas or electricity and the racketeers use 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 said that “though earlier the mafia was working indiscreetly, now they have become powerful to threaten the officials openly”.

While FBR officials are now at war with each other and mafia’s presence and rule is a reality, Transparency International Pakistan has demanded recovery of taxes of billions. 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 officer who has lodged a written complaint with Chairman FBR of what he calls ‘fraudulent tax refunds’ was amongst the 13 officers who refused to serve in the National Accountability Bureau (NAB) on deputation. According to experts, tax frauds recently surfaced and reported in Press are only a tip-off the iceberg. The actual number of tax frauds is yet to be determined. These experts argue that the Parliament constitutes a committee to thoroughly probe the record of the last ten years of all concerned tax departments and unearth all cases of tax frauds. The retrieval of public money through this process would substantially increase tax collection for the current year.

The following summary of major tax frauds, reported in the Press since 2005, establishes beyond any doubt the criminal culpability of the staff and high-ups of FBR:

—- On December 10, 2012, FBR appointed two inquiry committees to investigate multibillion rupees refund scams and the loss of up to Rs 1190 million in revenues. According to Press reports, Chairman FBR Ali Arshad Hakeem took note of a letter written by Additional Commissioner Large Taxpayer Unit (LTU) Karachi, Sajjad Akbar Khan in this regard. These committees will be headed by FBR’s Member Legal, Aqil Usman and Member Training, Yasmin Saud.

—- FBR’s data shows that fake input adjustments and illegal refunds caused Rs 537 billion in losses to the national exchequer and in the first five months of the current fiscal year, the revenue stood at Rs 200 to Rs 250 billion.

—- Recently, Commissioner Inland Revenue (Appeals-II) Karachi, Bashrat Ahmed Qureshi, sent a message to Chairman Ali Arshad Hakeem, alleging that a senior FBR official had given incentive to two fertilizer companies of the same group causing a loss of Rs 690 million and Rs 500 million to the national exchequer.

—- In November 2012, 52 companies in Karachi alone were blacklisted, while registration of 10 was suspended/blocked after their alleged involvement in what tax authorities termed as a ‘daylight dacoity’. The blacklisted companies provided fake input adjustment invoices resulting into fake refunds of Rs 40-45 billion.

—- Tax gap of FBR, according to various studies, was not less than 70 to 85 percent during 2008 to 2011.

—- In August 2012, Federal Tax Ombudsman (FTO), Muhammad Shoaib Suddle, instructed the FBR to restructure the Pakistan Revenue Automation Ltd (PRAL) and Investigation & Intelligence with a view to transforming them into proactive agents of sales tax fraud prevention and detection. The FTO gave these instructions on a decision on a complaint filed by Advocate, Waheed Shahzad Butt. According to the complaint, tax fraud taking place on such a large scale could not be perpetrated without insider information and support.

—- In July 2012, Rs 47 billion tax scam involving five cellular companies surfaced when NAB barred the FBR from granting what it termed unjust relief through a Statutory Regulatory Order (SRO) giving waiver in respect of tax chargeable on interconnection service to these companies.

—- In April 2012, while the imbroglio surrounding one of the country’s biggest scams of missing containers was still lingering on, another 785 boxes belonging to Afghan Transit Trade went missing. They were not de-sealed at the customs border checkposts. This raised a big question mark about the performance of the customs authorities because disappearance of boxes from computer screen at any stage raised controversies, difficult to be substantiated when it came to investigation or litigation.

—- In March 2012, sales tax scandals amounting to Rs 159 billion were unearthed involving multinational companies and large industrial groups. Large Taxpayer Unit in Karachi detected sales tax fraud amounting to Rs 25 billion. Islamabad’s Large Taxpayer Unit, which detected Rs 10 billion worth of sales tax fraud and Lahore’s Large Taxpayer Unit, pointed out unlawful adjustments in sales taxes to the tune of Rs 8 billion.

—- In April 2011, the Directorate of Intelligence arrested two persons involved in issuance of fake sales tax invoices for generating illegal input tax adjustment or refund. Both were wanted in a tax fraud case of Rs 7.5 billion.

