INSPECTION REPORT IN RESPECT OF REFUNDS PROCESSED BY ZONE B, KARACHI.

(JULY 01, 2007 to 30.11.2007)

INTERNAL CONTROL CELL

OFFICE OF THE DIRECTOR GENERAL, REGIONAL TAX OFFICE, KARACHI

INDEX
S. No. 01. 02. 03. 04. 05. 06. description Background Purpose Jurisdiction & Composition of Zone-B, Karachi Data, Documents & Record relied upon Preliminary Inspection & Observations thereof Process of Inspection Step by Step a. Step I Cross matching data b. Step II Editing & Short Listing c. Step - III Verification of facts d. Step IV Cross Verification Suspected Loss of Revenue Loop Holes Identified a. Boards Facilitation Policy Misused b. Lack of Network Facility to T.O. c. Taxpayers Facilitation Division d. Data Processing Cell Roles Played a. Taxation Officer (E&C) b. Departmental Staff (E&C) c. Authorized Representative (Alleged) d. Refund Officer e. DPC Officials f. NTN Cell Officials Recommendations / Suggestions a. NTN Cell b. Federal Board of Revenue c. Regional Tax Office i. Refund Issuing Check List ii. Receipt of Refund Application iii. Requisition of Case Record & Updating iv. Mechanized Processing of Refund below Rs. 10,000/v. Inspection of Refund Record vi. Verification of Identifiable Multiple Challans vii. Generation of Monthly Refund Issuance Deficiency page 4 4 4 4-5 56 6 6 6 7 7 78 8 8 9 9 9 10 10 10 10 11 11 11 11 11 11 12 12 12 12 13 13 13 13 14 14

07. 08.

09.

10.

11.

Report by FTO Conclusion

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S. No. A. B. C. D E F G H H-1 J K L M N

Annexures List of refund cheques issued by zone-b, Karachi presented at and cleared by SBP. (Greater than Rs, 10,000/-) List of refund cheques issued by Zone-B, Karachi presented at and cleared by SBP. (Lesser than Rs. 10,000/-) Identified bogus refunds greater than Rs. 10,000/Identified bogus refunds lesser than Rs. 10,000/DPCs internal SOP Circular No. 5 of 2003 List of identified Fake NTN Certificates Proposed NTN Stock Report Proposed NTN Issuance Report Proposed Refund Processing Check List Proposed SOP for processing of Refunds less than Rs. 10,000/- mechanically Proposed Monthly Refund Issuance Discrepancy Report FTO Disposition List Taxation Officers, Zone B Disposition List Refund Officers, Zone - B

Page 17 27 28 80 81 82 83 128 129 130 131 133 134 135 136 137 138 139 140 141 143 144

01.

BACKGROUND
Having gathered intelligence that Boards directives with respect to issuance of refunds were being compromised and that due diligence was not being exercised specially while processing claims, wherein, amount of refund was less than Rs. 10,000/-, the Director General, Regional Tax Office, Karachi, was pleased to order inspection of non-corporate refunds issued by Zone B, Karachi, during the current Financial Year.

02.

PURPOSE
Inspection was conducted with the purpose to ascertain as to whether adherence to prescribed office procedure was being made and further to determine the level of transparency of refund process. Pin pointing of the existing loop holes and suggesting of the ways and means to be adopted in future to protect the loss of revenue was yet another rationale.

03.

JURISDICTION / FUNCTIONS ASSIGNED TO ZONE B, KARACHI

Zone B, Karachi comprises of 55 Units and is supervised by 05 Additional Commissioners, each heading a Division and controlled by the Commissioner assisted by Special Assistant and other support staff. The zone is entrusted with Enforcement & Collection functions including processing of refund claims in respect of the tax population previously assessed to tax at various former zones of Southern Region, Karachi. Issuance of Refund Vouchers is controlled through designated Refund Officers. Each division of the zone has two (02) such Refund Officers, one responsible to issue cheques wherein amount of claims is less than Rs. 10,000/-, while the other is responsible to issues cheques where amount of claim exceeds Rs. 10,000/-, meaning thereby that at one single time ten (10) in number Refund Voucher Books are in use at the zone.

04.

