TaxPayer

Wrong interpretation of tax laws: ADRCs cause huge loss to exchequer

ISLAMABAD: The Alternative Dispute Resolution Committees (ADRCs) of the Federal Board of Revenue (FBR) have caused huge revenue loss to the national exchequer by wrongly interpreting tax laws for giving inadmissible benefits to the taxpayers.

A special study of the Auditor General of Pakistan on evaluation of performance of ADRCs revealed that the ADRCs of the FBR have given financial benefits to many companies by wrong interpreta-tion of tax law.

The AG office report also showed that the FBR Legal Wing has to-tally failed to check wrongly processed cases under the ADRCs. There are instances where ADRC recommendations were accepted by the FBR in criminal cases where FIRs have been lodged against persons involved in tax frauds. The report reflected that the forum of the ADRCs has been misused through wrong interpretation of tax laws.

According to the report of the Auditor General, the FBR may ex-amine the observations of the audit in light of norms of prevailing laws and regulations and may withdraw the wrong decisions which had created ambiguity in law being an example of tax savings for others taxpayers. At the time of acceptance of application, the grievances may be examined under provisions of law by the FBR and only those be forwarded to the committee which are on merit. It will minimise the burden and rush of work of the committees, it added.

The report further said that with a view to create tax friendly envi-ronment, Government introduced a scheme of 'out of court set-tlement' through enactment (section 47A of Sales Tax Act, 1990). Alternative Dispute Resolution Committees comprising represent-atives of Collectorate, General renowned tax practitioner and Federation of Chamber of Commerce and Industry were consti-tuted in each Collectorate. The ADRC is a recommendatory body and its decision is finally accepted or rejected by FBR. Audit carried out performance audit of only 97 cases.

The findings of Audit further revealed that a case of evasion of sales tax of Rs 150.531 million by a taxpayer was recommended by the ADRC for reduction of Rs 13.364 million for want of solid proof whereas it was already decided by the department, Collector (Ap-peal) and Tribunal in favour of Government on the establishment of reported charges which caused loss of revenue of Rs 137.167 million.

A taxpayer had not paid duty and taxes on dutiable/taxable sup-plies but ADRC recommended exemption involving Rs 1.792 mil-lion. The committee extended the favour to a tax payer by wrongly interpreting the section 4(1) of the Federal Excise Act, 1944 which caused loss of Rs 16.090 million.

The FBR considered that in the absence of an institutional ar-rangement for IT related projects within FBR, the prospects of ef-fective implementation of systems are bleak. Development of dep-loyment plan, training mechanism and standard operating proce-dures for implementation and making operational the new systems are by-product/natural outcome of an effective organisational structure and are as such, considered practically not viable at this point of time. Moreover, segregation of development functions and operational functions amongst Pral and business users, respectively, are imperative for effective implementation of IT Sys-tems.

The report recommended that the FBR should constitute a full time core business domain team, comprising of selected officers from field formations and FBR HQ; exclusively authorised to co-ordinate the development of systems with duly authorised teams of Pral. All the IT-related requirements of FBR shall be centralised in the core business domain team to avoid redundancies/duplications in the systems on one hand and hence enhance acceptability of the systems on the other hand.

The FIRs lodged against two taxpayers involved in tax fraud of Rs 155.744 million were withdrawn on the recommendation of ADRC, whereas the committee had no jurisdiction to involve in criminal cases. He AG office report further said that the ADRC had not fina-lised nine cases within the time prescribed for proceedings whe-reas 24 cases involving Rs 446.070 million were decided by the ADRC after the prescribed time limit thereof.

In another case, a registered person had purchased certain raw material, claimed input tax but did not pay output tax and the de-partment had rejected the input tax and charged sales tax liabilities amounting to Rs 3.947 million. The ADRC recommended the case for settlement unlawfully.

On pointation by Audit, a taxpayer was charged with a liability of Rs 21 .747 million as the exemption allowed therefore had expired and its threshold was more than required for exemption ie one million whereas the taxpayer was allowed turnover tax illegally by the ADRC.

The report further disclosed that the proceedings of tax fraud in-volving Rs 11.072 million against a taxpayer was established by the department but ADRC intervened and recommended to stop the initiation of the case unlawfully. A taxpayer was served a show cause notice involving 13 discrepancies.

The ADRC discussed only one discrepancy in his decision and rec-ommended the case in favour of the taxpayer whereas Federal Board of Revenue had settled all the 13 discrepancies of Rs 197.325 million. The ADRC had recommended shifting of tax liabil-ity of Rs 54.013 million from one taxpayer to another taxpayer, whose case was already decided by the High Court in his favour being ultra virus to law which also upheld by the Supreme Court of Pakistan, AG office report added.

The ADRC recommended the recovery of Rs 98.536 million from tax evaders in 18 cases. The department was not aware of about the recovery, as the particulars of recovery were neither available nor provided to Audit on demand. (Para 10.08) The ADRC recom-mended the total payment of Rs 1.455 million on account of not paid tax on fixed assets pending before the superior courts. Whe-reas, the FBR decided the case in favour of taxpayer. The matter broadly involved major tax liability which was subsequently upheld in favour of the government.

A taxpayer had not made payment of his purchases involving input tax of Rs 1.794 million through bank instruments/transactions as required under the law, whereas ADRC made recommendation in favour of taxpayer by ignoring law. A taxpayer claimed input tax prohibited under law but ADRC allowed the input tax causing loss of revenue Rs 7.640 million.

A multinational company was charged for non-payment of tax on taxable supplies whereas ADRC recommended the cases in favour of the company by giving benefit of ignorance of law, caused loss of revenue of Rs 0.845 million, Audtor General report added.