What major anomalies did IRD´s crackdown against the fake VAT bill racket expose?
The investigation showed that firms registering for VAT were selling their bills to others, charging 0.5 to 1 percent in fees, and those firms in turn were using the VAT bills to create fake transactions. They then either walked away with the VAT that consumers paid or inflated their expenses, thereby lowering their income tax liability. Because the government refunds VAT on exports and construction, they also used the fake bills to create fake transactions and claim refund for VAT that they never paid.
The racket was found to be well in excess of Rs 10 billion and spread across all major sectors. Why has the revenue administration failed to trace it so far?
Investigations traced the racket as far back as two years ago. But during the initial years, the extent of fake bill use was small. During those years, we were enjoying high revenue growth and because of that we probably failed to trace the racket. But our failure only emboldened them. Hence, they ran the racket on a wider scale. It is very unfortunate, but we found that even big and reputed names in the private sector were involved.
Who are those firms? Why is the government not disclosing their names?
No government in the world discloses the names of taxpayers. We also cannot disclose their names because they are cooperating in the investigations. They have accepted their mistakes and shown eagerness to correct themselves. Their names will automatically become public if they refuse to cooperate and challenge us in court. Keeping their names secret is not unfair either. After all, our job is to force them to correct their behavior, not to defame them.
The investigations have shown the involvement of revenue staff as well. What will be their fate?
They will be punished as well. We will not spare anyone. We have already withdrawn from the field customs staffs involved in the wrongdoing. They are now under detention because they supported the racketeers by producing fake customs documents. Like the racketeers, they will be tried on charges of forgery. Our investigation team is trying to dig out the names of other wrongdoing staff also. Unfortunately, the entrepreneurs under investigation have not named any names so far. If we trace others´ involvement, we will bring action against them as well.
What correction measures has MoF taken to deal with the problem?
We face this problem because we lacked risk assessment tools to keep track of transactions in the market. Anomalies in VAT can be traced if the system is linked to IT and an electronic database. If we had electronic cash machines and fiscal printers, which require traders to register their transactions at every step of value addition, we could have matched the details and nipped the racket in the bud. Realizing these shortcomings, IRD has developed a risk engine. It has also developed software with which Inland Revenue Offices will feed in transactions and match VAT bills and procurement bills. This will start the correction process. We are also conducting an independent study to identify other forms of anomaly. Once its report is in, we will move aggressively to implement other reform measures as well.
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