these underhand ways of making money unless some serious steps are taken to remove the rot from the grass roots level right up to the top echelons of the bureaucracy.
People here are beginning to lose their grip over their businesses, as the scenario of fraud at every stage is getting worse. There are claims of growth in the economy and the gradual eradication of corruption, but according to the politicians here in Pakistan every single word they utter seems to be false and an attempt to deceive the public.
Businesses are collapsing, and almost one in every ten businessmen is planning to invest his money abroad, and to gradually settle down there. If this continues, Pakistan’s assets and capital will fly out of the country, as a lot of Pakistani citizens have already left and settled outside in other countries where taxes are honestly paid and the citizens can see their taxes used for the uplift and development of the cities they live in.
The only way to survive this while setting up a business is to plan carefully, especially taking the level of fraud into account. It is recommended to take advice from a person of good repute, as well as to have a sound business plan before venturing into business. This scenario will not just haunt a business in the production of products but it will also create obstacles while investing money for capital, land etc.
"This country is the second most corrupt country in the world." (Interview of the president, General Pervez Musharraf)
The integrity of, and morality that once existed in this country has been wiped out. It has exposed itself in front of the world and Pakistan today, has a
dubious international image. We have been described as a terrorist state, a state where the climate for foreign investment is not healthy and also a state that cannot live within its
means or a state that cannot manage its finances professionally. Hence we have had to resort to borrowing huge loans from the International Monetary Fund and the World Bank to bail us out of our problems against the payment of heavy interest rates.
Since Pakistan’s true problems have been thus underlined, it should start taking steps towards prosperity and should try to analyse the pit it has fallen into.
Another way of getting out of these pitfalls can only be through intense supervision of
the payment of taxes. The government should take serious steps in implementing the strictest laws upon
businesses, and fine those businesses heavily which are not able to pay these taxes on
time.
I came up with a few case studies, which clearly show just how bad the situation is of
the level of ethics in Pakistan. I have tried to quote some of the dialogues by a few
businessmen, who are facing problems in gaining moral standards.
Case Study # 1
KARACHI, Oct 25: The Sales Tax Department has summoned registered taxpayers in connection with inquiry into tax frauds detected during 1998-2001, industry sources said.
The summons issued under section 37 of the Sales Tax Act, 1990, requiring taxpayers to appear in person with purchase records.
A leading exporter said the issue of fake claims of Sales Tax refunds has led to a demand from trade for change in the system to check such practices. The Sales Tax department has not yet responded.
Officials admit that through fake and flying sales tax invoices, false claims of millions of rupees are being annually lodged in an organized way. This results in loss to the national exchequer and deprives genuine exporters from getting their much needed sales tax refund claim on time.
The summons, which have been issued by the Collectorate of Sales Tax, Faisalabad to exporters based in Karachi and elsewhere in the country, further state that the inquiry will be deemed to be judicial proceedings within the meaning of Section 193 and Section 228 of the Pakistan Penal Code (Act XIV of 1860).
Under the Sales Tax system, the buyer pays sales tax to the supplier of goods at the rate of 15 per cent and the latter has to deposit the amount in the national exchequer. In case a buyer is an exporter, he submits his refund claim with the sales tax department. But sales tax or refund is evaded, if both the buyer and seller join hands or the supplier issues a fake or flying sales tax invoice and does not collect or deposit the required tax amount in the national exchequer, another exporter said.
The exporters also complain over the delay in taking up the issue that is now three years old.
The vice chairman, Pakistan Knitwear Exporters Association, Anis Marfani, said that as the taxpayers were penalized for making any mistake or delays in payment of tax amount, the official machinery too should be accountable for lapses.
Marfani said that there should be proper and timely verification before making refund payments to prevent frauds.
As long as there is no accountability of the tax collectors, he said, such revenue leakages would continue.
Case study # 2
“The Towel Manufacturers' Association of Pakistan (TMA) has suggested the government to adopt the old law of excise duty to check bogus claims of sales tax refunds.
In a statement issued on Monday, TMA patron-in-chief S M A Rizvi said that year after year there was constant rise in sales tax refund amount obtained through fake and bogus claims but the high-ups at the Central Board of Revenue (CBR) were yet to introduce a system which could check this menace.
He lamented that time and again exporters had pleaded with the government that the old law of excise duty i.e. clearance of goods on Form AR-2 and AR-3 be adopted which did not involve any monetary transaction but this simple law was not acceptable to the CBR who were devising another method called "DTRE" which was extremely complicated and had been undergoing change every now and then.
Rizvi further said that till such time, the rules of sales tax collection were simplified and exports were not made zero rated, neither investment nor exports would grow.
He said that CBR figures showed that it had refunded Rs7 billion in 2001 and Rs10 billion in 2002 against such bogus sales tax refund claims.
