Steps afoot to check bogus sales tax refunds

KARACHI: The Federal Board of Revenue (FBR) has decided to include unique customs tariff codes of goods in sales tax returns form to curb fake refund claims and input adjustments, sources said.

Harmonised system (HS) codes -- the same used for tariffs determination – will be included in sales tax return form to eliminate use of flying invoices for bogus refunds and input adjustment by identifying actual products/goods for determination of duty and taxes.

The tax authorities failed to stop the phenomenon of flying invoices as many taxpayers were taking advantage of this to falsely claim sales tax refunds and input tax adjustment.

The sources said during the past few years the FBR had taken major steps to ensure transparency in the sales tax refunds. The measures helped the FBR stop the fake invoices but the flying invoices are still used by registered taxpayers to claim refunds and input adjustment.

Most recent initiative of the FBR was the launch of sales tax real-time invoice verification, which helped the FBR check fake invoices.

The system cross-matches buyer and seller on the basis of invoices issued for transactions.

The system checks the sales tax registration of buyer and seller and verifies the transaction.

Though the system blocked the bogus entities to make transactions there are certain taxpayers who are registered for sales tax under a sector of the economy but are issuing invoices of goods of another sector.

The sources said the inclusion of HS / Pakistan Customs Tariff codes will stop this practice. They said scrutiny of sales tax returns revealed that a person engaged in the iron and steel sector was issuing invoices for the sale of textile products. A lot of similar transactions where taxpayers on the basis of flying invoices obtained refunds and input adjustments have been detected in the past.

With the implementation of the codes the seller would be compelled to use the reverent codes for making invoices of goods, according to the sources.

The sources said the FBR planned to introduce the draft return form very soon due to concerns over leakage of revenue through flying invoices.

In a meeting earlier this month, Prime Minister Imran Khan directed the tax authorities to curb the menace of flying invoices to prevent tax losses. He said the objective of tax reform is to make the tax code simple, plug existing loopholes in the system and reduce discretionary powers of tax collectors and tax practitioners.

Automation to ensure transparency of the tax system was emphasised with instruction to tax authorities to especially focus on the issue of flying invoices.