FBR study reveals Rs3.4tr tax gap

October 10, 2024 (MLN): A staggering tax gap of Rs3.4 trillion has been reported by the Federal Board of Revenue (FBR) in a recent study, as revealed in a joint press conference today by the Finance Minister, Minister of State for Revenue, and Chairman FBR.

The study conducted by FBR portrays sales tax evasion across different sectors of the economy, indicating that only 14% of 300,000 manufacturers, who are required to register for sales tax, are compliant, with many registered entities involved in misreporting, excessive input tax claims, and fraudulent invoicing.

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 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 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 majority of the entities are claiming input tax in-excess of 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% of total reported sales, were found in evasion of sales tax by claiming excess input tax of Rs29bn.

The major source of fake and dubious input tax is claim on the purchase of scrap metal and coal.

Batteries

The study of the 6 active cases across the Battery sector, representing 99% of total reported sales reveals that a major part of this sector has claimed excess input tax adjustment of Rs11bn than best practices within the industry.

The major source of fake and dubious input tax is 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 Rs18bn in FY23-24 than best practices within the industry.

The major source of fake and dubious input tax is claim on the purchase of coal.

Beverages

The study of the 16 active cases engaged in the manufacturing of aerated water, representing 99% of the total reported sales of aerated waters reveals that some of these cases have claimed excess Input tax adjustment of Rs15bn in FY23-24 as compared to the 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 Rs169bn 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 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 evidence of tax fraud in different sectors which include 11 cases of the battery sector, 897 cases of 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 Rs227bn.

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 incases of firms (association of persons) and Directors, CEO's, CFO's and other authorized persons of the company.

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