FINDINGS/RECOMMENDATIONS MUSHTAQ AHMED SUKHERA, FEDERAL TAX OMBUDSMAN.----This is an own motion investigation initiated while exercising powers conferred under Section 9(1) of the Federal Tax Ombudsman Ordinance, 2000 to investigate irregularities committed by the FBR field formations in processing and sanctioning of bogus sales tax refunds during the period 2011-14 identified by Directorate General I&IIR of FBR. The Red Alerts in such case were issued to the field formations concerned but neither any action was initiated against the fake claimants and their connivers in the Deptt, who were involved in bogus registration, processing and sanctioning of fraudulent refund and issuance of refund cheques, nor was any action proposed against the related officers/officials of bank branches concerned and PRAL management.
2. In the case of Messrs Fab Tex Industries STRN 1700400008219 NTNo. 4000082-6, Registered Person
(RP) engaged in the manufacturing of other textiles N.E.C, the investigation conducted by I&I-IR FBR, revealed that:
(i) the RP was registered as manufacturer of other textiles on 24.09.2012 but input against utilities were not claimed;
(ii) during the period October 2012 to December 2012 the RP claimed refund of Rs. 8.489 million, on account of local zero rated supplies but most of purchases were from suspended/blacklisted units having no relevance with the business activity of the unit;
(iii) the RP was found engaged in imports and supply of yarn and bogus purchases of Rs. 122.977 million to get illegal refund;
(iv) Out of total zero rated supplies of Rs. 186.896 million the RP made supplies of Rs. 150.150 million to blacklisted unit;
(v) the RP misused SRO 1125(1)/2011 dated 31.12.2011 and-availed benefit of manufacturing status without having such facility and caused loss to national exchequer of Rs.11.339 million.
3. Thus, Red Alert was accordingly issued by the Directorate General of I&I-IR FBR vide letter dated 21.07.2014, for conducting physical verification to verify manufacturing facility of the unit, investigative audit to verify suspicious purchases and supplies and determination of exact tax liability, immediate suspension of STRN to block imports, recovery of evaded tax and initiation of criminal proceedings against the persons/ officials involved in this nefarious and unlawful activity.
4. Comments of the Secretary, Revenue Division Islamabad were sought in terms of Section 10(4) of the FTO Ordinance read with section 9(1) of the Federal Ombudsmen Institutional Reforms Act, 2013.
In response thereto, the FBR forwarded parawise comments of the Commissioner-IR, Zone-I, Corporate RTO, Karachi vide letter dated 27.12.2019. It was contended that physical verification of the manufacturing premises was conducted as the RP made huge imports of Rs.327.158 million under SRO 1125(I)/2011 without payment of value addition but the unit was found closed. The then Commissioner-IR, Zone-I, RTO, Karachi initiated proceedings for blacklisting and suspended STRN of the RP vide order dated 22.10.2014.
5. Meanwhile, the RP filed C.P. No.D-5615/2014 before the Hon'ble High Court of Sindh, wherein following Order was passed on 03.12.2014: "Accordingly, by consent impugned order 22.10.2014 is hereby set-aside. Petitioner is directed to approach the respondent on 15.12.2014 at 11.00 am and submit compliance of the notice, whereafter, respondent shall pass appropriate order in accordance with law. In the meanwhile sales tax registration of the petitioner shall be restored immediately. However, the petitioner may not be allowed to claim input adjustment/refund of the sales tax till decision by the respondent in this regard."
6. In compliance to the Order of the Hon'ble High Court, STRN of the RP was restored vide order dated 24.12.2014. The proprietor appeared and confessed that he had insufficient in-house facility to convert the imported goods and was getting goods manufactured from other units but was unable to provide details about other units. Proceedings for blacklisting were initiated and sales tax registration of RP was suspended on 20.01.2015, followed by blacklisting order dated 09.05.2015. It was informed that three refund claims of Rs.8.489 million, for the tax period October, November and December 2012, were filed but not processed.
7. Averments of the Deptt considered and case record perused.
8. It has been noted that the then CIR, Zone-I, RTO Karachi suspended STRN of the RP on 22.10.2014 after three months of issuance of Red Alert and then by consent restored STRN by taking refuge of court order. Despite confession by the RP regarding misuse of SRO 1125(1)/2011, the Deptt failed to apprehend the culprit and initiate action to determine tax liability and recover the tax evaded This is indeed a criminal negligence and a case of gross maladministration. Although after the receipt of Red Alert, no refund claims were processed but the Deptt failed to initiate any proceedings for retrieval of short levied of sales tax/ value added tax on imports amounting to Rs.566.964 million, through misuse of concessionary SRO. The outlaws, who were involved in registering the fake RP, as no operational manufacturing facilities were found at the declared premises, were also not taken to task. Sadly, even after starting own motion investigation, the Deptt seems disinclined to take any action in this regard. It also sounds strange that the Directorate General of I&I-IR FBR, after conducting such laudable effort of detecting fraudulent activities and issued letters of Red Alerts to the filed formation but did not pursue the matter to its fruition.
FINDINGS:
9. Failure of the Deptt to initiate action against the person(s)/officials(s) involved in registration of fake RP and retrieval of refund already issued prior to issuance of Red Alert, is tantamount to maladministration in terms of Section 2(3)(i)(d) and (ii) of the FTO Ordinance.
RECOMMENDATIONS: FBR to-
(i) direct the Chief Commissioner-IR, Corporate RTO, Karachi to investigate and indentify the officials involved in registration of fake RP and initiate disciplinary/criminal action against those found involved
(ii) direct the Chief Commissioner-IR, Corporate RTO, Karachi to investigate and identify the officers/officials who failed to take timely action to recover tax evaded through misuse of SRO 1125(1)/2011 and take appropriate criminal/disciplinary action against them;
(iii) initiate criminal proceedings leading to prosecution of RP and recovery of evaded amount, swindled from public exchequer;
(iv) report compliance within 45 days.