Tax News April 05, 2016

1.      Massive sales tax evasion: three leading vendors of computer industry arrested

April 05, 2016

Directorate General of Intelligence and Investigation Inland Revenue (IR) Islamabad Monday arrested three leading vendors of computer industry for their alleged involvement in massive sales tax evasion to the tune of over Rs 1 billion after detecting dummy IT companies in Dubai to commit tax fraud.

Sources told Business Recorder here on Monday that the directorate of intelligence IR successfully completed investigation of a global scam of computer industry and its logical conclusion lead to detection of massive amount of evaded taxes and preventive measures would save revenue to the tune of billions per annum. The global investigation of the case would also bar other computer vendors from adopting the same techniques used to evade sales tax by creating dummy companies in Dubai. The detection of the scam would also improve contribution of sales tax from this sector by diverting smuggled imports to documented channels. The agency had deputed a team of experienced officers who were working day and night to analyse and verify data from various sources to unearth the modus operandi adopted by the tax evaders. The directorate has expanded the scope of investigation which would also be instrumental in improving sales tax collection of the FBR.

On Monday, the agency has arrested accused Saleem Zaveri, Shiekh Yaqoob and Atiq ur Rehman of Advance Business System outside Supreme Court of Pakistan following withdrawal of their pre-arrest bail applications from the apex court. On Tuesday (today), agency would start interrogation of the said accused persons. During the last two months, the directorate of intelligence IR was fully focused on this international case of sales tax evasion. As a result of agency's efforts, the legal imports of computer and related equipment has shown enormous increase of Rs 5 billion (value) with increase of around Rs 1 billion in payment of duties and taxes in one year through improvement in legalised computer imports into the country. This international case of tax evasion has given a clear message to the entire computer industry to legalise their imports or face similar kind of criminal proceedings, in cases of tax evasion. The agency has also focused on analysis of data from Dubai and other sources to verify the authenticity of the level of tax evasion committed by the company.

A global IT company has also confirmed to the agency that supplies of Rs 4 billion has been made to the said company involved in tax evasion, sources said. The agency investigated company's offices in Dubai and analysed the trail of payments made from Pakistan to Dubai. The agency found that the computer products were massively under-invoiced in Dubai and then shipped to Pakistan, where the sales tax liability is understated. Interestingly, all products were not imported through legal channel and these were smuggled into Pakistan to evade sales tax. Moreover, the undocumented payment model enabled accused to cause loss to the national exchequer by declaring imports at lower rates. The company was involved in making payments to the computer manufacturers from Dubai via banking channel. However, most of payments from Pakistan to Dubai are sent through non-banking channels.

Details of the case revealed that a complaint was forwarded to the Directorate (I&I-IR) Islamabad by National Accountability Bureau (NAB), wherein the involvement of various importers of computer products in tax evasion was indicated. The complainant also provided details of purchases of the subject unit and of some other distributors. This data was matched with declaration of M/s Advance Business System in Sales Tax to establish the veracity of the complaint, which confirmed that the said unit is involved in tax evasion and tax fraud.

To obtain material evidence, search of premises of Islamabad Branch office of M/s ABS was carried out after obtaining prior approval from Magistrate Islamabad under section 40 of the Sales Tax Act. Further, documents, record and computer systems were taken into custody. The detailed analysis of the impounded record and computer systems revealed that Islamabad Branch office of the subject unit was issuing Non-General Sales Tax Invoices and operating Benami Bank accounts in Islamabad for depositing the evaded tax money to understate its tax liability.

The department when contacted the computer manufacturers regarding M/s ABS imports, a global company confirmed that during the period March 2010 to September 2013, Advance Business System has made purchases from the international IT company amounting to Rs 4,198,537,486. Another global company confirmed purchases of Advance Business System amounting to Rs 2,352,051,206/- during the period July 2012 to December 2013. M/s ABS has provided data of purchases from other international companies.

Compared to these purchases of Rs 6,907,530,053 /- , ABS only declared Rs 1,677,242,117/- worth of imports for the same period. The difference between actual purchases and declared imports amounts to Rs 5,230,287,936 /- on which sales tax was evaded knowingly and dishonestly by M/s ABS. Therefore, the loss to the national exchequer caused by the company amounting to Rs 1,046,057,587/- (approximately).

