FBR’s hideous legacy of unpaid refunds  

Huzaima Bukhari & Dr. Ikramul Haq

“The genius of our ruling class is that it has kept a majority of the people from ever questioning the inequity of a system where most people drudge along, paying heavy taxes for which they get nothing in return”—Gore Vidal 

The reality behind claim of the Federal Board of Revenue (FBR) regarding annual growth of 16 to 20 percent in revenue collection from 2013 to 2018 during the regime of Pakistan Muslim League (Nawaz)—PMLN—has been finally exposed. We have constantly been mentioning in these columns every year during the rule of PMLN time the facts behind the so-called “extraordinary” performance and “bonuses” given to some FBR’s officials; unveiling blocking of refunds of billions of rupees and advances from big corporate taxpayers, yet no independent inquiry was conducted even by the present coalition Government of Pakistan Tehreek-i-Insaf (PTI) though it was specifically demanded in 2018 and 2019 in many columns published in this newspaper. Once de facto Prime Minister-cum-Finance Minister, now fugitive, Muhammad Ishaq Dar, Adviser to Prime Minister Haroon Akhtar, and Chairmen of FBR, who served them, were all guilty of hiding the facts and taking credit of what was actually based on deceit and cheating. They brazenly hoodwinked members of the Parliament, international lenders/donors and the public at large besides destroying businesses, especially export houses, by denying them bon fide refunds creating serious issues of liquidity crunch.

In a two-part series, Finance Act 2020—lacking initiatives and innovations, Business Recorder, July 3 and 10, 2020, this point was specifically raised that FBR “never reveals the actual amount of refunds due—just shows the figure of refunds actually paid. FBR has yet not posted on its website the total quantum of refunds payable as on June 30, 2020 after claim of exceeding the target. It should do so without any further delay and must pay all the pending refunds by July 31, 2020”. While FBR did not bother to reveal publically the true amount of refunds, payable even after the publication of above articles and demands from various associations and the taxpayers, the Standing Committee of National Assembly on Finance, Revenue and Economic Affairs [hereinafter “the Standing Committee”] took notice and summoned FBR’s officials to disclose the actual quantum of refunds paid. Facts revealed by FBR during hearings before the Standing Committee  on July 9 and 10, 2020 exposed both the PMLN and PTI governments for not paying outstanding refunds.

It was admitted by FBR’s officials that refunds of Rs. 532 billion were due from June 2014 to June 2019. They again failed to mention refunds due for the fiscal year 2019-20 after paying Rs.135 billion under sales tax, income tax, customs and federal excise against last year’s figure of Rs. 122 billion. This year for the first time, an amount of Rs. 100 billion was paid in respect of long-outstanding refunds through technical supplementary grant (TSG) by the government. Bulk of outstanding refunds, as is clear from data given to the Standing Committee, was blocked by the government of PMLN to show higher collection and extraordinary growth by FBR. It is now the duty of the Standing Committee to fix responsibility and order recovery of bonuses given to FBR’s officers by PMLN Government for showing inflated figures and recast the actual collection of each year to which these blocked refunds relate!  

The following is the brief summary, according to Press report, of some facts revealed by FBR officials before the Standing Committee:

• “FBR did not report the claims outstanding from before June 2014 and also for the period of July 2019 to June 2020.
• The admission confirms the existence of yet another circular debt, like Rs. 2.1 trillion in the power sector, and also affirms that FBR’s tax collection was grossly over-reported.
• From June 2014 to June 2019, Rs. 413.5 billion of income tax refund claims had been outstanding.
• Outstanding sales tax refund claims amounted to Rs112 billion.
• Customs rebate claims amounted to Rs. 6 billion.
• In fiscal year 2018-19, the total tax collection was Rs. 3.826 trillion and if amount of unpaid refunds of Rs. 532 billion is excluded, the net collection would be only Rs. 3.294 trillion (just 8.6% of GDP).
• FBR did not share tax refund claims data for fiscal year 2019-20. If it is included, the due refunds of taxpayers would be far higher than Rs. 600 billion. It is also a failure of the International Monetary Fund (IMF) that could not pick gross over-reporting of revenues.
• The trend showed that like Pakistan Muslim League-Nawaz (PML-N), Pakistan Tehreek-e-Insaf (PTI) government too blocked tax refunds to inflate its revenues.
• During PTI’s first year, FBR received Rs. 101.5 billion in income tax refund claims but did not pay Rs. 87.5 billion, which was 86.2% of the claimed amount, according to the presentation before the Standing Committee.
• To a question on actual tax collection from withdrawal of concessionary tax regime of the exporters, FBR said that the government had estimated receiving Rs. 70 billion due to withdrawal of SRO 1125 and its net general sales tax (GST) collection after withdrawal of SRO 1125 was Rs. 83.4 billion. FBR admitted that the exporters filed refund claims of Rs. 105.2 billion refund, out of which Rs. 72.2 billion were paid and the remaining Rs. 33 billion included in collection of Rs 3.99 trillion for fiscal year 2019-20.
• A member of the Standing Committee could not get an answer to his question about FBR’s claim of existence of $12 billion local textile market. “Had such market existed, the FBR could have collected Rs. 250 billion after withdrawal of SRO 1125”, he added.
• To a question whether there were no outstanding income tax refunds prior to 2014, FBR said that there could be refunds even prior to the 2014 period but their data was with the field formations, “but he said that the amount may not be too high”.
• One member of the Standing Committee also criticised the government’s decision to give Rs.100 billion refunds through a supplementary grant to FBR, which he said “was ethically and professionally wrong, as the refunds could only be paid out of gross tax collection”.

