Axact earned Rs436 million in five years: FBR

ISLAMABAD: The Federal Bureau of Revenue (FBR) documents reveal that the fake degree famed IT company Axact (Pvt) Limited earned Rs436.363 million from 2009 to 2013 out of which it wrongly claimed that Rs422.995 million income was exempted from taxes.
The FBR, after scrutinising the details filed by M/s Axact, conducted a detailed case study on the affairs of the said IT company and directed the RTO Karachi to make assessments deemed to have been made regarding tax exemption claimed by the company. “Internet marketing entails sales, both inland and abroad. Break-up of local and foreign sales needs to be obtained on record and wealth statements and bank accounts statements in all the cases need focused examination and analysis. Assets created outside Pakistan, especially in the UK and Dubai need to be investigated,” it directed the RTO.
The case study is titled “Gross Misuse of Clause 133 (Computer software or IT services or IT enabled services), Part I, the Second Schedule, Income Tax Ordinance, 2001, M/s Axact (Pvt) Limited, NTN: 269260, concerns RT0-111, Karachi Wrongly claimed Exempt income RS. 422.995 Tax Years 2009-2013”.
Following is the self-explanatory and revealing case study of the FBR conducted last year:
“Currently, at Directorate l&I-IR Islamabad a detailed sector study (Exemption under clause 133, part-1 of second schedule to Income Tax Ordinance, 2001) is under way. This focused exercise aims specifically at misuse of exemption regime which was introduced to incentivise the growth of IT sector, especially export of software, IT services and IT enabled services. However, like other segments of inland taxation, this regime (export of software) is also being grossly misused by phony IT companies. Departmental lethargy in timely combating this crime has further encouraged the fraudsters. A case study developed by I&I-IR Islamabad unveils the crime and its tax impact. The overall scope of the aforesaid exemption regime and the volume of potential threat of tax evasion is being outlined hereunder.
“Number of cases dealing in computer software — 3480; Number of cases where exempt income has been claimed during TY 2013 — 538; Volume of exempt income declared by 538 cases for TY 2013 — Rs6.30 billion.
“1. Statutory provisions: Clause 133 Clause 133, Part I, of the Second Schedule grants exemptions to income from exports of computer software or IT services or IT enabled services up to the period ending on 30th day of June, 2016. For the purpose of this clause —
(a) “IT Services” include software development, software maintenance, system integration, web design, web development, web hosting, and network design, and
(b) “IT enabled services” include inbound or outbound call centers, medical transcription, remote monitoring, graphics design, accounting services, HR services, telemedicine centers, data entry operations, locally produced television programs and insurance claims processing.
2. Regulatory Provisions: Export of Software
Part 12 of Chapter XII of Foreign Exchange Manual of State Bank of Pakistan exclusively deals with the “Export of Software”. The regulatory procedure for this segment of exports has been laid down as under.
“The following procedure will be adopted for the export of computer software and realisation of the proceeds of such exports: a. The software houses/companies will get themselves registered with the concerned area office of the Exchange Policy Department. b. Whenever an exporter concludes an agreement for the export of software, he will submit a copy of the same to the area office for information. c. Each exporter will submit a monthly statement of his exports/earnings in the prescribed form (Appendix V-14) along with the Export Proceeds Realisation Certificates issued by the Authorised Dealer through which the value of exported software is repatriated to Pakistan.”
3. Nature of misuse of exemption regime: Discreet and exhaustive probe conducted by Directorate General l&I-IR reveals that the aforesaid exemption is being grossly misused by a vast majority of the claimants. There are several aspects & angles of this alleged misuse which are briefly explained hereunder.
i. The claim of exemption without complying with the specific regulatory provisions framed by State Bank of Pakistan (SBP) for the export of software is illegal as genuineness of the status as exporter of software can only be determined under Part12-Chapter XII of SBPs Foreign Exchange Manual which exclusively deals with the ‘Export of Software’. Currently, hundreds of individuals/concerns are illegally claiming exemption under clause 133, which is actually meant for genuine software exporters. Informal inquiries from SBP confirm that most of the IT concerns are neither; a. Registered with the concerned area office of the Exchange Policy Department, SBP, nor b. Submit a copy of the agreement for the export of software, to the said area office for information, nor c. File the monthly statement of exports/earnings in the prescribed form (Appendix V-14) along with the Export Proceeds Realisation Certificates issued by the Authorised Dealer through which the value of exported software is repatriated to Pakistan.
Exemption is being wrongly claimed against different commercial activities/taxable services especially internet marketing (online sales) which explicitly fall outside the ambit of above mentioned IT services or IT enabled services.
“iii. Domestic Income generated from IT services/IT enabled services rendered or provided within Pakistan is being concealed/suppressed by grossly inflating income from exports of computer software/IT services/IT enabled services.
iv. The banner of exports of computer software/IT services/IT enabled services is being used by various non-IT businesses as smokescreen for hiding their other taxable incomes in the guise of subject exemption. v. Maze of IT companies/concerns is created to complicate the tax transactions and to hinder any possible action by tax authorities.
