Rs3.4 trillion sales tax evaded across key economic sectors, says finance minister

Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, disclosed that out of a total of Rs 7 trillion in tax evasion, approximately Rs 3.4 trillion is attributed to Sales Tax evasion across key economic sectors. 

He made these remarks during a press conference alongside Rashid Mahmood Langrial, Chairman of the Federal Board of Revenue (FBR), where they discussed the findings of an FBR study on sales tax evasion.

In a stern declaration, Finance Minister Mohammad Aurangzeb announced punitive measures including 10 years in jail and substantial fines, specifically warning chief financial officers (CFOs) of large corporate firms against endorsing incorrect tax returns. He highlighted the recent arrest of the owners of the country’s fifth-largest footwear company for tax evasion.

The minister announced that enforcement operation is imminent, emphasizing that the government must rigorously apply these measures to combat tax evasion effectively.

The study revealed that only 14% of 300,000 manufacturers required to register have done so. Many of these registered entities misreport turnovers, claim excessive input taxes, and utilise fake invoices. 

Sales Tax in Pakistan, which is collected via the VAT mode, relies on businesses to collect taxes from buyers—a system that has been extensively breached, according to the minister.

The minister highlighted that malpractices were rampant across five key sectors: Iron and Steel, Cement, Beverages, Batteries, and Textiles. 

In the iron and steel sector, 33 large businesses, which represent more than half of the total sector sales, were found to have evaded Rs 29 billion in sales tax, primarily through fraudulent claims on scrap metal and coal purchases. 

Similarly, in the battery sector, six active cases accounting for 99% of the total sales claimed Rs 11 billion in excessive input taxes, mainly from lead purchases. 

In the cement sector, 19 active cases claimed Rs 18 billion in excessive input taxes for FY23-24, chiefly through coal purchases.

Furthermore, the beverages sector, with 16 active cases covering 99% of aerated water sales, claimed Rs 15 billion in excessive input taxes primarily through purchases of sugar, plastics, and services. 

Meanwhile, the textile sector, with 228 active cases, claimed Rs 169 billion in excessive input taxes, predominantly from services, chemicals, coal, and packaging.

To combat tax evasion, the government has ramped up enforcement measures, including arrests and criminal cases, which have led to a notable reduction in fraudulent input tax claims in FY23-24. Nevertheless, significant evasion continues, prompting plans for more stringent measures.

Additionally, the FBR has identified tax fraud evidence in various sectors, including 11 cases in the battery sector, 897 in the iron and steel sector, and 253 fraudulent input claims on coal purchases. Those implicated could face up to 10 years in prison, substantial fines, and penalties.

On the same occasion, the FBR Chairman emphasised that input tax adjustment fraud is a critical issue. He issued a stern warning to CFOs against signing incorrect returns, particularly before the October 15 deadline, stressing that those involved in tax evasion would face severe consequences.