The "sell through reports" were also obtained from the international IT company to confirm that these products were sold in Pakistan. Hence, it was found during the investigation that the partners of M/s ABS and their Manager of Blue Area Islamabad violated the provisions of Sections 3, 6, 7, 22, 23, 26, 73 of Sales Tax Act, and committed tax fraud in terms of section 2(37) which are punishable under sections 33(11) & 33(13) of the Sales Tax Act, 1990 read with Sections 37A and 37B ibid. Therefore, criminal proceedings have been initiated against them and FIR No 1 of 2014 dated 18.2.2014 was registered against them. Investigation conducted so far revealed astonishing facts.

The investigation of the DG I&I IR revealed that the partner of M/s ABS maintains a dummy subsidiary company in Dubai (a tax haven) with the name of "I T Station FZE" and ships its consignments purchased from international companies, and other manufacturers to Dubai instead of Pakistan. The said company is owned & operated by Saleem Zaveri, partner M/s ABS and it has office in Dubai. During investigation Salim Zaveri confirmed that he owns this company. The accused Saleem Zaveri & Shiekh Yaqoob claimed that usually they purchased in bulk quantities in order to get lower prices and import 20% goods to Pakistan and sold remaining 80% at Singapore.

They have provided documents in support to their stance related to foreign sales, however, their claim regarding foreign sales is contradictory to the sell through reports submitted by them to their principal international IT company. Moreover the said business was not declared in income tax return of the accused Saleem Zaveri. Investigation of the case also revealed that products are massively under-invoiced in Dubai and then shipped to Pakistan, where the sales tax liability is understated. Investigation also revealed that all products were not imported through legal channel and these were smuggled into Pakistan to evade Sales Tax.

M/s ABS makes payments to the computer manufacturers from Dubai via banking channel, as confirmed from global companies. However, most of payments from Pakistan to Dubai are sent through non-banking channels. During investigation they provided certificates issued by the banks showing transfer of 17.5 million US dollars for imported goods during the period July 2009 to June 2014. M/s ABS failed to provide any documentary trail of remaining payments from Pakistan to Dubai. The undocumented payment model was contrary to the directions of State Bank of Pakistan and resultantly it enabled accused to cause loss to the national exchequer by declaring imports at lower rates.

As ABS pays little to no amount of input tax on its imports, it consequently does not charge output tax and makes sales without charging of sales tax. The data recovered from the laptop found in the office of M/s ABS Islamabad Branch established the fact that they made huge supplies without charging GST. The buyers were also contacted and they confirmed that they bought goods from M/s ABS without paying GST. In order to deposit the proceeds of these sales and to conceal the actual sale proceeds from the tax authorities, Saleem Zaveri & Sheikh Yaqoob maintains benami/dummy bank accounts in the name of their employees. During investigation customers have confirmed that M/s Advance Business System requires its customers to make payments either in cash, or through cheques in favour of different undeclared accounts. During investigation Saleem Zaveri and Sheikh Muhammad Yaqoob admitted that Ghulam (Proprietor) was their employee, however they denied having any relation with said bank account. The accused denied allegations that benami accounts were being operated to conceal sales however they could not explain why they directed their buyers to deposit sales proceeds in these accounts. They said they are not beneficial owners of these accounts. However, two of these accounts were opened on the registered addresses of M/s ABS that shows their relation with accused. Emails regarding deposit of sales proceeds in benami Bank accounts are available to the agency. In view of this, it establishes that M/s ABS has violated the provisions of Sections 3, 6, 7, 22, 23, 26, and 73 of Sales Tax Act and committed tax fraud in terms of section 2(37) which are punishable under sections 33(11) & 33(13) ibid. The Supreme Court of Pakistan had directed to issue show cause notice within 03 days, on the basis of data / evidence gathered so far. Therefore, the contravention report has been finalised by the agency for assessment/adjudication as per provisions of section 11 of the Sales Tax Act, 1190.

2.      RTO-II Lahore achieves revenue target for March

April 05, 2016

The Regional Tax Office-II, Lahore has achieved the assigned revenue collection target for March 2016, surpassing all the targets under the heads of income tax, sales tax and Federal Excise Duty (FED) through enforcement and recovery actions.