DATA / DOCUMENTS AND RECORD COLLECTED & RELIED UPON TO CONDUCT INSPECTION
Data / Documents and record were collected from the following offices to conduct inspection, as appended in the table to follow:

S. Name of Office / Unit Data / Documents Collected No. i Federal Treasury Officer, DPC, Soft data in respect of Refund Karachi. Cheques presented at & cleared by State Bank of Pakistan during the period July 01, 2007 to November 30, 2007. ( Annexure A & B) ii Taxation Officers (E&C), Zone -B, Karachi. Advices Refund Registers (01.07.2007 to 24.11.2007) Counterfoils of used refund books Case record of refunds processed on last recorded date of current refund voucher book used in the case of amount less than Rs. 10,000/- (03 units).

iii

M/s. Mindshare (Pvt.) Limited, Attested copy of the Multiple Karachi. Challans submitted by the claimant as evidence of tax deduction. M/s. PRAL, Karachi. Sub-Office, Re-Verification of DPC Sheets and details contained on Reverse of 09 selected Multiple Challans.

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05.

PRELIMINARY INSPECTION & OBSERVATION THEREOF

Preliminary inspection conducted on 26.11.2007, in respect of the refund cheques issued on last recorded date of each current Refund Voucher Book (less than Rs. 10,000/-), revealed that out of 96 refund claims processed, 89 were allegedly found to be bogus. It was also noted that claims were being processed violating normal office process and that due diligence was not being exercised while processing the refunds, some of the discrepancies noted are appended hereunder: a) Refund applications were being received directly at the E&C Units, instead of Tax Facilitation Division. b) Refund process was being initiated & completed on the basis of photo copies, instead of Original Returns.

c) Case record was neither being called from IP, to verify taxpayers profile & other particulars nor was the status of claimant and his/her existence being verified from Master Index. d) Allegedly photo copies of the defaced Multiple Challans submitted as evidence of tax deduction / collection were being accepted by the Taxation Officers, as sufficient proof and third party verification was not being carried out despite the fact that Original Deduction Certificates were not being brought on record. e) Photo copy of the DPC verification sheets, signed & stamped by single personal were being accepted with out any cross verification. f) A single (non entity) Authorized Representative (M/s. Rana Associates, Advocates & Income Tax Consultants, 207, Aziz Chamber, Liaquatabad, Karachi) whose existence could not be verified, since there exists no such building on the given address, was allegedly involved in the process and was also receiving the Refund Cheques. g) Out of 96 refunds 40, processed by Mr. Ishrat Ali, ACIT/Taxation Officer 20 (E&C) pertained to one single locality of Saddar, Karachi (Ghafoor Chamber or Hayat Chamber), while addresses given on many of the returns did not bear shop or office number. Yet another 28 refunds processed by Mr. Safdar Hussain, ACIT/Taxation Officer 41 (E&C) contained incomplete addresses of North Nazimabad or North Karachi, wherein only blocks or sectors of the area were mentioned. (Details attached as annexure C & D).

06.
06.01.

INVESTIGATION CONDUCTED
Keeping in view the discrepancies stated above and suspecting that an organized white collar crime may have been committed, further methodological investigation was conducted step by step to un-earth the scam and estimate loss of revenue. Step I, Creation & Cross Matching of Data Federal Treasury Officer, DPC, Karachi, was requested to make available soft copy of the data created out of the information contained on face of the cheques issued by Zone B, Karachi and duly cleared by the State Bank of Pakistan during the period July 01, 2007 to November 30, 2007. Having obtained the said data, it was cross matched with Master Index running an SQL enquiry on the system, defining parameters to identify alleged bogus refunds. Step II, Editing & Short Listing List of suspected mismatched identity and cases not existing on Master Index was put through manual editing for spell check, comparison of business name(s), and address etc to eliminate input errors if any. 7

Step III Verification of Facts To confirm the doubt that data contained on reverse of the Identifiable Multiple Challans had been de-faced to suit claim of bogus refund, General Manager PRAL, Sub-Office, Karachi, was taken onboard and requested to re-verify nine (09) selected Multiple Challans, strictly in accordance with the laid down SOP in respect of Identifiable Multiple Challans (in general termed as category 90), which had been used in processing of 68 short listed bogus refunds. Details provided by the said officer confirmed the suspicion cast and was further indicative of the fact that data captured as Sub-Challan of category 90 of the above referred Multiple Challans was different from that contained on photo copies submitted by the alleged claimants as evidence. Step IV, Cross Verification Below mentioned With Holding Agents (WHAs), were issued verification request in respect of above referred nine (09) Multiple Challans: o M/s. Independent Media Corporation (Pvt.) Limited, Karachi. o o o M/s. Mindshare (Pvt.) Limited, Karachi. M/s. Trading Corporation of Pakistan (TCP) Limited, Karachi. M/s. Pakistan Beverages Limited, Karachi. 06.02. Till finalizing of this report, only M/s. Mindshare (Pvt.) Limited, Karachi, responded by submitting duly attested / notarized photo copies of alleged challans under the cover of a letter submitted by M/s. Najmi & Co., dated 13.12.2007, confirming the suspicion cast and proving thereby that not only the details on reverse of the challan had been tempered by the claimant to suit his claim but companys seal appended on the photo copy was also fake and did not exist with the company.

