Pakistan finance minister reveals PKR 3,400 billion tax evasion

Pakistan’s Finance minister Muhammad Aurangzeb on Thursday revealed a tax gap of PKR 3.4 trillion ($12 billion) due to tax evasion and fraud.

It was found that only 14% of the 300,000 manufacturers required to be registered are actually registered.

Additionally, many registered entities are involved in misreporting turnover, claiming excess input tax, and using fake invoices.

The minister said sales tax in Pakistan is collected in VAT mode, following international best practices. However, the trust placed in business entities to collect sales tax from buyers is being massively breached.

He highlighted findings from the study related to the iron & steel, cement, beverages, batteries, and cement sectors. Malpractices were found to be widespread across these sectors, with many entities claiming input tax far exceeding industrial benchmarks and best practices.

It was also apprised that due to this huge prevalence of tax evasion, enforcement measures including arrests and registration of criminal cases along with improvements in the reporting system were intensified during last financial year, resulting in significant decrease in the claim of fake input tax in FY23-24 across all the sectors.

However, despite these efforts massive evasion still persists. To counter this evasion, more intensified enforcement measures have been planned.

Finance minister also apprised Federal Board of Revenue has already identified and gathered evidences of tax fraud in different sectors which include 11 cases of battery sector, 897 cases of iron & steel sector and 253 beneficiaries of fake input claims on the purchase of coal.

Large number of cases have been identified for criminal proceedings on account of sales tax fraud inclusive of above-mentioned sectors.

The persons in the supply-chain of these cases have manipulated the input tax adjustments, debit and credit notes and other means to defraud and dodge the return filing system. The total amount of sales tax fraud committed is PKR 227 billion.

Massive enforcement crackdown has been planned and would be implemented in coming weeks.

Finance minister also stated that sales tax fraud is a criminal offence and carries strict action under law which includes arrest and imprisonment of up to 10 years other than heavy penalties and fines.

The action would be taken against owners of the business, incases of sole proprietorships, partners in cases of firms (association of persons) and directors, CEOs, CFOs and other authorized persons of the company.