IN order to check claims for bogus sales tax refunds and illegal input tax adjustments against fake and flying invoices, the government has decided to remove legal lacunae from the computerised risk-based evaluation of sales tax software.

Tax officials estimate that refund payments between Rs100 billion to Rs200 billion are made against fake and flying invoices by bogus companies in a given year. And these fake refund claims have been rampant for the past many years.

Many bogus companies, which do not do any business, issue fake invoices. They then claim refunds from the sales tax department, without having paid a single penny on raw materials. And registered taxpayers use flying invoices to claim undue refunds, by showing an excessive use of raw material.

Some of those who operate in zero-rate sectors (no duty, no refunds) claim refunds on the raw materials supposedly used in export proceeds.

In this scenario, the pilot project of the computerised risk-based evaluation of sales tax (CREST) software did help the Federal Board of Revenue (FBR) achieve some success in blocking payment of illegal refunds during the past few months. The most notable case was the detection of illegal payments being made to the textile sector, which led to recovery of more than Rs4 billion from textile tycoons.

The government has now empowered the FBR to take strict action against people who have claimed illegal refunds from the tax department.

The CREST system has an in-built capacity to verify replies received from registered persons. It is designed for sales tax, based on declarations, and covers areas like purchases, including input tax adjustment of buyers and suppliers; zero rated sales to registered persons or blacklisted or suspended Sales Tax Registration Numbers (STRNs).

Similarly, the software will verify the section 8B exemption claims against qualifying criteria per notification; exports claims in returns that do not match customs export data, and commercial imports by non-manufacturers, who also do not show value addition on imports.

At the same time, the FBR claims that CREST allows faster and timely sending of discrepancy alerts to taxpayers. It is also up to the taxpayers if they want to avail the IT system offered by CREST to respond to the discrepancy alert, or if they want to visit the tax office to explain their position.

While this state of the art software may help the FBR minimise the menace of illegal refunds to a certain level, illegal input tax adjustments and refunds will continue until the government immediately takes some other measures.

The government should also reduce the sales tax rate to single digits for all products. This will not only lead to enhancement in the tax base of registered sales taxpayers, but also increase collection. Currently, the sales tax rate varies from eight per cent to 25 per cent, depending on the commodity. More than 90 per cent of the total sales tax is collected from 10 items.

This reduction in the sales tax rate will reduce claims for input tax adjustments. The margin for the speed money will also automatically be minimised. This will help, to a large extent, in reducing the issuance of fake and flying sales tax invoice claims.

Millions of dollars of exporters are kept abroad. And fake e-forms have emerged as the principal document used by unscrupulous exporters to slip foreign exchange outside the country.

The filing of the e-form ensures repatriation of sale proceeds of exports in the shape of foreign exchange to the country.