07.

SUSPECTED LOSS OF REVENUE INVOLVED

Below tabulated loss of revenue is suspected to have occurred through encashing of non-corporate refund vouchers issued by Zone B, Karachi, and presented at & cleared by the State Bank of Pakistan during the current Fiscal Year:

SUMMERY OF INSPECTION OF ZONE - B REFUNDS - CURRENT YEAR UPTO RS. 10,000 OVER RS. 10,000 TOTAL AMOUNT AMOUNT AMOUNT DESCRIPTION NO. MILLION NO. MILLION NO MILLION RS. RS. RS. CLEARED BY S.B.P. AND CREDITED TO 4557 42.429 936 202.496 5493 244.925 CLAIMANTS' ACCOUNT SUSPECTED FRADULENT 4331 40.694 155 33.735 4486 74.429 CLAIMS PERCENTAGE 95% 96% 17% 17% 82% 30% CATEGORY WISE BREAK-UP OF SUSPECTED FRADULENT REFUNDS UPTO RS. 10,000 OVER RS. 10,000 TOTAL AMOUNT AMOUNT AMOUNT DESCRIPTION NO. MILLION NO. MILLION NO MILLION RS. RS. RS. MIS-MATCHED IDENTITY (NTN, NAMES, 4264 40.166 136 30.249 4400 70.415 AND LOCATION ETC.) NOT EXISTING ON 67 0.528 19 3.486 86 4.014 MASTER INDEX TOTAL 4331 40.694 155 33.735 4486 74.429

08.

LOOP HOLES IDENTIFIED

In claiming and processing bogus refunds, advantage has been taken of the following loop holes, committing this organized white collar crime:

a)

Boards Facilitation Policy Misused

i. To facilitate the taxpayers, Board issued direction in year 2003, to do away with issuance of Refund Advice / Order and subsequent submission of Schedule to the State Bank of Pakistan in the case of refund wherein amounts were lesser than Rs. 10,000/-. The said facility has been grossly misused with mala fide intention, since no further deterrence existed. ii. Non incorporation of security checks such as three dimensional or embossed seal on NTN Certificate, absence of serial number and signatures of the issuing authority lead to apparent parallel NTN issuing system and resulted in obtaining of Fake Certificates by the alleged claimants, through greasing of palms of the DPC / NTN Cell staff. 9

b) Taxation Officer (E&C) - Lack of Net-working & verification

facility and attitude of

i. Non-availability of facility to Taxation Officer to verify taxpayers particulars from Master Index encouraged the criminal to tender in bogus claims. ii. Direct receipt of refund claims by Taxation Officer (E&C), in violation of the laid down procedure again made the job easy for the criminals apparently in collusion with lower staff. iii. Casual attitude and laid back role on part of the Taxation Officers (E&C) especially with reference to third party verifications in the absence of Original Deduction Certificates again encouraged the organized crime. iv. Handing over of refund vouchers either to alleged authorized representatives or alternatively to the departmental staff members in the absence of physical presence of the claimant and in violation of laid down process / Director Generals instruction further prompted the criminal.

c).
i.

Taxpayers Facilitation Division

Failure to secure back return receiving seals, provoked the criminals to apparently slot in lower staff, to their advantage, by getting the returns stamped and subsequently submitting the same, declaring it to be the original one, thus deceiving the Taxation Officer (E&C). Failure to emphasize its responsibility and allowing other functions to discharge duty on its behalf, especially failure to dispatch refund vouchers through courier or registered post supposedly encouraged lower staff to work for criminals.

ii.

d).

Data Processing Cell

i. Failure to point out existence of a parallel NTN Cell and non maintenance of proper stock of the stationary apparently encouraged the insiders to work with mala fide intent establishing a parallel NTN Issuing System. ii. The following further acts of Data Processing Cell apparently encouraged the alleged criminal to misuse Multiple Challans: Restricting of verification of Identifiable Multiple Challans to the extent of WHAs name, type of deduction, date of payment, total amount contained on face of challan.

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Non verification of the details on reverse of said challans, in violation of SOP & directions contained in Para 7 (iii) (a) of Circular No. 5 of 2003. (Annexure E & F) Continuity of verification through multiple users at zones and DPC simultaneously. Entertaining of verbal requests to conduct verification and failure to maintain record of such requests. Non-availability / non-printing of user id-code on the verification sheet, single signature and lack of counter verification.

09.

