Refund Scams

REFUND SCAMS <!--[if gte mso 10]> REFUND SCAMS By M. Iqbal Patel, F.C.A., Karachi The Federal Board of Revenue (FBR) now a day is facing short-fall in revenue than targeted on one hand and there cases have been unearthed of mega tax frauds involving millions of rupees loss caused to the national exchequer due to undue payment of refunds. The payphone companies obtained huge amounts of refunds based on Board's earlier ruling of 2004 that excise duty was chargeable on discount price. Although these refunds were time barred and it was mandatory for the collectors to obtain Board's approval for condoning time period for issuance of refund in time barred cases and to seek guidelines prior to the issuance of huge amount of refunds but the concerned officers did not bother to comply with the requirement of approval and issued the refunds of around Rs.380 million unilaterally to the payphone companies. However, later on the Board was of the view that payphone companies are not entitled to claim refund of excise duty as its incidence is passed on to the consumers and duty collected in Value Added Tax mode is charged on gross amount rather than discounted price. This view of the Board has been endorsed by the Law and Justice Division. In fact the payphone companies were not entitled to the refunds for the reasons that they were exempt from payment of excise duty on the services provided by them for the period up to July 1, 2005. Further they were neither liable to be registered as service provider nor they charged any excise duty for the services provided by them. Moreover, they neither filed any sales tax return nor issued any sales tax invoice. It was ignored that the transactions were never made against sales tax invoices but against corporate bills issued by the Telecommunication Company Ltd. with no registration number of the claimant recorded thereon. It is a glaring instance which shows how the statutory laws are ignored and techniques are used by the responsible tax officials for committing massive evasion of duties and taxes. Although the FBR has instituted a committee to investigate the matter and take disciplinary action against the officials appeared to be guilty of inefficiency and misconduct under the Removal from Service (Special Powers) Ordinance, 2000, but the constitution of committee one after the other delays the matter and raises the doubt of fruitful out come. Another an organized gang comprising former senior tax officials has been busted who issued bogus income tax refunds accounting to Rs.138 million during 2006-2007 to hundred of individuals on the basis of bogus tax deduction certificates issued by certain members/ brokerage houses/brokers of Karachi Stock Exchange. It is expected to increase this amount of bogus refunds manifold after the scope of investigation is expanded. The said biggest income tax refunds fraud reported in the press stated that this scam unearthed is based on credible information and documentary evidences, if the case being so then there no reason appears to delay prompt action against the officers involved who caused tremendous loss to the national exchequer by issuing illegal refunds. But so far there no report is published as to whether any action has been taken against them. There another mega tax fraud has been unearthed that certain franchise mobile phone companies in Karachi have obtained illegal refunds on the basis of wrong National Tax Numbers which were actually issued to some other persons. The accused tax official is said to be ex-CIT-Appeal who used to simply sign the appellate orders drafted by the franchisees lawyers. Interestingly to note that the official issued illegal refunds in dozens of cases during the period of four years from 2003 to 2007, but all of them remained undetected by the inspection team and auditors of the Tax Department. Most of the cases are related to tax years, 2005 and 2006 involving an amount of Rs.13.45 million which was illegally paid to these companies. The quantum of fraud may be mass extent as it is alleged that the official has purchased undeclared property in Karachi as well as in U.K. It is not comprehensible that how a CIT-A who has neither power nor has access of the records to issue refunds has successfully issued illegal refunds. Obviously a gang the officers/staff below him could have helped him in his mission. One more scam has been unearthed in Lahore involving a senior official has issued bogus refunds of over Rs.103 million in 39 cases on forged documents during period of four years from 2003-2007. The Commissioner who issued illegal refunds in several case remained undetected and without any check by any tax agency. Further he was said to have already been involved in corruption. It transpired that he successfully crossed all the barriers all the time. These are the glaring instances which show how the statutory laws are ignored and techniques are used by the responsible tax officials who are entrusted the sacred duty to safeguard the interest of the nation are involved in committing massive evasion of duties and taxes. The officials have not only tampered the tax records but also grossly violated rules and regulations to facilitate the illegal refunds. They haves deliberately drafted wrong cases showing misstatements, concealed the basic facts of the cases, flouted statutory provisions and legal requirements to give legal backing to the bogus refunds. These violations were committed in such a bold manner