This crime of denying billions of rupees to the exchequer, he said, was being carried out by a cartel of corrupt businessmen and sales tax officers.
"Without changing the system and taking strict action, against such elements the country will continue to suffer on account of huge revenue loss", he added.”
Case study # 3
A Gang Involved In Issuing Fake Invoices Busted
The Collectorate of Sales Tax, Faisalabad has recently busted a gang which was indulging
in the issuance of fake invoices for a long time, undetected. Three units namely M/s. Al-Rashid Fabrics, M/s
M.H. Textile registered as manufacturer-cum-wholesaler did not have any manufacturing
facility at all. M/s A.R.K, was registered with the Multan Collectorate, but however, their
records including two other units was found lying in one office in Faisalabad which showed that they were
paying a nominal amount of sales tax against transactions of huge amounts of money. They were also
issuing sales tax invoices against fake purchases without actually depositing sales tax into
the government exchequer. The investigation has further revealed that they used to
issue sales tax invoices to various registered persons through brokers in the market
against receipt of a certain percentage ( reportedly 20 to 25%) of the amount of sales tax
shown in the invoices. Thus, a loss of revenue of twenty eight million rupees was inflicted upon the
national exchequer. Two persons were arrested in this case.
Tax fraud has been defined in section 2 (37) of the Sales Tax Act, 1990 as follows:
“Tax fraud means knowingly, dishonestly or fraudulently and without any lawful excuse
(the burden of proof of which excuse shall be upon the accused)
- Doing of any act or causing to do any act; or
- Omitting to take any action causing the omissions to take any action,
In contravention of duties or obligations imposed under this act or rules or instructions
issued there under with the intention of understanding the tax liability or underpaying the
tax liability for two consecutive tax periods or overstating the entitlement to tax refund to
cause loss of tax”.
Forms of tax fraud
- Suppression of sales: sales deliberately omitted from sales records.
- Suppression of purchases: purchase deliberately omitted from purchase records.
- Suppression of production capacity.
- Fake import documents.
- Manipulation of wastage.
- Manipulation of figures.
Exports are the backbone of the economy of a country. Increase in exports leads to
greater foreign exchange earnings/reserves and a more favorable balance of payments.
These factors in turn determine the budgetary policies and indicate the health of an
economy. This is the reason why governments give great importance to boosting their export
sector.
In terms of sales tax law, exports are zero-rated; therefore, refund of sales tax to exporters
is paid on the basis of sales tax paid on goods which are subsequently used in the
manufacture of finished products, which are then exported.
Payment of refunds also act as an incentive for exporters since the duty/taxes paid are
refunded. However, as with any other incentive, there is a tendency by some
unscrupulous elements to obtain fraudulent refunds by mis-declaring the description,
value, quantity and quality of the zero rated goods or the raw materials used therein and most
commonly, by submitting fake invoices. There have been cases in funds through
fraudulent means which have been prosecuted and convicted by the court of law.
However, such detections are not easy to make since the unscrupulous claimants operate
in an organized way to beat the system.
INFO MATRIX FEBRUARY & MARCH – 2002
(Rs. In millions)
Definition of Audit
A business that produces its final account must have them audited by law. An audit is a
check to make sure the financial performance of the business, shown in its accounts are
accurate.
Performance of Audit
The financial year 2001-2002 witnessed a quantum jump in the field of audit. Against 8627
audits conducted during 2000-2001, audits have been undertaken and completed during
the last financial year. Though the percentage of recovery has also increased, the amount
detected during 2001-2002 is far below, as compared to detections made during 2001-
2002. This situation is quite disturbing and calls for focus on the quality of audits during
the current financial year. The senior officers and senior auditors/ auditors are requested
to conduct audit in a more professional manner, so that due government revenues generated by
way of effective audit, is ensured.
The refund system for exporters is one of the primary areas where major fraud can and
does occur. For example, exporters may take undue advantage of their refund position
and apply for excessive refunds on the basis of fake invoices for input purchases. Another
example of such fraud is when businesses export goods and receive a refund for input
taxes, but then smuggle the goods back into the country to be sold in the domestic market
without paying import duties and taxes.
Most of the exporters would like to get their refunds quickly from the government in
order to reduce their net cash outflows and thereby, lower their cost of doing business.
The government may also have a policy to help businesses by speeding up the payment
of refunds. In such a situation, the tax administrators find themselves facing a dilemma.
Will they process the refunds quickly and face the risk of approving fraudulent claims?
Or will they audit every claim and, as a result, delay the payment of refunds to everyone?
In many developing countries, the result is the worst of all possible scenarios: because of
the delays, the honest exporters have to bribe or "tip" the tax officials to get payment of
their legitimate refunds. At the same time, such corruption makes it possible for
businesses to bribe the tax administration officials to process fraudulent claims as well.