ALLEGED ROLES PLAYED:

a)

The Taxation Officers (E&C) in general

Encouraged direct receipt of documents relating to refund at their respective offices in most of the cases, processed the claims without having practically verified existence of alleged claimants from the Master Index. Furthermore, accepted photo copies of Multiple Challans and DPC verification sheets as sufficient evidence and made no effort what so ever to conduct third party verifications. This casual attitude and laid back role on part of the Taxation Officers (E&C) especially with reference to third party verifications in the absence of Original Deduction Certificates resulted in loss of revenue and encouraged organized white collar crime. b)

Staff of Taxation Officers (E&C)

Received directly the documents relating to refund instead of directing the claimants to file the same at respective Tax Facilitation Division, put up the same before the Taxation Officer with out having called for the case record, received Refunds Vouchers from the Refund Officers to deliver the same to the alleged claimants or their alleged representatives. Also assisted the alleged claimant (in certain cases) by fixing Return Receipt Seals on copy of returns creating a position wherein the Taxation Officer could easily be dodged to treat the same as original return. As per verbal intimation of Mr. Safdar Hussain, ACIT/TO41(E&C)/Refund Officer, he handed over 28 in number Refund Vouchers issued on 24.11.2007 to Mr. Javed Pervaiz, UDC, of Division III, Zone B and that all the refund advices were prepared by Mr. Raza, KPO of CIT office.

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c)

Alleged Authorized Representative

As per verbal intimation of Mr. Ishrat Ali, ACIT/TO-20(E&C)/Refund Officer, he handed over 40 in number Refund Vouchers issued on 24.11.2007, to a person from M/s. Rana Associates. However, the said Tax Advisor does not exist on given address. d)

Refund Officers

Compromised transparency of the process by handing over refund vouchers either to the alleged authorized representatives or alternatively to the departmental staff members in the absence of physical presence of the claimant and in violation of laid down process / Director Generals instruction.

e)

Data Processing Cell Officials

Restricted verification of Identifiable Multiple Challans to the extent of WHAs name, type of deduction, date of payment, total amount contained on face of such challan, in violation of SOP & directions contained in Para 7 (iii) (a) of Circular No. 5 of 2003 and further entertained verbal requests to conduct verification, but failed to maintain physical or soft record of such verbal requests. Further failed to adopt ways and means through software to indicate details of KPO processing request, thus became instrumental in the loss of revenue.

f)

NTN Cell Officials

Failed to point out existence of a parallel NTN Cell and also failed to maintain proper stock of the stationary, thus encouraging the insiders within its own walls to work with mala fide intent establishing a parallel NTN Issuing System, hence Fake NTN Certificates were printed. 20 such cases stand identified, details of which are enclosed as annexure G to this report.

10.

RECOMMENDATIONS
In light of the findings recorded above, the following proposals are suggested to be considered to be adopted at national level to eliminate the chances of malpractices processing of refunds and to protect the interest of revenue in future.

a)

NTN Cell
i. Having put each NTN Cell under direct administrative control of the Commissioner of I.P. Division of the respective Regional Tax Office, it

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shall be headed by a designated Officer Incharge, who shall stand responsible for generating of a Monthly Report and its subsequent submission to the respective Director General through the concerned Commissioner. The said report should be indicative of NTN Certificate Stocks opening / closing balance, addition / usage and wastage on the format proposed & attached as annexure H & H-1 to this report. ii. Copy of the above said report shall also be utilized by the respective I.P. Division to create profile of the new taxpayers and subsequently identify cases of non-filers on or after due date of filing of monthly / annual statements / return. iii. Concerned Commissioner of respective I.P. Division shall arrange to conduct audit of the stationary provided to the NTN Cell on regular basis. b)

Federal Board of Revenue

The Board may consider issuance of directions with respect to the following: i. Order to restore generation of Refund Advice / Order and submission of schedule to the State Bank of Pakistan in cases of refund amount being less than Rs. 10,000/- as well. ii. Re-design NTN Certificate, embedding security checks in the same and have the said serialized stationary printed preferably on security paper from Security Printing Corporation of Pakistan for future use. iii. Ensure usage of specialized three dimensional stickers containing Boards logo along with use of embossing seal.

c) Regional Tax Office

Director General of each Regional Tax Office may consider issuing of the following administrative directions for strict compliance by all its subordinate offices, Data Processing Cell (PRAL), and Federal Treasury Officer (FTO), to protect any further loss of revenue and make refund processing exercise fool proof: Refund Processing Check List No Taxation Officer of the Enforcement & Collection Division shall process refund with out having made use of and having brought on record the proposed check list attached as annexure J to this report.