—- In 2010, the Directorate General of Intelligence and Investigation detected 166 cases of tax evasion, involving duty and taxes amounting to Rs 2,828 million in the first six months (July-December) of 2009-10.

—- In 2009, 59 cases of duty and tax evasion amounting to Rs 1,603 million were detected.

—- On 14 January, 2008, Directorate-General of Intelligence and Investigation detected “an organised tax fraud in Punjab involving a gang of income tax officials, who issued fraudulent refunds to the fake government contractors”. According to details “the nature of this tax fraud was entirely different from the modus operandi of the income tax gangs recently busted in Enforcement Zone, Companies-IV, Karachi and Lahore”.

—- On 5 January 2008, a report was published in leading newspapers disclosing that FBR unearthed a scam in Lahore involving a senior income tax official (Grade-20), who allegedly issued bogus refunds of over Rs 103 million in 39 cases on forged documents during 2003-2007. Earlier a similar scam was reported in Karachi.

—- On 22 October 2007, Directorate-General of Intelligence, Customs and Excise, instituted criminal proceedings against 14 industrial units of Punjab for claiming illegal sales tax refunds by filing bogus invoices. The fraud took place two years ago when many commercial exporters had claimed illegal refunds on the basis of fake documents (FBR took two years to take notice of the crime!). Obviously the beneficiaries were giving huge bribes to concerned officials, who are still working without any fear of accountability.

—- On 2 June 2007, FBR issued notices to pay phone companies for recovery of Rs 370 million falsely claimed refunds. The Board launched adjudication proceedings against these companies involved in obtaining illegal excise duty refund. In this connection, formal notices have been served to these companies.

—- On 14 May 14 2006, the apex court rejected the bail application of one Raja Zaraat, “who was wielding far larger financial clout than originally estimated” in getting billions of rupees as tax refund on forged documents [says a Press release of FBR!). The FBR disclosed that although the first complaint against the accused was received by it in December 2005 yet no action was taken till 4 May 2006 when the accused was arrested in Islamabad. It is obvious that this colossal tax fraud was not possible without the connivance of tax officials.

—- A scam in Lahore involving a senior income tax official (Grade-20), who allegedly issued bogus refunds of over Rs 103 million in 39 cases on forged documents during 2003-2007, was unearthed. FBR sources in the Directorate General of Intelligence and Investigation revealed that the official not only tampered with the tax record in certain cases, but also grossly violated rules and regulations, particularly Income Tax Ordinance 2001 to facilitate the illegal refunds. Tax fraud in the Companies Zone, Lahore, appeared to be committed on the same pattern as Companies Zone, Enforcement Zone-B Karachi. The astonishing part of the story was that the corrupt official was appointed to work as Member Tribunal to settle income tax-related disputes of taxpayers. He also issued illegal refunds during his appointment on other positions in Lahore, showing serious loopholes in the system to check the wrongdoings of senior tax officials in field formations.

—- During 2003-2007, one tax official used different techniques to issue illegal refunds in several cases without any check by any agency. It was found that the accused official during his appointment as Commissioner Income Tax (CIT), Companies Zone-II, Lahore was allegedly involved in corruption. Details collected by an intelligence agency revealed that the official deliberately issued bogus refunds of Rs 19.211 millions to an electronic company in 2003, 2004 and 2005 despite the fact that tax record was tampered by changing figures/important documents. The examination of record also showed concealment of basic facts of the case and flouting of statutory provisions and legal requirements. The official deliberately drafted wrong cases showing misstatements to give legal backing to the bogus refunds. In another case, the official issued bogus refund of Rs 33.99 million to a company for the tax year 2004. The objections raised by the lower income tax officials were ignored to issue bogus refunds. According to sources, the accused official was also given additional charge of Commissioner of Income Tax Zone-A, Lahore for 2-3 weeks in June, 2007. During this period, illegal refunds were issued in 37 cases involving over Rs 50 million by committing serious violations of law. In all 37 cases, violations in interpretation of law were so blatantly committed that they were clearly visible even on initial scrutiny of documents. The Board initiated disciplinary proceedings against the official under the Removal from Services (Special Powers) Ordinance 2000, but he not only survived but got promotion in Grade 21!