“Massive misuse of clause 133 at RTO Karachi Ill Case Study:
M/s Axact (Pvt.) Limited and its directors
I. Introduction to the company:
M/s Axact Pakistan (Pvt.) Limited having NTN 2692690-3, 114-116 C, Jami Commercial Street No13, Phase VII, DHA, Karachi (“The company”) is a subsidiary of M/s Axact FZ LLC UAE. The parent company holds almost 100 percent share capital, while both directors of the company, Mr. Shoaib Ahmad Sheikh, NTN 2123894-4, and Mrs. Ayesha Shoaib Shaikh NTN 214853-5 have nominal share capital of Rs10 each. The company is involved in development and sale of Information Technology (IT) products including Enterprise Resource Planning (ERP) software, etc. According to website of the company (www.axact.com), the concern started its operations in 1997. Later on, it was converted into a private limited company in 2006 under Companies Ordinance, 1984 and presently with a workforce of 5,200 employees and associates worldwide it has clientele in more than 100 countries, The company currently operates in Karachi, Islamabad and Dubai with eight business units and products and more than 8.3 million customers worldwide. M/s Axact claims that it is largest exporter of IT products & services in Pakistan. (Annex I).
II. Analysis/scrutiny of Tax Record: All tax returns for tax years 2009 to 2012 have been filed on 24-6-2013 and for Tax Year 2013, on 9-1-2014. Analysis of Audited Financial Statements of the company for the years 2009 to 2013 reveals that the company provides/renders software and services to its parent nonresident associate i.e. M/s Axact FZ LLC, UAE, only.
i. Tax year 2009. The company declared net profit of Rs17.251 in its Profit & Loss Statement. It declared that it earned 94% of profit by exporting software to parent company. The company offered Rs1,059,890 for tax and paid tax of Rs370,692 on its taxable income. ii. Tax year 2010. The company earned total income of Rs23. 158 million from its operations.
“Further analysis of return of income of the company filed u/s 114 of the Income Tax Ordinance, 2001, revealed that the company declared taxable income of Rs3,056,861 only while remaining profit of Rs20,101,210 were declared exempt as it was earned through export of IT software and services to parent company.
iii. Tax year 2011. Likewise, in the year ending June 30, 2011, the company declared exempt income of Rs11. 605 million and declared taxable income of Rs3,857,839 only. Exports to parent company constitute 75% of total income while remaining 25% income was declared taxable. The company claimed refund of Rs3,970,136 in tax year 2011.
iv. Tax year 2012. According to profit & loss account, the company earned profit of Rs160.142 million for the tax year 2012. However, the company offered income of Rs2,453,914 for tax and paid tax of Rs858,870 on its taxable income. The company did not pay tax on its remaining profit (Rs157.688 million) as income by export of software and IT services enjoy exemption under clause 133 of second schedule of Income Tax Ordinance, 2001.
v. Tax year 2013. In tax year 2013, the company declared net income from the export of software at Rs217.408 million (99% of total income) and enjoyed exemption under clause 133 of second schedule of Income Tax Ordinance, 2001 on said income. The company calculated its tax liability of Rs1,028,887 which was adjusted against tax already paid, resultantly; refund of Rs12,734,966 was claimed in year 2013. III. Genuineness of claim of exemption under clause 133:
Taxpayer’s claim of exemption u/c 133 merits rejection on account of following facts: i. M/S Axact (Pvt) Ltd is only partially complying with the prevailing regulatory mechanism (Part-12, Chapter XII, Foreign Exchange Manual) developed by State Bank, for exporters of software. Receipts relating to sale of IT products in Pakistan are either being suppressed or mis-declared as export proceeds. ii. M/S Axact Pakistan is mainly involved in Internet/online marketing, mainly selling easily downloadable IT products. This activity is entirely different from export of software.
Company’s declared version regarding its status suffers from serious contradictions. Tax record reflects that M/s Axact Pakistan (Pvt.) Limited is a subsidiary of M/s Axact FZ LLC UAE and the parent company holds almost 100 percent share capital; whereas company’s website (http://www.axact.com) unveils the engineered corporate veil when it clearly spells out that Axact Pakistan with head office at Karachi is managing Axact Dubai, which is corporate head office; “Axact, continues to expand with offices now in Karachi, Islamabad and Dubai. This reflects Axact’s ongoing commitment and focus to deliver its award-winning solutions and services to new international markets and customers. The head office in Pakistan is in Karachi and the capital city can also boast an Axact regional office. The corporate head office is in Dubai, the city which has become the new business hub of the world.”
IV. Who owns M/S Axact FZ-LLC Dubai?
“Mr. Shoaib Ahmed Sheikh (one of directors of M/s Axact Pakistan) holds 97% shares of M/s Bol Enterprises (Pvt.) Ltd having NTN 4134669-6. Total capital of Rs67,900,000 is invested by said person in M/s Bol enterprises which got it registered with tax department on 19/04/2013. The investment made by Shoaib Sheikh does not commensurate with his income declared by him in year 2013. Moreover, he has only 0.0002% (1 share) rights in M/s Axact Pakistan (Pvt.) Ltd while M/s Bol Enterprises is massively advertising on the website of M/s Axact Pakistan (Pvt) Ltd. It also confirms that M/s Axact FZ LLC UAE is owned by Shoaib Sheikh and it is established to evade taxes.
