The Finance Minister along with the Minister of State for Revenue and Chairman FBR conducted a press conference to brief about the study conducted by FBR regarding sales tax evasion across different sectors of the economy. It has been found that there exists a tax gap of Rs. 3,400 billion accounted for by tax evasion and tax fraud.
Evasion can be gauged from the fact that only 14 percent of the 300,000 manufacturers liable to be registered are registered. Many of the registered entities are also involved in misreporting of turnover, excess input tax claims, and the use of fake and flying invoices.
The sales tax in Pakistan is collected in VAT mode as per best international practices. Under this mode, trust is reposed in business entities for the collection of sales tax from the buyers. It has been observed that this trust is being breached at a massive scale.
The Finance Minister shared the findings of the study pertaining to the Iron & Steel, Cement, Beverages, Batteries, and Cement sectors. It has been found that the malpractices prevail all across the business sectors. It was also observed that the majority of the entities are claiming input tax over industrial benchmarks and best industrial practices.
Iron & Steel: It was observed that out of the 33 large businesses engaged in the Iron & Steel sector, representing more than 50 percent of total reported sales, were found in evasion of sales tax by claiming excess input tax of Rs. 29 billion.
The major source of fake and dubious input tax is claims on the purchase of scrap metal and coal.
Batteries: The study of the 6 active cases across the Battery sector, representing 99 percent of total reported sales reveals that a major part of this sector has claimed excess input tax adjustment of Rs. 11 billion than best practices within the industry. The major source of fake and dubious input tax is the claim on the purchase of lead.
Cement: The study of the 19 active cases across the cement sector, reveals that a part of the sector has claimed excess input tax adjustment of Rs. 18 billion in FY23-24 than best practices within the industry. The major source of fake and dubious input tax is the claim on the purchase of coal.
Beverages: The study of the 16 active cases engaged in the manufacturing of aerated water, representing 99 percent of the total reported sales of aerated waters reveals that some of these cases have claimed excess input tax adjustment of Rs. 15 billion in FY23-24 as compared to an industrial benchmark of the sector. The major source of fake and dubious input tax is claimed on the purchase of sugar, plastics, and services.
Textile: The segmental study of the 228 active cases engaged in spinning, weaving, and composite units, reveals that many of these cases have claimed excess input tax adjustment of Rs. 169 billion than best practices within the industry. The major source of fake and dubious input tax is claimed on the purchase of services, chemicals, coal, packaging, and other irrelevant materials.
It was also apprised that due to this huge prevalence of tax evasion, enforcement measures including arrests and registration of criminal cases along with improvements in the reporting system were intensified during the last financial year, resulting in a significant decrease in the claim of fake input tax in FY23-24 across all the sectors. However, despite these efforts massive evasion still persists. To counter this evasion, more intensified enforcement measures have been planned.
The Finance Minister also apprised the Federal Board of Revenue has already identified and gathered pieces of evidence of tax fraud in different sectors which include 11 cases in the battery sector, 897 cases in the Iron & Steel sector, and 253 beneficiaries of fake input claims on the purchase of coal.
A large number of cases have been identified for criminal proceedings on account of sales tax fraud inclusive of the above-mentioned sectors. The persons in the supply chain of these cases have manipulated the input tax adjustments, debit and credit notes and other means to defraud and dodge the return filing system. The total amount of sales tax fraud committed is Rs. 227 billion.
A massive enforcement crackdown has been planned and will be implemented in the coming weeks. The Finance Minister also stated that sales tax fraud is a criminal offence and carries strict action under law which includes arrest and imprisonment of up to 10 years other than heavy penalties and fines. The action would be taken against owners of the business, in cases of sole proprietorships, Partners in cases of firms (association of persons), and Directors, CEOs, CFOs, and other authorized persons of the company.
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what about the FBR past and current employees who assisted in this tax invasion?
A lot of money actually going to FBR officials , facilitating the corruption.