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 Crescent and Yasdan Traders International, a Registered Person (RP) vide STRN 170039309183 engaged in the "other persons service activities", investigation were conducted by I&I-IR, FBR. It revealed that the above RP claimed refund for the months of November and December amounting to Rs.10.401 million. The refund was based on huge input claims of fake and flying invoices of the following parties dealing in steel and plastic:

(i) Messrs Shaikh Pipe Mills
(ii) Chaudhry Steel re-rolling Mills.
(iii) Messrs Deenar Steel Mills
(iv) Messrs Xaviar Co.
(v) Messrs F.A Enterprises
(vi) Messrs Alveena Traders
(vii) Messrs Bristol Plastic Industries
(viii) Messrs Saam Enterprises
(ix) Messrs Salman iron merchant
(x) Jaangda Industries
(xi) Messrs O.S Corporation

3. The entire supplies worth millions were also made by the RP to the unregistered persons. The tax profile showed that during the month of November 2012, supplies were made to Messrs Khalid Textile, Messrs Waseem Corporation and Messrs Shoaib Textiles against the input of iron and steel. Thus, refund claim aggregating to Rs.10.401 million was, on the face of it, dubious.

4. Thus Red Alert was issued by the Directorate of I&I-IR/Karachi vide letter dated 25.03.2013 for stoppage of bogus sales tax refund and concomitant necessary action against the person(s)/official(s) involved in the nefarious and unlawful activities.

5. Deptt to sleep 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.

6. 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, RTO-III, Karachi submitted parawise comments vide letter dated 15.11.2019. It was contended that "Red Alert" was issued by the Directorate of Intelligence and Investigation-IR, Karachi (the Directorate) vide letter dated 25.03.2013 against claim of dubious and fake sales tax refunds. It was informed that at the time of receiving the "Red Alert", the case fell under the jurisdiction of RTO-II, Karachi from where it was transferred to its present jurisdiction in the light of Board's Jurisdiction Order F.No. 57(2) Jurisdiction /95923-R dated 21.07.2016. It was averred that Red Alert letter was not received along with case record hence no action could be taken. The Sales Tax Registration (STR) of the RP was however, was suspended by the Commissioner-IR, Zone-IV, RTO, RTO-II, Karachi vide order dated 15.04.2013. The RP is still suspended and no refund was issued after the receipt of the "Red Alert". The refund profile of the RP, however, reveals that prior to Red Alert, seven sales tax refund claims for tax period May, June, July, September, October to December 2012 amounting to Rs.56.126 million, were processed. Out of this, except claim for tax period December 2012, amounting to Rs.9.210 million, the cheques of balance amounting to Rs.46.916 were issued to the RP.

7. The averments of the Deptt considered and case record perused.

8. It is observed that a countrywide investigation against issuance of bogus refunds was carried out by the Directorate General I&I-IR, FBR. After painstaking exercise, I&I-IR unearthed number of cases, where fake RPs were registered with the connivance of the staff. These fraudsters claimed refund on the basis of fake and flying vouchers and in many cases, got away with fraudulent refund, causing colossal loss to already cash starved exchequer.

9. In the case of instant case of RP, Red Alert was issued by the Director I&I-IR Karachi vide letter dated 25.03.2013 with specific recommendations. Unfortunately, the Deptt did not realize the gravity of the situation and except suspending status of the RP, no serious effort appears to have been made for stoppage of issuance of refund claimed amounting to Rs.10.041 million. Even status of the RP was not registered as required under the law. The Deptt also did not make any effort 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 a team work, involving not only the main beneficiaries but also having connivers in the Deptt and bank officials who opened the bank accounts through which refund cheques were drawn.

10. 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 erstwhile RTO. His studied silence on the part of CCIR RTO-III Karachi regarding failure to initiate action against the culprits is also very strange. This is evidently a case of gross maladministration where, except suspending the RP, the Deptt has failed to blacklist its status as required under Section 11 of the Sales Tax Rules, 2006 (the Rules). The outlaws, who were involved in registering fake RP 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. Before issuance of Red Alert, seven sales tax refund claims for tax period May, June, July, September, October to December 2012, aggregating to Rs.56.126 million were processed. Out of this, except claim for tax period December 2012, cheques of balance tax period amounting to Rs.46.916 million were issued to the RP. The Deptt failed to furnish any evidence regarding initiation of investigation on this aspect, as the issue of fake and flying vouchers cannot be ruled out and during these tax periods. Thus, issue of fake and flying invoices for the tax period above, also needs thorough investigation and concomitant recovery proceedings, if case is proved against the RP. It also sounds strange that the Directorate General I&I-R FBR and its field offices, after conducting such laudable effort of detecting fraudulent activities, issued Red Alerts to the field formations but did not pursue the matter to its fruition.

FINDINGS:

11. 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:

12. 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 failed to complete blacklisting proceedings in terms of Section 12 of the Rules and were involved in processing of refunds on the basis of fake and flying invoices 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.46.916 million, swindled from public exchequer;

(iv) report compliance within 45 days.

SD/-
MUSHTAQ AHMAD SUKHERA
FEDERAL TAX OMBUDSMAN