2014 PLP 1424 (PTD)

6. When confronted, both PRAL and I & I responded to the points raised by the complainant. In their reply, PRAL emphasized the important role that it had played in setting up a complex, electronic system to facilitate fraud-free transactions involving payment of sales tax. It claimed to have created the right tools to detect tax fraud within the e-FBR system. Downplaying the complainant's suspicions of PRAL's involvement in aiding and abetting outside criminal elements in sales tax fraud, it was pointed out that PRAL was only a technology provider and a responder to Departmental requirements by designing, implementing and maintaining re-systems according to given specifications. It had no direct role in the day to day working of field formations.

7. The I & I response was more extensive but fell short of giving clear answers to pertinent questions posed by the complainant. For instance, it had no plausible explanation on why it made no effort to take up the question of wholly inadequate punishment awarded in the Rs.230 million tax fraud in case F.I.R. No.6 of 2010. There was only a general statement that appeal for enhancement of sentences had been filed in 'appropriate' cases of fraud. However, no details were provided why serious cases like F.I.R. No.6 of 2010 were not considered fit for the purpose. No clear answer was provided either as to how it was possible for many fraudsters to be 'ACTIVE' taxpayers for a considerable time after detection of fraud committed by them, at times even after an F.I.R. had been registered, except that several legal formalities were required to be completed before a registered person could be blacklisted and categorized as INACTIVE. But that begs the important question; if a fraudster could siphon away millions of rupees with such relative case, what practical worth the ACTIVE TAXPAYERS LIST (ATL) was!

8. I & I also did not provide any insight on how the fraud could have been perpetrated on such a scale without access to passwords, pin codes and user IDs that are supposedly in safe custody of PRAL. As already stated, it was seldom possible to break into and manipulate the e-FBR system without access to security codes created and held by PRAL.

9. An important point brought out in the I & I response, however, was that a fake sales tax invoice, at times, would bear particulars of a person other than the listed seller. Thus if ABC was the seller, the fake invoice would be issued bearing particulars of XYZ. The obvious question as to why the system was failing to detect such mundane discrepancies still remains unanswered.

10. Both sides have been heard, record and documents produced examined and written submissions considered.

11. One thing that comes out very clearly from investigations made is that the sales tax fraudsters in Pakistan have become adept at targeting the online system of claiming input tax credit. It is the responsibility of the PRAL for making the system reasonably foolproof. Take for instance the creation of dummy entities. Lack of sufficient pre-registration checks is a critical reason why it has been possible to get so many dummy entities registered with relative case by the criminal elements. As online registration is a first step for a participant in the automated sales tax System, it is only reasonable to expect that due attention was paid to build effective checks in the system. What is even more worrisome is that PRAL does not appear to have learnt lessons from the case with which dummy entities have been set up in the past.

12. The inept excuse offered by I&I for keeping suspect registered persons ACTIVE long after their fraud was discovered is not helpful at all in preventing such a malpractice in future. I & I needs to take up the matter with PRAL so that ways could be found to 'Red Hag' a suspect entity at the earliest possible stage in the fraud chain, thereby giving timely warning to the potential buyers. Findings:

13. Both PRAL and I & I appear to have failed to devise an effective automated online system for registered sales tax persons. Complicity and collusion of rogue Tax Employees with outside criminal elements is also not ruled out. Recommendations:

14. FBR to-- (i) set up a task force to investigate all aspects of sales tax fraud and propose effective countermeasures; (ii) restructure PRAL and 1 & I with a view to transform them into proactive agents of sales tax fraud prevention/detection; (iii) review I & I staffing policy and only highly qualified professionals with demonstrated expertise in uncovering cases of online white-collar crime should be assigned key investigative roles; (iv) proceed against tax employees found involved in perpetration of fraud and bring them to justice, particularly those in the higher ranks; (v) hire high quality prosecutors to handle complex tax frauds prosecutions; (vi) enable prospective buyers to deal only with legitimate sellers. The procedure for blacklisting and listing as INACTIVE must be telescoped so that doubtful firms do not remain in the field to dupe innocent buyers; and (vii) report implementation of recommended steps within three months. CMA/28/FTO Order accordingly.