FBR launches probe into Rs7 billion tax evasion

KARACHI: The Federal Board of Revenue (FBR) has launched investigation against 42 textile units for rendering an estimated seven billion rupees in tax revenue losses through misuse of zero-rating facility of sales tax, officials said on Friday.

The officials said the FBR identified 42 textile companies which made sales of Rs 36 billion to bogus companies and deprived the government of tax revenue. An official of Inland Revenue said the textile units could avail zero percent sales tax on sales to registered companies under a law (statutory regulatory order 1125(I)/2011).

But, sales tax impact is 19 percent, including 17 percent flat rate along with two percent further tax, in case of sales to unregistered buyers. The FBR conducted scrutiny of monthly returns of sales and purchases submitted by textile companies. It was identified that 42 textile units made sales to around 22 companies, which were apparently registered with the different tax offices.

The tax authorities, however, found that all the 22 companies were bogus as they were registered on the basis of fake documents. “The physical verification of these 22 units was launched to determine how these companies could be able to get registration in a controlled mechanism,” the official said. The official said the bogus companies were issuing fake invoices to the textile units to get relief of zero-rating.

“In fact, these textile units were selling their products to unregistered persons and pocketed 19 percent sales tax by cheating the tax authorities,” the official added. Sources said phenomenon of ‘fake’ and ‘flying’ invoices is due to zero-rating sales tax regime.The government allows zero rating facility of sales tax for five exports-oriented sectors: textile, leather, sports, surgical and carpet goods.

The fake and flying invoice played havoc to revenue base in the past and caused issuance of billions of rupees in fake sales tax refunds. Another official at Corporate Regional Tax Office Karachi, however, said FBR made it impossible for a fake company to get registration because of geographical identity and biometrics made mandatory for the new registration. The official said the FBR monitors online identity of bogus companies that file monthly returns. The government has to settle billions of rupees in refunds to businesses. Last year it cleared more than Rs100 billion in the first 11 months of the last fiscal year compared to Rs54 billion in the corresponding period a year earlier as business community slammed liquidity crunch created out of pending refund claims.

Fake invoices are not limited to local industry, but businesses were also found deceiving tax authorities into fake refund payments and evading taxes and duties in cross-border trade.

Policy advocacy group Pakistan Business Council estimated more than Rs500 billion in annual losses incurred by national exchequer due to mis-pricing and under-invoicing. It advised the government to thoroughly review import valuations to stem misuse and under-invoicing.