FinMin Uncovers Rs3.4 Trillion Sales Tax Evasion Across Multiple Sectors

Sales Tax Evasion

Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, announced on Thursday that the government has uncovered approximately Rs3.4 trillion in sales tax evasion across various sectors of the economy.

This evasion is part of a larger Rs7 trillion tax theft that has been detected. The revelation came during a press conference where Aurangzeb was joined by Federal Board of Revenue (FBR) Chairman, Rashid Mahmood Langrial, to present findings from a study on sales tax evasion in Pakistan.

The study uncovered widespread tax malpractice, particularly among manufacturers. Out of the 300,000 manufacturers in the country who are liable to register for sales tax, only 14% have actually done so.

Additionally, many of those registered are misreporting their turnover, claiming excessive input tax, and even using fake invoices to avoid paying their due taxes.

Sales tax in Pakistan is collected through a value-added tax (VAT) system, where businesses are trusted to collect taxes from buyers on behalf of the government.

However, this trust has been broken on a significant scale, as evidenced by the findings from key sectors such as iron and steel, cement, beverages, batteries, and textiles.

Aurangzeb highlighted the iron and steel sector as one of the major offenders. In this sector, 33 large businesses, representing over 50% of total sales, were found to have evaded Rs29 billion in sales tax by claiming excess input tax, particularly on scrap metal and coal purchases.

Similarly, in the battery sector, six active cases, covering 99% of total sales, claimed Rs11 billion in excess input tax, primarily related to lead purchases.

The cement sector was another area of concern, where 19 businesses were found to have claimed Rs18 billion in excess input tax for the fiscal year 2023-24, mostly related to coal purchases.

In the beverages sector, 16 businesses, representing 99% of aerated water sales, claimed Rs15 billion in excess input tax, primarily related to the purchase of sugar, plastics, and services.

The textile sector, which involved 228 active cases, claimed a staggering Rs169 billion in excess input tax, mostly through services, chemicals, coal, and packaging purchases.

In response to this alarming level of tax evasion, Aurangzeb emphasized that the government has ramped up enforcement efforts.

These measures include arrests and criminal cases against those involved, which have already led to a significant reduction in the number of fake input tax claims during the fiscal year 2023-24. However, he acknowledged that tax evasion remains widespread and that further steps are needed to tackle the issue effectively.

The FBR has also identified clear evidence of tax fraud in multiple sectors. This includes 11 cases in the battery sector, 897 cases in the iron and steel sector, and 253 beneficiaries of fake input tax claims related to coal purchases.

Those found guilty of tax fraud face severe penalties, including imprisonment for up to 10 years, hefty fines, and other sanctions.

FBR Chairman Rashid Mahmood Langrial warned that input tax adjustment fraud is a serious problem and urged Chief Financial Officers (CFOs) and other company officials to ensure that their tax returns are accurate, particularly with the October 15 deadline approaching.

He cautioned that those who continue to engage in tax evasion would face harsh consequences, as the government remains committed to curbing this illicit practice and ensuring that the country’s tax revenues are properly collected.