—- FBR suspended three senior income tax officials of Karachi, who sanctioned Rs 138.460 million fake refunds on bogus tax deduction certificates issued by some stock exchange members. FBR constituted a high-level committee headed by Mukhtar Ahmed Gondal, Director General, Large Taxpayer Unit (LTU) Karachi, to probe this mega tax fraud. The Director General Intelligence and Investigation recommended to the Board that immediate action be taken against a former commissioner of Income Tax, Companies Zone-IV, Karachi; ex-Additional Commissioner Companies Zone-IV, Karachi and Ex-DCIT, Companies Zone-IV, Karachi. The FBR was also required to obtain tax record from Regional Tax Office (RTO), Karachi, for fixing responsibility on PRAL, stock exchanges and identification of banks. On the findings of the DG Intelligence, the FBR initiated disciplinary proceedings against the suspected income tax officials. The DG Intelligence apprehended that Board’s immediate attention was needed in this regard, otherwise its negative fallout might cause irreparable loss in meeting the revenue target. FBR found that the former officials of Enforcement Zone, Companies-IV Karachi used illegal ‘tax deduction certificates’ issued to some stock exchange brokers for claiming refund. The Vigilance Wing of DG Intelligence detected that the three ex-income tax officials of Companies Zone-IV caused huge loss to the exchequer by issuing bogus income tax refunds to hundreds of individuals during 2006-07. The involved officials issued illegal refunds to individuals who were out of the Companies Zone-IV, Karachi, jurisdiction. FBR sources said the illegal refunds were issued in such a manner that all the ingredients of an organised tax fraud were properly managed. The DG Intelligence had detected that refunds were issued on the basis of certificates u/s 164 of Income Tax Ordinance, 2001 to selected brokers/individuals for trading in shares. Under the law, members of the stock exchanges were not authorised to issue such certificates. The individuals whom refunds had been issued did not fall under Enforcement Jurisdiction of Companies Zone-IV, Karachi. The National Tax Numbers (NTNs) of these individuals were in serialised sequence, pattern of tax years was identical, refund cheque numbers were in serialised sequence, dates of refunds were identical, whereas members/brokers issued unauthorised certificates to individuals/brokers under section 164. Interestingly, refunds were issued to individuals, who were residents of other cities/stations and their particulars do not match with the NTN Master Index.

The above list is not exhaustive but is just a tip-off the iceberg. The increased numbers of refund scams and unfettered tax evasion confirm that nothing has changed in FBR even after taking loans worth millions of dollars for reforms (sic). It is a sad reflection on FBR’s top management. They are still encouraging the profit-hungry and unscrupulous businessmen not to pay taxes but just give them their due “share” and then whiten their untaxed assets through amnesty schemes by just paying 1 to 1.5 percent. In the morning many officers sit in offices and in the evening render “professional” services [on muk-muka (settlement) basis] at their homes. It is beyond any doubt that the prevalent mass-scale evasion of taxes is not possible without the connivance of tax administrators.

The tax-evaders and dishonest tax officials together constitute a mafia that has made Pakistan a haven for tax dodgers and plunderers of national wealth. The tax officials holding key posts are posted on the recommendations of their political masters and not on merit. The unholy alliance between the tax evaders and tax officials design and implement policies for “mutually-beneficial” relations. The outcome is a total destruction of our socio-economic system (we are witnessing ever-increasing rich-poor divided, chaos and lawlessness).

Pakistan is controlled and ruled by ashrafiya (elites). Flouting the rule of law with shameless impunity is the hallmark of ashrafiya. They are not paying taxes due from them and FBR being their handmaid prepare tax amnesty schemes for them. The tax evaders, plunderers of national wealth, the corrupt, drug barons and extortionists have hijacked all the state institution. In these circumstances, tax scams can only be countered through a permanent commission, representing the people of Pakistan, which should probe the cases and release its reports in the Press on monthly basis.

(The writers, lawyers and partners of HUZAIMA & IKRAM (Taxand Pakistan: http://www.taxand.com/our_locations/pakistan), are Adjunct Professors at Lahore University of Management Sciences (LUMS)

Huzaima Bukhari and Dr. Ikramul Haq, "Beyond reform?," Business recorder. 2012-12-14.