Tax experts told Business Recorder on Tuesday that FTO had recommended restructuring of the PRAL transforming them into proactive agents of sales tax fraud prevention and detection and set up a task force to investigate all aspects of sales tax fraud. The FTO has given these instructions on a complaint filed by a Lahore-based tax lawyer Waheed Shahzad Butt in C.No 192/LHR/ST(48)/390/2012 dated 23.08.2012.
They said that FBR has neither preferred representation before the President under section 32 of the FTO Ordinance, 2000 nor any review has been filed before the FTO, however, implementation on the recommendations issued by the FTO are pending despite lapse of three months.
The complainant has referred to the role of PRAL as being especially suspect. Moreover, reports published in the media also suggest that a significant number of accounts of existing registered sales tax persons may have been deliberately created as dummy entities for use in input tax scams.
FTO has also asked the FBR to set up a task force to investigate all aspects of sales tax fraud and propose effective countermeasures. Other than this, the FBR has been asked to review Investigation and Intelligence staffing policy and ensure that only highly qualified professionals with demonstrated expertise in uncovering cases of online crime be assigned key investigative roles.
FTO has instructed the FBR to proceed against tax employees found involved in perpetration of fraud, particularly those in higher ranks. The FBR has been asked to hire high quality prosecutors to handle complex tax fraud prosecutions. Dr Suddle asked the FBR to enable prospective buyers to deal only with legitimate sellers. He termed 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.
The FTO asked the FBR to implement the recommendation within three months and report implementation to the FTO office. During the investigation, the FTO found that sales tax fraudsters in Pakistan have become adept at targeting the online system of claiming input tax credit but after the lapse of three months order is still unimplemented.
Lack of sufficient pre-registration checks is a critical reason why criminal elements get so many dummy entities registered with relative ease. As online registration is the first step for a participant in the automated sales tax system, it is only reasonable to expect that due attention is paid to build effective checks in the system. PRAL does not appear to have learned lessons from the ease with which dummy entities have been set up in the past. Moreover, Investigation & Intelligence kept suspect registered persons active long after their fraud was discovered. It needs to take up the matter with PRAL so that ways could be found to 'red flag' a suspect entity at the earliest possible stage in the fraud chain, thereby giving a timely warning to potential buyers.
The FTO finds that both PRAL and Investigation & Intelligence appear to have failed in devising an effective automated online system for registered sales tax persons. Complicity of rogue tax employees with outside criminal elements has not been ruled out.
The complainant mentioned that a feature of the existing e-FBR Web Portal is the categorisation of registered sales tax persons as active and inactive. This categorisation is meant to act as a ready reckoner for the purchasers of goods to determine whether there were at 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 as 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, numerous innocent purchasers of goods end up interacting with them. By the time they discover that their sales tax payments are not getting deposited into the government account, it is often too late, expert said.
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.
According to the FTO decision, when confronted, both Pral and Investigation & Intelligence responded to the points raised by the complainant. PRAL emphasised the important role 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 criminal elements in sales tax fraud, it was pointed out that PRAL was only a technology provider and a responder to departmental requirements by design, implementation and maintaining e-systems according to given specifications. It had no direct role in the day-to-day working of field formations. Investigation & Intelligence 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 created and maintained by Pral, they added.