Sources told Business Recorder here on Monday that the Federal Board of Revenue (FBR) has acknowledged the performance of the said RTO for amassing the assigned targets for third quarter ending on March 2016. The credit goes to Khawaja Adnan Zahir, Chief Commissioner Inland Revenue, Regional Tax Office-II, Lahore who has taken a number of enforcement actions with co-ordinated efforts of the field formations to ensure recovery of the unpaid amount of taxes particularly assessments and admissible demands with effective audit strategy.

Regional Tax Office-II, Lahore achieved the target assigned for the month of March 2016. It is reported that against the assigned target of Rs 3,977 million, Rs 2,939 million and Rs 17 million under the heads Income Tax, Sales Tax and FED respectively, RTO-II, Lahore collected Rs 4,000 million, Rs 3,001 million and 26 million respectively, thus, achieving target under all three heads. It is noteworthy that RTO-II, Lahore has been able to achieve growth of 28 percent, 32 percent and 100 percent under the said three heads of taxes as compared to the collection made during March 2015.

Furthermore, that RTO-II, Lahore has for the first time collected more than Rs 7 billion during any month of a financial year. Khawaja Adnan Zahir, Chief Commissioner Inland Revenue, Regional Tax Office-II, Lahore is leading his team from the front since he joined RTO-II, Lahore on 08-02-2016. Under his leadership, RTO-II, Lahore has been able to achieve this feat. It was learnt from sources that RTO-II, Lahore had conducted raids in 92 cases up to March 2016 resulting in detection of the defaulted amount of Rs 686 million and cash recovery of Rs 181 million. As a result of these efforts, the reduction in illegally claimed carry-forward comes to the tune of Rs 505 million.

3.      Entitlement to cash rewards: FBR proposes separate Inland Revenue Reward Rules for officers

April 05, 2016

Inland Revenue Officers and departmental representatives defending/winning cases in courts would be entitled to cash rewards under the proposed Inland Revenue Reward Rules, 2016. Sources told Business Recorder here on Monday that the Federal Board of Revenue (FBR) had proposed separate Inland Revenue Reward Rules, 2016 for Inland Revenue officers.

As per rules, "meritorious service" means a performance falling in one or more of the specified categories: Firstly, those who are taking part in detection, assessment and recovery of amount of tax evaded or unlawfully refunded. Secondly, tax officers creating additional demand u/s 122(5A), 122(1)(5) or 161/205 of the Income Tax Ordinance, 200l on account of non-compliance of the statutory provisions related to withholding regime, correct class of income, and finally Tax Regime and the obligatory provisions related to the mandatory use of the banking channel etc. The additional demand created under Sections 11 and 25 of Sales Tax Act 1990 shall also be eligible for the reward if that is on account of discrepancies in input and output or misapplications of law and rules thereto.

Provided that the reward shall be payable only if the resulting demand is 20 percent higher than the demand created in the same case in three preceding years; and the demand is either upheld by the Appellate Tribunal Inland Revenue (ATIR) or admitted by the taxpayer. Rewards would be given to legal assistance to the High Courts and Supreme Court resulting in the decisions favourable to the department. Provided that the issue involved in the case is of Rs 100 million or above in the said CP/Suit/Reference and the officers name and/or arguments are mentioned in the order of Court.

Rewards might be given to tax officials winning legal issues in learned ATIR in capacity as Departmental. Representative, sources said. Tax officials would be given rewards who would make original contribution in any field relating to the Inland Revenue and displaying extraordinary devotion to duty; achieving budgetary targets through extraordinary planning and efforts and display of exceptional and outstanding overall results in recovery of current and arrear demand, disposal of audit cases, monitoring of with holding taxes, broadening of tax base, timely filing of appeals and disposal a such cases, and improvement of human resource management and information systems.

Tax officials would be entitled to rewards who are providing meritorious services rendered and approved by the head of the allied offices of FBR and FBR (HQ).

Eligibility for reward: Cash reward shall be sanctioned under these rules to the specified categories of persons in rendering of meritorious services.

Determination of reward: The amount of reward, in cases of rendering of meritorious services relating to recovery of tax evaded or refund unlawfully paid shall be determined in the following manner:

Amount of Tax sought to be evaded Rs 500,000/- or less, the amount of reward would be twenty per cent of the tax duty and other taxes. The amount of Tax sought to be evaded more than Rs 500,000/- but not more than 1,000,000/-, the amount of reward would be Rs 100,000/- plus ten percent of the tax in excess of Rs 500,000/- and amount of tax sought to be evaded over Rs 1,000,000/-, the amount of reward would be Rs 150,00/- plus five per cent of the tax in excess of Rs 1,000,000.

