The Federal Board of Revenue (FBR) has failed to establish FBR Refund Settlement Company Limited to clear pending refunds of billions through the issuance of sales tax bonds to the exporters.
The Auditor General of Pakistan (AGP) has directed the Federal Board of Revenue (FBR) to explain the excess reporting of tax collection and less payment of shares to provinces from a divisible pool and the burden on the federal exchequer.
Under the FBR Guidelines for Sales Tax Refund Bonds issued in 2019, bonds shall be issued by the FBR Refund Settlement Company Limited in Central Depository System (book-entry form) against Refund Payment Orders as issued in favor of the claimants under Section 67A of the Sales Tax Act 1990. The bonds shall be issued in values in multiples of one hundred thousand rupees.
The bonds so issued carry a simple profit of 10 percent per annum payable at the end of the maturity period i.e. against a bond of Rs. 100,000, Rs. 130,000 shall be paid after maturity to the holders of the bond.
The bonds are freely transferable within CDS. The bondholders can sell/transfer the bonds to another person/bank/entity against any consideration or without any consideration (simply as a gift). No payment will be recorded/handled in CDS. The bonds shall be approved security for calculating the Statutory Liquidity Reserve (SLR).
The report of the AGP stated that the section 171A of Income Tax Ordinance 2001, provides income tax refunds payable may also be paid through income tax refund bonds to be issued by FBR Refund Settlement Company Limited (RSCL), in book entry form through an establishment licensed by the Securities and Exchange Commission of Pakistan in lieu of payment to be made through the issuance of cheques or bank debit advice.
The AGP observed that a supplementary grant of Rs. 100,000 million was obtained in the financial year 2019-20 and Rs. 40,000 million in the financial year 2020-21 with the title, “1B0799-Encashment of sales tax and income tax refund bonds”. However, it was observed that the above-mentioned bonds were never issued to the taxpayers. Instead of issuing bonds, the outstanding refund liability was discharged through payment of cash during the said financial years which was a violation of the above law.
The unauthorized refunds resulted in financial implications. The supplementary grant was not used for the purpose for which it was obtained from the Parliament. The refunds were paid in cash as normal refunds using a new head of account instead of refund codes specified/allocated by the AGP under article 170 of the Constitution. This has resulted in excess reporting of tax collection and excess payment of shares to provinces from the divisible pool causing an extra burden on the federal exchequer pool during the relevant accounting period causing an extra burden on the federal exchequer.
The lapse was reported to the department from August to November 2021. The department reported that a refund of Rs. 100 billion was paid through Technical Supplementary Grant (TSG) in 2019-20 and DR&S reconciled the revenue receipts of the said year with the office of AGPR, Islamabad. Refunds of Rs. 40 billion had been issued during the financial year 2020-21 through TSG and the DR&S had already signed the reconciliation statement for the said year with the office of the AGPR, Islamabad by not excluding the amount of Rs. 40 billion from the overall revenue receipts of the FBR.
The AGP contended the management’s reply on the grounds that the refund has to be paid out of gross tax collection for the year under relevant law instead of a supplementary grant obtained specially for the purpose of issuance of the refund. This resulted in excess reporting of tax collection and less payment of shares to provinces from the divisible pool. Moreover, the purpose of issuing refund bonds was defeated causing an immediate burden on the federal exchequer.
The DAC in its meeting observed that a substantial amount was granted to the FBR for the establishment of a Refund Settlement Company but no progress in this regard was made by the FBR till the financial year 2020-21.
The representative of the Finance Division also endorsed the viewpoint of Audit that neither a Refund Settlement Company was formed nor refunds were issued through bonds. The DAC further observed that this was an operational and policy-level issue and it was agreed that the matter may be taken up with the concerned wings of FBR through Member Accounting FBR.
The AGP has recommended that the position may be clarified under the intimation to the AGP as the said company could not be established which resulted in the non-issuance of refund through bonds. This also led to excess reporting of tax collection, less payment of share to smaller provinces from the divisible pool, and adversely affected the liquidity of the federal exchequer. This discrepancy may be regularized by getting authorization from the Ministry of Finance and this practice may be discouraged in the future.
