Inefficiency at its best

The Federal Board of Revenue (FBR) has failed to stem the growing menace of tax frauds

THE NEWS

By Huzaima Bukhari and Dr Ikramul Haq

The Federal Board of Revenue (FBR), even after completing six years of so-called tax reforms (which started in 2002 and will end in 2009), symbolises an institution wrought with sleaze, wastefulness, inefficiency and corruption. The recent episodes of tax scams (fake income tax refunds, flying sales tax invoices, excessive payments of export rebates, etc) have once again confirmed the existence of an unholy alliance between corrupt tax officials and unscrupulous businesspeople, which is not only depriving the nation of billion of rupees but is also criminally shifting the incidence of taxes to the poor.

In recent years, the FBR has been making tall claims about its automation efforts. Its chairperson informed the public time and again that after the introduction of automated procedures in all departments, the possibilities of tax fraud were eliminated effectively. On the contrary, the data show that since 2005, when computerised procedures were introduced, the incidence of tax frauds has increased manifold, in comparison with the days when manual procedures were in vogue.

This shows that before going for automation, system analyses were not conducted properly and human resource development was completely ignored. The recent tax scams testify to the fact that there is a complete failure on the part of so-called 'line members' (drawing excellent salaries and fringe benefits) to adopt preemptive measures against possible tax frauds. This also confirms that functional members (old timers representing the departmental bureaucracy) are not ready for change; for one obvious reason that their salaries, as well as that of their subordinate staff, are much lower than those officers hired from the market and the 'donor-imposed' foreign consultants.

The tax frauds that surfaced recently were detected mainly by the Directorate-General of Intelligence, the FBR. These frauds, however, represent only a tip of the iceberg. The actual number of tax frauds committed during the last five years and the quantum of tax involved are yet to be determined. The government, therefore, must immediately form a commission comprising anti-corruption officials, judges, and audit and tax experts to thoroughly probe the record of the last five years of all the tax departments, in order to unearth all the cases of tax frauds. The retrieval of public money through this commission will also help increase the collection of taxes in the current fiscal year.

The following summary of major tax frauds reported in the media recently and its analysis establishes beyond any doubt the criminal culpability of the high-ups of the FBR:

On January 5, 2008, a report was published in a leading newspapers disclosing that the FBR has unearthed a scam in Lahore involving a senior income tax official of BPS-20, who allegedly issued bogus refunds of over Rs 103 million in 39 cases on forged documents from 2003 to 2007. Earlier, a similar scam was reported in Karachi.

On October 22, 2007, Directorate-General of Intelligence, Customs and Excise, instituted criminal proceedings against 14 industrial units of Punjab for claiming illegal sales tax refunds by filing bogus invoices. The fraud took place two years ago when many commercial exporters had claimed illegal refunds on the basis of fake documents (interestingly, it took the FBR two years to take notice of the crime!).

The inquiry of illegal refund to pay phone companies is till pending. These companies, according to the FBR's own admission, were not entitled to the refund because they were exempt from excise duty on the services provided by them for the period up to July 1, 2005. Why no action was taken at the time of payment of refund and an inquiry was initiated only much later?

On May 14, 2006, the Supreme Court of Pakistan rejected the bail application of Raja Zaraat, "who has been wielding far larger financial clout than originally estimated" in getting billions of rupees as tax refund on forged documents, says an FBR press release. The FBR admitted that though the first compliant against Raja Zaraat was received by it in December 2005, no action was taken against him till May 4, 2006, when he was arrested in Islamabad.

The FBR has itself admitted that in numerous cases refunds were made to commercial exporters without obtaining prior approval of additional collectors. This is a clear violation of the FBR's Sales Tax Wing's directive that the approval of additional collector was required for sanctioning refund claim exceeding one million rupees to commercial exporters. The sanctioning authorities also ignored the FBR's instructions on the procedure for overruling system objections for issuance of sales tax refunds. Investigation showed that sales tax officials did not carry out profile analysis of the suppliers in cases of refund claims, sanctioned to commercial exporters under Refund Rules, 2006.

Glaring system errors were also detected in STARR refund automation programme, whereby goods exported were recorded in the system only till the filing of shipping bills. This resulted in inaccurate as well as incomplete data of export consignments. It was noticed that certain unscrupulous exporters filed claims without making actual exports. There was need for capturing the data of shipping lines to ensure authenticity of export documents used for claiming rebate, which was never done. Though the FBR was aware that some unscrupulous exporters were claiming sales tax refunds against fake and tampered shipping bills, no concrete efforts were adopted to counter them.

Also, in many cases, unscrupulous exporters -- with the connivance of corrupt tax staff -- successfully obtained refund by circumventing the STARR system, because it had not put enough checks to verify the shipping bills. During scrutiny of STARR programme in 2006, it was found that refunds were made even in cases where the computer programme had detected discrepancies in the documents submitted by exporters.

The increased number of refund scams and unfettered tax evasion confirm that nothing has changed, which is a sad reflection on FBR's top management. The corrupt and resourceful are still holding key posts, and are issuing refunds on forged documents. They are still encouraging the profit-hungry traders and businesspeople not to pay taxes, but just give them their due 'share'.

It is beyond any doubt that the prevalent mass-scale evasion of taxes is not possible without the connivance of tax administrators (read 'administraitors'). The tax-evaders and tax administrators together constitute a mafia that has made Pakistan a haven for tax-dodgers and plunderers of national wealth. The tax officials holding key posts are directly connected with these people. They design and get implemented policies for 'mutually-beneficial' relations between them, while the whole nation is a silent spectator. The outcome is a total destruction of our socio-economic system (ever-increasing rich-poor divide, chaos, lawlessness, etc).

(The writers are tax advisers who also teach at LUMS.)