The amount of reward, in cases of rendering of meritorious services relating to assessment and defending cases before High Courts and Supreme Court respectively paid shall be determined in the following manner:

Amount of tax sought to be evaded Rs 5,000,000/- or less, amount of reward 20 percent of the tax duty and other taxes; Amount of tax sought to be evaded more than Rs 5,000,000/- but not more than Rs 10,000,000/-, amount of reward Rs 500,000/- and amount of tax sought to be evaded over Rs 10,000,000/-, amount of reward Rs 1,250,000/-.

The amount of reward, in cases of rendering of meritorious services relating to defending revenue as Departmental Representative under Rule 2 (iv) (d) paid shall be determined in the following manner:

Amount of tax involved in the legal issue (any amount less than 5 million), the amount of reward would be Rs 10,000/- for the departmental representative (DR). The amount of tax involved in the legal issue exceeds Rs 5 million but is less than Rs 50 million, the amount of reward would be Rs 100,000/- for the DR. The amount of tax involved in the legal issue exceeds Rs 50 million but is less than Rs 100 million, the amount of reward would be Rs 200,000/- for the DR and amount of tax involved in the legal issue exceeding Rs 100 million, the amount of reward would be Rs 300,00/- for DR. The amount of reward shall be sanctioned after realisation of the whole of the tax involved.

The rules said the amount of default surcharge and penalty shall not be taken into account for reward purposes. In cases of meritorious services, the amount of reward shall be such as determined by the sanctioning authority. Provided that the amount of reward amount shall not exceed 36 months basic salary.

Payment of reward: The amount of reward determined in cases of rendering of meritorious services relating to recovery of tax evaded or refund unlawfully paid, shall be apportioned. Where no informer is involved, the offices and officials specified, reward would be 50 percent; supervising officers who write AERs, reward 10 percent; support staff of officers (Inspectors & Auditors), reward percentage 15 percent and Inland Revenue Welfare Fund, the percentage of reward would be 25 percent.

Where informer is involved, the officers and officials specified, reward would be 30 percent; supervising offices who write AERs, reward 10 percent; support staff of officers (Inspectors & Auditors), reward would be 5 percent; Inland Revenue Welfare Fund, reward would be 25 percent and informer or whistleblower, if any (in that case, the supervising officers and support staff shall be excluded from the record), reward would be 20 percent. The amount of reward as determined in the case where more than one individual is involved shall be distributed in proportion of their basic salary.

Reward sanctioning authorities: The authorities for sanctioning of reward under these rules shall be as follows: Officers of Inland Revenue Service and Staff (BS-1 to BS19 in field formations), the sanctioning authority would be Chief Commissioner or Director General, as the case may be. The officers of Inland Revenue Service and Staff (BS-20 and BS-21 in field formations), the sanctioning authority would be FBR Member (Inland Revenue) operations Federal Board of Revenue. The officers of Inland Revenue Service and Staff (BS-1 to BS-20 FBR (HQ), the sanctioning authority would be relevant member/DG. In case of officers of Inland Revenue Service (BS-21 to BS-22 in FBR (HQ), the sanctioning authority would be Chairman FBR. The officers of Inland Revenue Service and Staff (BS-1 to BS19 of Allied Offices), the sanctioning authority would be head of the Allied Office. The officers of Inland Revenue Service and Staff (BS-20 to BS-22), the sanctioning authority would be Chairman FBR.

Sanction of reward amount: The reward sanctioning authority in the field formations shall constitute a committee consisting of at least one BS-20 and two BS-19 officers to examine the cases and recommend for sanction of reward. Provided that the beneficiary of reward shall not become member of the committee entrusted with examination of reward cases and formulation of recommendations thereof. On the basis of these recommendations, the sanctioning authority shall decide the eligibility of reward to be sanctioned, draft rules said.

The reward sanctioning authority shall ensure that the reward amount is apportioned on the basis of basic pay amongst the case instituting team as well as the officers and staff making meaningful efforts in the case till such stage that recovery of the duties and other taxes was affected.