that even basic reading of documents showed clear violations and misinterpretation of law. Despite of the fact that their unique techniques caused huge loss to the national kitty, yet astonishing part of the story, as reported in the press, is that one of the said corrupt officer has been given new assignment to work as Member Tribunal to settle income tax-related disputes of the taxpayers who approaches the said appellate forum in order to seek justice form it. It is anybody's guess the fate of the justice a taxpayer would receive from there. The above instances of refund scams have unfolded the weaknesses in the system of issuing refunds and flow in tax laws. It will be noted from the above cases that most of the frauds are committed by the Commissioner. In one of the cases the Commissioner (Appeal) is involved but he could not have succeeded in committing the fraud without the support of his subordinates. The incidents mentioned above calls for to seriously look into the loop holes in taxation system or in its laws which allow corrupt practices by tax law enforcers themselves so as to initiate remedial measures to avoid occurring of such incidents. It may be noted that the incidents mentioned above relate to the post period of enforcement of the Income Tax Ordinance, 2001 (Ordinance). The issue of refund is addressed in the section 170 of the Ordinance. It empowers a Commissioner to process an application of refund made by a taxpayer and serve an order for acceptance or refusal of claim of refund to him. He is allowed a long period of allowed 45 days from the receipt of refund application for the purpose. Firstly it will be noted that neither the Ordinance provides procedure nor mechanism which he is required to follow in verification the claim of refund of the applicant nor the Income Tax Rules, 2002 provides rule to that effect. These discretionary powers for verification the claim of refund has became source of harassment of the taxpayers. The tax officials use different tactics to delay to entertain the refund application under one or the other cover. Secondly in the absence of any prescribed procedure in the Ordinance or Rules, the Board has been issuing instructions/directives through the circulars/letters on issuance and processing of refunds since 1978. It has issued warning several times that in case of infringement of these instructions by any Assessing Officer shall be treated as inefficiency and misconduct and shall be visited with strong penal action under the Government Servants Rules, 1973. But one may hardly find a single precedent to quote where such punitive action has been taken against any tax official by the Board despite 'of the fact that issue of refund has become such a critical issue that not only the Chairman of the Board but even the Chief Executive of Pakistan General Pervez Musharraf has been approached by the aggrieved taxpayers through their trade bodies requesting him to come for their rescue to get refund of their excess money paid by them to the exchequer. Finally the powers entrusted to the Commissioner under section 170 as mentioned above are absolute in the sense that in case he does not issue order or his decision within the stipulated period of 45 days; the applicant has no choice except to file appeal against his lapse for non-compliance with the statutory requirement. Thereby a taxpayer has been left to the mercy of the Commissioner. These absolute powers given to the Commissioner are without corresponding liability provided in the Ordinance on his part to make him accountable for his failure to comply with statutory requirement to pass the order within the stipulated period. These statutory powers are binding on him being these powers are not discretionary. Although the Board has been issuing warnings to the tax official that in case of breach of their duty they will be treated it as their misconduct and punishment shall be awarded under the Government Servants Rules, 1973. Our society has become accustomed to daily shocks of greater proportion than corruption that such trivial incidents fail to shake us anymore. The Board focuses more on punishment to stop the curse of corruption instead of finding ways to systematically and strategically deal with the problem of corruption. The question is to how eradicate this menace. Though punishment is considered as one of the traditional and time-tested techniques which influence one's behavior in a desired direction. But more important is how to apply modern technique for bringing discipline in the taxation. The Ordinance is silent on the issue of awarding any penalty or punishment to the tax collectors. This lacuna in the tax laws encourages inefficiency, corruption and maladministration in the taxation system. On contrary the Ordinance provides for penalties, prosecution even fines or imprisonment for non-compliance with certain statutory obligations by a taxpayer. But exceptionally in case of tax officials no any action is provided in the Ordinance against them for their failure to comply with their statutory obligation. One of the measures to minimize the corruption in the taxation system is to abolish this discriminatory treatment between tax collectors and taxpayers in the Ordinance. It must be brought at par providing similar penal provisions including the punishment under the Government Servants Rules, 1973 in the Ordinance for the tax collectors, thereby making the tax laws applicable to all the concerned judiciously.