The Standing Committee, however, did not fix any time frame for clearing all the pending refunds and countered the claim of FBR that they intended to adjust what they called “overpaid” to provinces for blocking refunds and over-reporting the collection. Why should provinces suffer for the wrongdoing of federal government? They did not ask FBR to block refunds and overstate collection. This is a serious matter and those who over-reported collection and received bonuses should be punished. But at the same time, the Standing Committee must ascertain who gave them instructions for these malpractices! 

It is a fact that top bosses of FBR were not doing it without instructions and/or knowledge of political masters. It cannot be believed that finance ministers or advisers on revenue were too naïve not to ascertain the fact of blocking refunds when complaints had been coming from aggrieved persons and various associations. In fact, it was mentioned in Sales Tax refunds: the fiasco unfolding[Business Recorder, December 18, 2019] that field officers were blocking refunds, creating illegal demands and denying adjustments of determined refunds against demands and “if Dr. Abdul Hafeez Shaikh, Advisor to the Prime Minister on Finance and Revenue…..does not stop these malpractices, it will be highly lamentable”.

The painful episode of blocking refunds, especially of exporters, started after Muhammad Ishaq Dar took oath of Finance Minister on June 7, 2013—till his fleeing the country on October 27, 2018 on the special aircraft of then Prime Minster Khaqan Abbasi, it was no doubt a ‘dar(k)’ era. He used all kinds of negative methods and oppressive taxes to show 20% annual growth in tax collection to please IMF—they in turn gave him “good reviews” and many waivers!

The IMF in none of its reviews and Press Release No. 19/264 mentioned the weakness of FBR in clearing all outstanding refunds so that correct picture of net revenue collection could have been ascertained. It is strange that such an important area of fiscal mismanagement escaped the attention of the IMF experts, country head and Executive Board. If the numbers are fudged by overstating revenue collection—taking advances not due and blocking refunds of billions—how can reforms and corrective measures suggested by IMF  be effective to remedy the situation?

The sordid story of blocked refunds was narrated in great detail in a report [‘Dar accused of delaying tax refunds’, The Express Tribune, June 19, 2016], prepared by the chairman of a committee constituted by Federal Tax Ombudsman (FTO) on the complaint of Pakistan Apparel Forum. The report held Ishaq Dar directly responsible for withholding bona fide refunds of exporters and others to show “extraordinary performance of achieving over 20% growth in tax revenues. On publication of this report on FTO’s website, Ishaq Dar became furious. He ordered its immediate removal and instructed FBR to dissociate itself from the report although it endorsed the draft when it was circulated! The details of this entire bizarre episode are available in Blocked tax refunds: FTO comes under pressure, removes repot from website, The Express Tribune, July 5, 2016.   

Strangely, but expectedly, till today nobody has been punished for withholding genuine refunds. This time as well, the Standing Committee has not referred the matter to Prime Minister or his Adviser, Dr. Abdul Hafeez Shaikh for necessary action or to the Auditor General of Pakistan for audit of FBR’s affairs on this issue.

Never ever has FBR disclosed in its collection statements how much undisputed and established refunds remained unpaid on the closing date of the fiscal year, which must be subtracted from the gross revenue receipts to portray the correct net revenue collection. It only mentions the actual refunds issued, whereas accrued and ascertainable liability of refunds should also be taken into account to reflect the true picture of net revenue realised during a financial year. One hopes the new Chairman FBR, appointed for three months for the time being, will take note of it and reveal not only the correct position of refunds due in FY 2019-20 and prior to 2014—this is a fundamental right of citizens to know under Article 19A of the Constitution—but also clear all of these and order probe in respect of allegations levelled—see Sales Tax refunds: the fiasco unfolding[Business Recorder, December 18, 2019]!   

The matter of over-reporting of collection and blocking of refunds this time should not go unnoticed and unpunished as time and again the Prime Minister says, “I believe in transparency and accountability even if my own people are involved”. The Prime Minister should take stern action against the culprits and must order payments of all bona fide refunds to people and businesses. He should also identify and prosecute, after due process of law, all those who failed to take punitive action against those in FBR who indulged in unlawful acts of blocking genuine refunds and allegedly issuing refunds to unscrupulous businessmen, claimed fraudulently, or through nepotism/favour.

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)