2012 PLP 1265 (PTD)

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).

This complaint is against notices issued by intelligence and Investigation Directorate (I & I), raising queries regarding input tax credit claimed by the complainant.

2. A nationwide scam of fake sales tax invoices has been under investigation by the I & I for some time. The complainant was found to have had business transactions with four black listed suppliers who had not deposited output tax amounting to Rs.615,

035. Notices under sections 37 and 38 of the Sales Tax Act, 1990 (the Act) were served on him by I & I to submit relevant record and join the investigation relating to the tax periods cited hereunder:-- Financial Year 2009-2010; Tax periods: 12/2009; 1/2010; 3/2010. Financial Year 2010-2011; Tax periods: 10/2010; 11/2010; 12/2010; 01/2011

3. The complainant contends that I & I investigation was not justified as the suppliers status at the time the transactions were made with the four suppliers was 'Active' and he had no way of knowing that they were engaged in tax fraud and had not deposited the sales tax paid by him along with the payment for purchases in government account as output tax. According to the complainant, the supplier had exclusive responsibility to deposit sales tax collected from buyer into government account as output tax and the recipient buyer bore no responsibility in the matter. The complainant further states that if sales tax was collected both from the buyer and the supplier pursuant to investigation, then that would lead to double taxation which was not permissible under the law.

4. When confronted, the Deptt filed a reply explaining that the complainant had been served with statutory notices so as to determine whether or not he had any involvement in the scam. However, the complainant chose not to submit the record required to conduct an in-depth investigation in the matter. He did not join the investigation and remained evasive. Nor he had filed a complaint before the Hon'ble Federal Tax Ombudsman simply to distract attention away from his involvement in the scam.

5. Both sides have been heard and record perused.

6. It is evident from the record that the complainant had dealings with blacklisted entities and the sales tax that he claimed to have paid to the supplier was not deposited into government account. The complainant admits that the sales tax payment he made to the supplier was entirely in cash. This means that all the transactions were below Rs.50,000 otherwise payment ought to have been routed through banking channels. This casts suspicion as it seems somewhat unusual that each transaction was for less than Rs.50,

000. Typically, cash transactions are resorted to by entities seeking to avoid leaving a paper trail. The complainant's failure to submit the required documentation requisitioned by I & I and not to appear before the investigating authority in person also leaves many questions regarding his alleged involvement unanswered. When a person has nothing to hide he should not feel reluctant to produce all the record before the investigating authority and to render explanations on all pertinent issues. Scrutiny of the relevant record would throw light on many contentious areas especially with regard to goods delivery from the supplier.

7. The complainant's contention that the Deptt. was not authorized to demand payment of sales tax from both supplier and buyer even in a tax fraud case has been looked into. Normally, the genuine buyer takes input tax credit and that has the effect of reducing his due tax liability by the amount of sales tax credit taken. The supplier on the other hand deposits the sales tax amount charged by him on the goods sold into government account. As sales tax is an indirect tax, the incidence is passed on to the 'consumer', in this case, the buyer. In a fake invoices scam, however, no sales tax is paid and none deposited. Here the fraudulent buyer manages to lower his tax liability by taking irregular input tax credit while the fraudulent seller enriches himself by charging money on a fake invoice. Thus both seller and buyer enrich themselves illegally at the expense of the exchequer. In such a situation both are defaulters in their own right and are therefore liable to pay individually or collectively the sales tax evaded by them.

8. The issuance of notices to the complainant by I & I in the context of the investigation underway in the fake invoices scam does not tantamount to maladministration. However, the F.B.R. is directed to ensure that the fake invoices scam is thoroughly investigated expeditiously as per law. H.B.T./88/FTO Order accordingly.