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Federal Tax Ombudsman Uncover Major Tax Fraud in Sales Tax Cybercrime Case

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Federal Tax Ombudsman Uncover Major Tax Fraud in Sales Tax Cybercrime Case

Islamabad 19-10-2024: A detailed judgment issued by the Federal Tax Ombudsman (FTO) has exposed a massive tax fraud involving the manipulation of sales tax records worth over Rs. 81 billion. The fraud, orchestrated by a network of cybercriminals, involved the misuse of dormant taxpayer accounts, including the Sales Tax Registration Number (STRN) of a retired armed forces personnel, to file fake sales tax returns without the taxpayer’s knowledge. The case highlights serious lapses in the Federal Board of Revenue (FBR) and PRAL’s internal controls, resulting in significant revenue losses for the government.

The judgment details how cybercriminals targeted dormant sales tax accounts by exploiting taxpayer credentials. The complainant, a former armed forces officer who owned a business under the name Gravity Traders, had his STRN blacklisted in March 2024 after fraudulent transactions totaling Rs. 81.434 billion, with a GST impact of Rs. 14.658 billion, were recorded against his name from September 2023 to January 2024.

The Federal Tax Ombudsman (FTO) found that the FBR and PRAL employees were complicit in facilitating these fraudulent transactions. The investigation revealed that the complainant had filed NULL tax returns during the relevant period, meaning no sales were recorded. However, fraudulent returns were filed using Annexure C by cybercriminals, bypassing the system’s automated checks.

The judgment highlighted the manipulation of FBR’s web portal, where the credentials of several dormant taxpayers were used to file bogus sales tax returns. The criminals even went as far as to change the complainant’s contact details in the FBR system to prevent him from accessing his account. The investigation pointed out significant lapses in the security and protection of taxpayer data, calling for immediate action to address these vulnerabilities.

Key beneficiaries of the fraud included prominent buyers such as Yasir Confectionery and New Metro Footwear Co, who claimed large amounts of input tax using the fraudulent transactions. Chenab Steel Rerolling Mills was identified as one of the largest beneficiaries of this tax fraud, having claimed Rs. 47.73 million in November 2023 alone.

The Ombudsman’s report also criticized the administrative failures of the FBR, noting that the tax authorities failed to act on the taxpayer’s application for deregistration in a timely manner. This delay allowed cybercriminals to exploit the dormant STRNs for fraudulent purposes. The judgment cited Rule 18(5) of the Sales Tax Rules, 2006, which requires the automatic recovery of inadmissible input tax credits, a provision that was disabled in this case.

The FBR was faulted for failing to maintain the integrity of the web portal and enabling the bypassing of automated checks, leading to a substantial loss of revenue. The judgment emphasized that these lapses amounted to maladministration under Section 2(3)(i)(a)(b)(c) & (ii) of the Federal Tax Ombudsman (FTO) Ordinance.

The Federal Tax Ombudsman (FTO) recommended that a fact-finding inquiry be conducted to identify the cybercriminals involved in the fraud, including potential insiders from PRAL and FBR. The judgment also called for legal proceedings to be initiated against several businesses that were identified as the ultimate beneficiaries of the fraudulent transactions, including Chenab Steel Rerolling Mills, Akbari Chemical Industries (Pvt) Ltd, and Khalid and Company.

The Ombudsman also ordered the revocation of the blacklisting order against the complainant, recognizing that he was not involved in the fraud. The case has been referred for further investigation, with a report expected within 90 days.

This case sheds light on the systemic vulnerabilities in Pakistan’s tax administration system, particularly in relation to data security and the prevention of cybercrime. The judgment underscores the need for tighter controls within FBR and PRAL to protect taxpayer information and prevent the misuse of dormant accounts. The case highlights the broader issue of tax fraud facilitated by cybercriminals, with recommendations for comprehensive reforms in FBR’s IT systems and processes.