FINDINGS/RECOMMENDATIONS MUSHTAQ AHMAD 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 refund during the period 2011-14 as identified by the Directorate General I&I-IR, 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 Amharic Traders STRN 1703999801282 NTN 3374552-8, a 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 w.e.f October 2008. However , except December 2009, the same remained dormant till March, 2012 where he declared exports and claimed refund amounting to Rs.4.21 1 million. Out of this refund amounting to Rs.4.120 million was issued; ii) the RP claimed as manufacture of other textile but failed to claim any input against utilities; iii) during the period from April 2012 to October 2012 the RP declared all zero rate local supplies to Messrs AZ and bothers Karachi involved in other manufacturer N.E.C. whose status was blacklisted w.e.f 19.04.2011 on account of claiming bogus refund; iv) as per Rule 33 of Chapter V of the Refund Rules 2006, notified vide SRO 555(1)/2006 dated 05.06.2006 the refund shall be paid to the extent of input tax paid on the purchase of imports that are actually consumed in the manufacture of goods which have been exported or supplied at the rate of zero percent. In the instant case ratio of consumption/ refund claims to same value was abnormally high the claim pertai ning to tax period April 2012 to December 2012; v) the major inputs of textile sector i.e. cotton, yarn, weaving/processing charges and utilities were declared zero rated since 2005. The textile sector claim input tax/refund against the purchase of chemicals, packing material and spare parts etc which comes to 2% to 3% of the sales values. In the instant case ratio of refund to sales was abnormally high; vi) the RP showed purchases from various parties such as `manufacturers of iron and steel' and 'whole sales waste and scrap', 'manufacturers of plastic products' and whole sale of food and beverage and tobacco' during tax period above amounting to Rs.14.958 and Rs.17.088 million respectively having no relevance to the RP's business activity; and vii) the RP had also made purchase from Noorani Steel a black listed unit. Besides, the RP also facilitated Hanata.
Trading, a blacklisted unit in getting bogus refund for tax period April, June and August 2012.
3. Thus, Red Alert was accordingly issued by the Directorate of I&I-IR Karachi vide letter dated 25.03.2013, for retrieval of bogus refund already issued and concomitant necessary action against the person(s)/official(s) involved in this nefarious and unlawful activity.
4. The Deptt. remained sleeping over such an important anti tax evasion exercise carried out by I&I-IR led to serious instances of maladministration on account of certain acts of omission and commission, reflecting improper motives, jeopardizing good governance and transparency in tax administration.
5. 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 Chief Commissioner-IR (CCIR), RTO-III, Karachi submitted parawise comments vide letter dated 19.11.2019. It 'was contented that case of the RP was transferred from RTO Karachi (defunct) to RTO-III vide FBR' s Jurisdiction order dated 21.07.2016. However, while transferring the RP's case record, the defunct RTO Karachi did sent copy of the Red Alert letter. On the basis of the said "Red Alert", proceedings under Section 21(2) of the Sales Tax Act, 1990 (the Act) read with rule 12 of Chapter 1 of Sales Tax Rules, 2006 were initiated, Sales Tax Registration of the RP was suspended by the Commissioner-IR, Regional Tax Office-III, Karachi vide order dated 28.02.2017. As per refund profile prior to Red Alert of the RP was issued eight refund claims. However, no refund was issued to the RP after the receipt of "Red Alert".
6. The averments of the Deptt. considered and case record perused.
7. It is observed that a country-wise investigation against issuance of huge bogus refunds was carried out by the Directorate General I&I-IR FBR. After painstaking exercise, the I&I-IR unearthed number of cases, where fake RPs were registered with the connivance of the staff. The fake RPs claimed on the basis of fake and flying vouchers, bogus refund and in most of the cases get away with fraudulent refund, causing colossal loss to already cash starved exchequer.
8. In the case of RP also on the basis of investigation, Red Alert was issued by the Director I&I-IR Karachi vide letter dated 25.03.2013 pointing out various discrepancies and inconsistencies requiring the Deptt. for further investigation and retrieval of bogus refund amounting to Rs.4.120 million. Unfortunately, the Deptt. did not grasp gravity of the state of affairs, and except blacklisting status of the RP i.e. after prolonged delay of almost 4 years on 28.02.2017; no serious effort appears to have been made for retrieving loss of revenue incurred on account of issuance of refund amounting Rs.4.120 million. Interestingly, the CCIR who contended that case record was received at RTO-III in July 2016 whereas the RP was blacklisted w.e.f 13.04.2017; this amply shows seriousness with which the matter had taken up such an important matter. The Deptt. also did not made any effort whatsoever to unearth the culprits from within and without, who were involved in sales tax registration of the fake RP. Obviously, the registration and issuance of refund was not a simple task but required a team work, involving not only the main beneficiaries of fraudulent refund but also having connivers in the Deptt. and bank officials who facilitated in opening the fake bank accounts through which refund cheques were drawn.
9. The CCIR RTO-III Karachi has tried to absolve himself from the responsibility by simply stating that Red Alert letter was not in the record received from the defunct RTO, Karachi. The studied silence on the part of the CCIR RTO-III Karachi regarding failure to retrieve huge loss of revenue and not initiating action against the culprits is also very strange. This is evidently a case of gross maladministration where, except blacklisting the RP (four years after receipt of Red Alert), the Deptt. has failed to initiate any proceedings for retrieval of bogus refund amounting to Rs.4.120 million pertaining to tax period December, 2009. The outlaws, who were involved in registering the fake RP and issuance of refund cheques were also not taken to task. Sadly, even after filing of the instant complaint, the Deptt. seems disinclined to take any action in this regard. It also sounds strange that the Directorate General I&I-IR FBR and its field offices, after conducting such laudable effort of detecting fraudulent activities whereby national exchequer was made to suffer colossal loss of revenue, and issued letters of Red Alerts to the field formation but did not pursue the matter to its fruition.
FINDINGS:
10. Failure of the Deptt. to initiate action against the person (s)/of ficials(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 FT O Ordinance.
RECOMMENDA TIONS:
11. FBR to-
(i) direct the Chief Commissioner-IR, RTO-III, Karachi to investigate and identify the officials involved in registration of fake RP and initiate disciplinary/criminal action against those found involved;
(ii) identify the officers/officials who were involved in processing on the basis of fake and flying vouchers and issuing refund of sales tax pertaining to tax period December 2009, amounting to Rs.4.120 million and take appropriate criminal/disciplinary action against them;
(iii) initiate appropriate action including criminal proceedings leading to prosecution of RP and recovery of amount of Rs.4.120 million, swindled from public exchequer;
(iv) report compliance within 45 days.