WAHEED SHAHZAD BUTT VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2014 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1424 (2012)

Sales Tax Act (VII of 1990)---

----S.7---Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9---Determination of tax liability---Adjustment of input tax fraudulently claimed on the basis of fake invoices with the collusion, connivance and complicity of elements within the tax employees of the Federal Board of Revenue, including the Directorate of Intelligence and Investigation and Pakistan Revenue Automation Limited---Validity---Sales tax fraudsters in Pakistan had become adept at targeting the online system of claiming input tax credit; it was the responsibility of the Pakistan Revenue Automation Limited for making the system reasonably fool-proof---Lack of sufficient pre-registration checks was a critical reason as to why it had been possible to get so many dummy entities registered with relative ease by the criminal elements---Online registration being a first step for a participant in the automated sales tax system, it was only reasonable to expect that due attention was paid to build effective checks in the system---What was even more worrisome was that Pakistan Revenue Automation Limited did not appear to had learnt lesson from the case with which dummy entities had been set up in the past---Inept excuse offered by I & I for keeping suspect registered person ACTIVE long after their fraud was discovered was not helpful at all in preventing such a malpractice in future---I & I needs to take up the matter with Pakistan Revenue Automation Limited so that ways could be found to 'Red Flag" a suspect entity at the earliest possible stage in the fraud chain, giving timely warning to the potential buyers---Both Pakistan Revenue Automation Limited and I & I appeared 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 was also not ruled out---Federal Tax Ombudsman recommended Federal Board of Revenue to (i) set up a task force to investigate all aspects of sales tax fraud and propose effective countermeasures (ii) restructure Pakistan Revenue Automation Limited and Directorate of Intelligence and Investigation with a view to transform them into proactive agents of sales tax fraud prevention/detection (iii) review Directorate of Intelligence and Investigation staffing policy and only highly qualified professionals with demonstrated expertise in uncovering cases of online white-collar crime would 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) to report implementation of recommended steps within three months.

Muhammad Munir Qureshi, Advisor for Dealing Officer.

Waheed Shahzad Butt for Applicant.

Mukarram Jah Ansari, Addl. Director, I. & I FBR, Muhammad Nayyar Shafiq, Deputy Director, I & I, FBR for Departmental Representatives.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---This complaint is for own motion intervention by the Hon'ble Federal Tax Ombudsman to take cognizance of alleged FBR complicity in the fake/flying invoices scam.

2.The complainant, a tax consultant, feeling concerned with the extent of sales tax revenue hemorrhage resulting from input tax credit fraudulently claimed on the basis of fake invoices has requested the Hon'ble FTO to take notice of the information widely available in the public domain, especially the print media, to unmask the alleged collusion, connivance and complicity of elements within the tax employees of the Federal Board of Revenue (FBR), including the Directorate of Intelligence and Investigation (I&I) and Pakistan Revenue Automation Ltd (PRAL), with the outside criminal elements.

3.The complainant is of the opinion that the tax fraud taking place at a colossal scale could not be perpetrated without insider information and support. He finds the role of PRAL especially suspect. Reports published in the media also suggest that a significant number of accounts of existing registered sales tax persons may have been deliberately set up as 'dummy entities' to be used in input tax scams.

4.A feature of the existing e-FBR Web Portal is the categorization of registered sales tax persons as ACTIVE and INACTIVE. This categorization is meant to act as a ready reckoner for the purchasers of goods to determine whether there was any risk attached to making purchases from the registered sales tax persons listed as suppliers of goods. In other words, a person involved in issuance of fake invoices would have to be listed INACTIVE. In practice, however, the system does not work in such a manner as to be of any practical assistance to intending purchasers of goods. This is because many registered persons who are known to have indulged in tax fraud manage to remain listed as ACTIVE taxpayers, long after their fraudulent practices have been discovered. Resultantly, many innocent purchasers of goods get trapped into interacting with such 'ACTIVE' taxpayers. It is often too late when they discover that their sales tax payments are not getting deposited into the Government account.

5.The complainant further pointed out that it is not a simple case of hacking into a system. The deliberate creation of dummy entities, for instance, illustrates that all this cannot happen without insider involvement.

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/FTOOrder accordingly.