If the reward sanctioning authority considers any particular individual or individuals to have been instrumental in instituting the case or have made special efforts during adjudication, appellate or recovery stages, then for reasons to be recorded in writing, such an individual or individuals may be sanctioned a higher proportion of the reward amount Within the permissible limit. However, reasons to that effect shall be recorded in writing and made part of permanent record such as minutes of meeting of the reward sanctioning committee.

Any officer or informer who has claimed a reward under these rules and is aggrieved by a decision of the Reward Sanctioning Authority, may request for copy of the said decision in writing which shall be provided within fifteen days. The aggrieved person may thereafter file appeal in writing, within sixty days, for redressal of the grievance to the Chief Commissioner or the Director General concerned, who shall decide the appeal within thirty days, through an order in writing.

If the aggrieved person is not satisfied with such an order or in case the appeal is not decided within thirty days for any reason, the aggrieved person may file an appeal to the Chairman, FBR who shall be the final authority. Periodic review of reward sanctioning process and allied matters: The Board shall every two years, invite suggestions, opinions and proposals from the officers of Inland Revenue Service and staff for improvement in the reward sanctioning process to make it more just, fair, transparent and equitable. This periodic review shall be publicised, in order to have the widest participation for value addition through the review process, draft rules added.

Under these rules, "Board" means the Federal Board of Revenue established under the Federal Board of Revenue Act, 2007. "Tax" means all types of taxes and duties levied and collected under the Income Tax Ordinance 2001, the Sales Tax Act, 1990, and the Federal Excise Act 2005; "Informer" means any person, a group of persons or a company who provides any original information in the shape of concrete evidence, which conclusively leads to detection of tax evasion, formulation of assessment or reassessment, and eventual recovery of the evaded tax or refund unlawfully paid; and includes a whistleblower as defined under 227B of the Income Tax Ordinance, 2001, 72D of the Sales Tax Act, 1990, and 42C and 42D of Federal Excise Act, 2005. Record is to be maintained at every field formation for registering the informer/ whistle blower having reference to information, nature of evidence, particulars of informer/whistle blower, expected amount of evasion, amount recovered, reward paid etc.

4.      FBR for Inland Revenue Welfare Fund

April 05, 2016

The Federal Board of Revenue (FBR) has proposed establishment of Inland Revenue Welfare Fund (IRWF) under the new Inland Revenue reward rules-2016 on the pattern of Common Pool Fund (CPF) of the customs officials. Sources told Business Recorder here on Monday that the FBR has circulated the draft of the Inland Revenue reward rules-2016 to the tax officials concerned for comments. Under the proposed rules, the FBR intended to establish Inland Revenue Welfare fund.

The draft rules said that a fund, to be known as Inland Revenue Welfare Fund, shall be established for the welfare of the tax officers and those persons mentioned in the said Rules. This IRWF shall be operated by FBR Member Operations of the Inland Revenue.

The welfare fund established shall be utilised for the general welfare of the officers and officials of Inland Revenue Service in the manner as prescribed by the Board under the Inland Revenue Welfare Fund Rules. Twenty five percent of the reward money will be remitted to such fund for the welfare of officers/officials of Inland Revenue working at FBR(HQ) and allied offices, the FBR rules added.

5.      All concessionary SROs to be phased out by fiscal year 2017

April 05, 2016

The federal government is all set to phase out all concessionary SROs in financial year 2016-17; it is learnt on Monday. According to sources, the Federal Board of Revenue (FBR) in continuation of previous year's exercise has now initiated the exercise for phasing out all concessionary SROs in the year 2016- 17. They said this exercise had been initiated on the same principles as referred during the years 2014-15 and 2015-16 and added that the year 2016-17 was last year of plan to phase out all concessionary SROs.

Replying to a question, sources said a meeting of the high-powered committee constituted in this regard was held last month under the chairmanship of Finance Minister Ishaq Dar. Sources said the FBR during the meeting gave a presentation on phasing out of concessions provided to the sector available under SRO 656(I)2006 and First Schedule of Customs Act 1969.

They said that the board, which had asked the stakeholders to submit feedback, had received proposals regarding the deletion of entries in SRO indicating import value Rs 30 million annually. The board is also contemplating that if 50 per cent import was under SRO and entry to be shifted to tariff on SPO rate or to closest higher tariff slab. They said the proposal of treating entry at normal rate if difference between SRO rate and tariff rate was below 2 percent was also under consideration besides shifting entry to tariff at closest higher rate if concession deemed essential.