FBR Urged to Probe Benami Transactions by Tractor Makers

The Federal Tax Ombudsman (FTO) has strongly recommended the Federal Board of Revenue (FBR) to probe into the aspect of massive benami transactions in the tractor manufacturing sector and monitor and enforce the sales tax invoicing system to verify the input tax claims and refunds of a leading tractor manufacturing company.

According to an order issued by the FTO on Tuesday against a top tractor manufacturing company, the complainant has highlighted before the FTO that he had booked 1001 agriculture tractors from a tractor manufacturing company on June 21, 2022, paying in advance full consideration amounting to Rs. 1,252,851,600, including a 5 percent sales tax, under serial number 25 of the 8th Schedule of the Sales Tax Act, 1990, through 91 pay orders.

However, the company only delivered 47 tractors to the complainant in the month of June 2022 and failed to deliver the remaining 954 tractors even after the 60-day expiration period.

The FTO office referred to the Statutory Regulatory Orders (SROs) related to the refund to agriculture tractor manufacturers, and therefore, due diligence is required while issuing a refund. But the FBR has also not been able to verify the genuineness or authenticity of the supply chain under Section 2(33A) of the Sales Tax Act, 1990.

The FTO office discovered that whenever any booking is made by a genuine grower or farmer through authorized dealers, the payment through banking instruments is made by the buyer or grower himself, and the invoice is issued in his own name. Such genuine instances are clearly distinguishable from the bulk of sales, wherein payment is received from someone else and invoices are issued in the names of lenders or benamidars.

It is evident from the proceedings that bookings of tractors are made by commercial dealers who are not themselves growers or farmers, but rather are carrying on the purchase and sale of tractors for profit or commission motives. Tractors purchased in this manner are invoiced in the names of unrelated persons and mostly used for purposes other than agriculture, i.e., industry, trolleying bricks and construction material, digging of land (housing societies), cleaning of garbage, etc., so refunds in such cases are inadmissible. Thus, most of the sales tax invoices are issued in the names of benami farmers or dummy growers. This scenario is a perfect benami arrangement that has already been prohibited under the Benami (Transactions) Prohibition Act, 2017.

While concluding the proceedings, the Tax Ombudsman has recommended that the Chief Commissioner Inland Revenue (IR), Large Taxpayers Office (LTO), Lahore, conduct an exhaustive review of the instant case to ensure that Section 2(44) and Section 23 of the Sales Tax Act, 1990, and all relevant SROs governing the tractor manufacturing sector are implemented in letter and spirit.

The FTO has recommended the Chief Commissioner IR, LTO, Lahore, verify the contents of the instant complaint, especially challenging the genuineness of input tax claimed by the respondent, and also verify the genuineness of farmers, and that the DG Anti-Benami Initiative, FBR, probe the incidence of benami transactions in the tractor manufacturing sector.

While conducting exhaustive investigations, the FTO has made serious observations about the company.

As per invoices issued by the company, 47 unrelated persons have been shown as the payers, who have neither booked the tractors through the authorized dealer, nor made any payment, nor maintained any business relationship with the payer. The case appears to be a classic example wherein goods are delivered to one person and invoices are issued to other (dummy) or fictitious persons.

The arrangement would shield the true particulars of the real payer or investor by portraying the made-up particulars of an unrelated person whose CNIC has been misused to conceal the transactions made by the real payer. Investments made and profits earned by the beneficiaries thus remain concealed and untaxed.

Such an arrangement has neither legal backing nor fits within the parameters of Section 23 of the ST Act of 1990. The company’s assertion that this practice is prevalent in the whole tractor manufacturing sector doesn’t carry weight if the practice in question is against the clear provisions of law and it only encourages benami transactions.

In the instant case, though the full price of 1001 tractors, inclusive of chargeable sales tax at that point in time, was paid by the complainant in June 2022, this transaction was not accounted for by the company when it filed the sales tax return for the month of June 2022.

When the company was confronted on this account, their AR’s first response was that time of supply is linked with delivery of goods, and as booked tractors were not delivered, hence there was no need to declare the same in June 2022. But when enquired about the non-invoicing of 47 tractors in the return of June 2022, in the name of the complainant to whom these tractors were actually delivered in the month of June 2022, AR had no explanation to offer. Similarly, though AR is of the view that time of supply is strictly linked with delivery of goods, he couldn’t offer any plausible reason when the aforesaid proviso was referred, which obligates.

According to AR, this proviso is redundant in the face of other main provisions of law, but he failed to substantiate his assertion. His next argument was that the said proviso only covers cases where part payment is made—once again, an overly simplistic interpretation of the law.

Moreover, the company has failed to provide any explanation as to how and under which provision of law the sales tax component of payment received by the company can be retained by the supplier for an indefinite period and how sales tax paid by the buyer can be adjusted against a price differential, if any, by the supplier on its own without disclosing this fact in the relevant sales tax return. Thus, by non-declaration of whole transaction and non-payment of sales tax recovered against 1,001 tractors from the payer or complainant, the company has contravened sales tax act, and LTO Lahore failed to take any suo motu cognizance of this glaring default.

Regarding payment of Karachi Inter Bank Offered Rates (KIBOR) plus 3 percent for failure to deliver tractors within 60 days under SRO 837(I)/2020 dated June 30, 2020, it is evident that 1,001 tractors were booked on June 21, 2022, against full payment including 5 percent sales tax through 91 pay orders by the complainant, and the respondent company was to deliver the same within 60 days of the booking, but he only delivered 47 tractors to the complainant though an authorized dealer of the respondent company. Revision of prices apart, the violation of the aforesaid SRO is evident.

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