Because of this potentially lucrative situation for auditors, a substantial number of them
are assigned and/or are attracted to managing the export refund system. The end result is
that the tax administrators make substantially more than they otherwise would receive as
wages and salaries from the tax department, they pay more fraudulent refund claims, and
the legitimate exporters get far less than they are entitled to. The economy, through the
loss of public sector revenue and reduced earnings of the legitimate exporters, bears the cost
of this process.
Although the condition of corruption in this field was crucial, the government, in order to
increase the foreign exchange of the country, ventured into making amendments to the
existing system. Instead of implementing strict laws, it gave even more leverage to the
exporters, so that now, instead of bribing their way out they started to steal from the
government’s revenue, by issuing fake invoices, as the idea of exchequers was dropped.
The government in their way did good to stop bribery but what they didn’t look at was
that 40% of the businessmen here are already dishonest and will come up with new ways of
making money fraudulently. I’m sure that a lot of businessmen were attracted to this new
system, but I am afraid to say that 60% of them were all reprobates.
Other means of tax fraud:-
- Fictitious documents.
- Result of verification of data provided by registered persons viz- a-viz other related sources.
- Dual records.
- Non-reconciliation of documents like purchases register viz-a-viz invoices and bills of entry.
The government has devised some ways to detect these frauds, though these are still not sufficient to completely stop fraud. They are as follows:
- Comparison of bill of entry with the stock register and physical stock.
- Comparison of utility bills production records.
- Verification of invoices.
- Surprise visits to the premises of registered persons to verify numbers of shifts, numbers of employees, etc.
CONCLUSION
We know that fraud exists in every society whether developed or under-developed, as people have diverse natures, aims and objectives in their lives. Some people are content with what they earn while others have lofty ambitions and dream of unimaginable wealth and riches which can fuel glamorous lifestyles. That is the inherent nature of human beings. To control unbridled ambitions, and to ensure that everyone has enough money to survive comfortably, laws are enacted in societies by governments that put curbs on businesses and also give incentives to business and industry to ensure that the economy grows and prospers and the citizens enjoy the fruits of their labour. Side by side, the state gets its due share of revenue from business and industry through the collection of legitimate taxes, and reinvests that money into the state by providing civic facilities to its citizens and retaining a tidy sum in the treasury in the event of a rainy day. The scenario is good. Business booms, the economy prospers, cities are well maintained and citizens are well fed and happy.
On the dark side, corruption filters into societies that are not secure. The concept of ‘you scratch my back and I’ll scratch yours’ seeps into a society when a state is not well governed; when laws are disregarded or circumvented, by both the governors and the governed; when people in powerful positions use their clout dishonestly; for the greater material and financial gain of a few people in positions of power. If the functionaries of a government do not do their jobs diligently and give their personal interest prime importance over and above the national interest, the moral fibre of a state begins to erode and then corruption begins to seep into all levels of society insidiously and irreparably. The common man follows suit and employs dishonest and fraudulent means to further his objectives. Then it becomes ‘every man for himself’ and gradually over a period of time, this parallel system becomes the norm and the honest, law-abiding system becomes the exception.
Tax evaders should be mercilessly penalized, corrupt tax officers should be stripped of their jobs, salaries should be substantially increased to quell the attraction for dishonest money, stringent measures should be employed to root out bribery and corruption starting at the highest level. When the citizens realize that their government means business, they will tread warily and cooperate with the new process. Then only can a welcome change be injected into a rotten system, to stem it. Discipline will then automatically play its role and the danger of anarchy will be reversed.
BIBLIOGRAPHY
- “Analyzing fraud” written by Ahmed, Erum (the review DAWN) (article)
- “Punishing the Corrupt” written by Ahmed, Sultan (DAWN) (article)
- “Economics of Corruption” written by M.Ziauddin (DAWN) (article)
- “Taking a hard look at corporate social responsibility” by A.B.Shahid (DAWN) (article)
- “Pakistan among five most corrupt states: WB Bureau report. (research on Internet)
- “Accountability must go on” written by Rahman, Hafizur. (research on Internet)
- “Fraud: The Root” written by Prof. Pomeranz, Felix (research on internet)
- “The Sales Tax Gazette,” published by the Sales Tax Wing, Central Board of Revenue, Islamabad.
- “Business Ethics” W. Michael Hoffman (Bentley College, center of Business Ethics)
ACKNOWLEDGEMENT
To understand the business ethics, I needed a very in-depth
knowledge of this subject, which I clearly lacked. In attempting to do this project, I came to realise not only how illiterate I was in this field, but also how ignorant I was about the fraudulent activities happening around me. Having now obtained this knowledge, I wish to convey my gratitude to my father and all those teachers who helped me in this demanding task, which could not have been achieved without their help.
BUSINESS ETHICS IN PAKISTAN
Presented to MS. Ibrahim
by
Bilal Khalid