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Sordid story of tax frauds – III

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 million to an electronic company in 2003, 2004 and 2005 despite the fact that tax record was tempered 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 press reports, 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 reportedly 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 allegedly sanctioned Rs 138.460 million fake refunds on bogus tax deduction certificates issued by some stock exchange members. FBR constituted a high-level committee 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 elements of an organised crime were present. 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 news in press was provided/leaked by FBR itself – these were not investigative reports by journalists. The increased numbers of refund scams and unfettered tax evasion confirm that nothing has changed in FBR even after so-called reforms funded through loans worth millions of dollars. It is a sad reflection on FBR’s top management. Even NAB after these reports did not take any action against the culprits to recover losses caused to national exchequer.

The failure of FBR, NAB and FIA has been encouraging the corrupt, criminals, tax evaders, smugglers, drug dealers, terrorists, rent-seekers, and profit-hungry unscrupulous businessmen not to pay taxes but just give officials their due “share” – in return FBR draft amnesty schemes for them to whiten their untaxed assets by just paying 1 to 1.5 percent. Even otherwise a permanent amnesty scheme is available in the form of section 111(4) of the Income Tax Ordinance, 2001 that ensures no question will be asked about the source of funds brought through remittances. One can go to any money-exchange dealer, give him local currency and he will arrange “remittance” (sic) for a small premium. In the presence of this obnoxious provision, why should the rich, corrupt, criminals bother about paying tax and filing retunes?

The tax-evaders and dishonest tax officials together constitute a mafia that has converted Pakistan into a haven for tax dodgers and plunderers of national wealth. In the morning many FBR’s officials “deal with clients” in offices and in the evening render them “professional” services on muk-muka (settlement) basis at their homes or offices of tax advisors where they work part time!. It is beyond any doubt that the prevalent mass-scale tax evasion is not possible without the connivance of tax administrators.

The tax officials holding key posts are holding the same on the recommendations of their political masters and not on merit. They create exemptions and concessions for them by issuing Statutory Regulatory Orders (SROs). The case of sugar industry – cartelized by dominant politicians of all parties – is a classic case for study. The unholy alliance between the tax evaders (majority of them are politicians-cum-businessmen) and tax officials deprives the national exchequer of billions of rupees and the rest of the nation is facing economic hardships. This unholy alliance designs and implements policies for “mutually-beneficial” relations and its outcome is total destruction of our socio-economic system (we are witnessing ever-increasing rich-poor divide, chaos and lawlessness).

Pakistan is now controlled and ruled by mafias – people in possession of colossal untaxed assets, immense money generated through unlawful means. These mafias are crippling all State institutions. Since members of Senate and National Assembly have either failed to file tax declarations or where filed are hopeless, the mafia chiefs and their cronies are operating fearlessly knowing that law violators can never establish rule of law. The FBR, being handmaid of these mafias, protects them through tax amnesty schemes or non-action against the tax evaders. The tax evaders, plunderers of national wealth, the corrupt, drug barons and extortionists have already hijacked all the state institutions. In these circumstances, tax evasion and tax frauds can only be countered through a permanent public commission, representing the people from all walks of life, which should probe the cases, release its reports in the press on monthly basis and recommend actions for retrieval of tax losses and punitive measures against the culprits.


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, "Sordid story of tax frauds – III," Business recorder. 2013-02-03.