“V. Huge claim on account of Marketing & Sale Promotion Expense:
2009—-2,123,414; 2010—-21,222,048 ; 2011—-244443529; 2012—-90338748; 2013—-138,126,020; Total—- 496,253,759.
As discussed earlier the company exclusively works for its parent company M/s Axact FZ LLC UAE only. However, the rationale behind incurring of huge marketing and sale promotion expenses when it provides services to parent company alone is missing. Similarly, Axact Pakistan is providing massive advertisement services to BOL Media Network. Administrative & Operational expenses claimed by Axact Pakistan need to be apportioned accordingly.
“VI. Transactions between Axact Pakistan and its Directors.
a. Loan from Directors: The company obtained loan of Rs28,029,480 and Rs9,688,080 during years 2011 & 2012, respectively. However, directors of the company did not file their returns of income for years 2011 & 2012. Both of directors filed incomplete returns of income for tax year 2013. As directors have no other business except M/s Axact Pakistan (Pvt.) Ltd, therefore, these huge receivables of directors are their concealed income; it is possibility that these two directors are major shareholders of M/s Axact FZ LLC, UAE, also. It indicates that the company incorporated in UAE is meant to avail exemption only.
b. Credit card payments. Company’s a/c with Standard Chartered Bank reflects huge payments against credit cards. Detailed analysis of credit card statements is required because apparently siphoning of company’s money by directors/executives is visible.
“VII. Gross understatement of Pakistan source income.
While M/S Axact Pakistan is involved in aggressive & exhaustive marketing campaign in Pakistan; its declared Pakistan source taxable income is ridiculously low vis-a-vis exempt income from export proceeds. The understatement is visible on account of following facts.
a. According to website of the company (www.axact.com), the concern started its operations in 1997. Later on, it was converted into a private limited company in 2006 under Companies Ordinance, 1984. Afterwards Axact F Z-LLC Dubai was created and in May 2008, a US federal trademark registration was filed for AXACT by Axact F Z-LLC Dubai. Creation of holding company after almost 10 years of operations by Axact Pakistan and that too coincides with introduction of exemption u/c 133 for the period 2006-2016, the whole scheme smacks engineered arrangement. This corporate veil scheme seems to be designed for routing the Pakistan source taxable receipts to Axact FZ LLC Dubai with the aim to launder the same as exempt income in the hands of Axact Pakistan.
b. Company’s continuous non-declaration of Pakistan source gross receipts is apparently unexplainable. While gross export receipts are fully declared, local receipts are never declared and only token net income from inland commercial activities is reflected in the returns. Similarly, expenses relatable to exempt and taxable operations are not being apportioned as provided under the law.
c. Exhaustive analysis of bank account statements reveals that in addition to the foreign currency remittances from Axact FZ-LLC Dubai, (received in company’s a/c with HBL), M/s Axact Pakistan has also received following huge amounts from the same company in the form of Pak Rupees in its a/c with Standard Chartered Bank.
“Tax Year — 2012 — Amount received in Pak Rupees — Rs156.674 million; 2013 — Rs672.298 million. These amounts can be reasonably attributed as income from local taxable operations in Pakistan. These receipts are actually Axact Pakistan’s income from IT services rendered in Pakistan and by no means can be treated as export proceeds u/c 133.
d. Company’s website (www.axact.com) indicates that it has developed ERP of worth Rs225 million approximately for Defence Housing Authority (DHA), Islamabad. This transaction alone explains the real volume of company’s operations in Pakistan.
e. Company’s expanding business in Pakistan is evident from the fact that Rozeepak.com advertises Axact jobs at almost all major cities in Pakistan.
VIII. Development of Enterprise Resource Planning (ERP) software for Defence Housing Authority (DHA), Islamabad (Annex III): The company claim on its website (www.axact.com) that it has developed ERP of worth Rs225 million approximately for Defence Housing Authority (DHA), Islamabad. However, the company delivered this ERP to M/s DHA, free of cost in 2013. It is pertinent to mention that the company was required not to claim expenses incurred on development of ERP against exports. Moreover, the company has opened its office in DHA Islamabad in the year 2013 which was not declared by it in its final accounts. There is strong possibility that the company received consideration from DHA in kind but did not offer this income for tax.
“IX. Way forward in the light of above RTO concerned may like to initiate the following proceedings. i. All assessments deemed to have been made in the aforesaid case need to be revisited as the regime of Clause 133 has been grossly misused. ii. Internet marketing entails sales, both inland and abroad. Breakup of local and foreign sales needs to be obtained on record.
iii. Wealth statements and bank accounts statements in all the cases need focused examination and analysis. Assets created outside Pakistan, especially in UK and Dubai need to be investigated.”
It should be noted that the Axact Group has denied any wrongdoing on its part and termed the allegations against it as totally baseless.