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ii. Receipt of Refund applications All refund applications must be received by the Tax Facilitation Division / Centre only and thereafter forwarded to respective E&C Division for processing of the same, while direct receipt of applications by E&C or its processing with out prescribed applications shall be considered as a mala fide act / insubordination. iii. Case Record Mandatory Utilization & up-dating of No refund shall be processed without calling for the case record from respective I.P. Division and especially in the absence of Original Return, Original Deduction Certificate and Original DPC Verification Sheet which should contain the details of Sub-Challans pertaining to the taxpayer claiming refund. Concerned Taxation Officer (E&C) would stamp Original Return in red ink for the purpose of caging with a seal containing words:

Refund Issued
vide Cheque No.__________ dated _________ Initials: TO(E&C) Refund Officer

Concerned Refund Officer shall accordingly fill the particulars of the Refund Voucher in the space provided in the seal and hand over the Refund Voucher to the Taxpayers Facilitation Division / Centre for dispatch of the same through courier or registered post, returning the case record to the I. P. Division through T.O. (E&C) who had issued order u/s 170 of the Income Tax Ordinance, 2001. iv. Mechanized Processing of claims under Rs. 10,000/Refund application, wherein, amount claimed is less than Rs. 10,000/ shall be preferably processed in a mechanized manner, after conducting prior desk audit, as is being done by Medium Taxpayers Unit, Karachi. Proposed SOP to be adopted in doing so is attached as annexure K to this report. v. Inspection of Refund Record

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Regular inspections of Refunds processed including records & registers must be conducted on monthly basis, by the respective Additional Commissioners acting as Supervisory Officers submitting a detailed report to the effect. vi. Verification of Identifiable Multiple Challans Data Processing Cell shall be bared to entertain verbal request to verify the contents of Identifiable Multiple Challans, while written requests shall be brought on record and always referred to, when responding back to such requests. Verification Sheet issued in respect of an Identifiable Multiple Challan, with out containing details of Sub-Challan relating to the claimant taxpayers shall neither be issued nor entertained by the Taxation Officer (E&C) allowing credit of the tax with held / deposited. Arrangements shall be evolved by DPC to print user-id of the KPO handling and printing the verification, on each generated sheet along with reference to the Taxation Officers correspondence. Each verification sheet shall bear at least two signatures authenticating the correctness of particulars contained therein. In case respective E&C Divisions have been authorized to verify and print such verification sheet on their own, the same shall be duly signed by the respective Special Assistant or DC (HQ) of such division further ensuring that details of Sub-Challans indicating share of the claimant is also printed on the sheet. Vii. Federal Treasury Officer Generation of discrepancy report by Respective FTO shall first compile data capturing information contained on the face of the Refund Vouchers cleared by the respective branch of the State Bank of Pakistan or authorized branch of National Bank of Pakistan and thereafter, compare the same with details stored in Master Index and issue a Monthly Refund Issuance Discrepancy Statement forwarding the same to the office of respective Director General and endorsing copy of the same to the Commissioner (E&C) entrusted with the function of issuing of refund, on the format attached to this report as annexure L.

11.

CONCLUSION

There is no denying fact that laid down office procedures in respect of verification of claimed tax credits, as well as refund process have been compromised, while existence of Parallel NTN Issuing System stands established and that loss of revenue has occurred 15

beyond any doubt. While adherence to office procedure and transparency may be ensured in respect of future processing of refund adopting the suggested ways and means, responsibility in respect of the carelessness on part of the respective Taxation Officers, E&C Unit Staff, DPC officials and outsiders such as Bankers & Authorized Representative etc. whose acts have lead to issuance of suspected bogus refunds causing an apparent loss of revenue to the extent of Rs. 74.429 (M), needs to be fixed. It is therefore, further proposed as under: a) The Competent Authority may be requested to constitute an Inquiry Committee to be headed by a Commissioner with an Additional Commissioner Income Tax, Manager PRAL and two Deputy Commissioners as members. The said Committee, may be ordered to identify the extent of responsibility of each person involved in processing of each bogus refund proceeding as under: i. Identify Taxation Officer (E&C) ordering bogus refund using the disposition lists of Zone B, Karachi enclosed as annexure M & N to this report. Compel the Taxation Officer / Refund Officer to furnish personal details of the Staff or AR involved to whom Refund Vouchers were, handed over. Verify from I.P. Division of the existence of record since sufficient number of claimants are not born on Master Index. Order identified Taxation Officer to produce case record comprising of Return, NTN Certificate, DPC Verification Sheet, Copy of Multiple Challans etc, which was allegedly brought on record by him / her while processing refund claim. Identify common features noted from the case record say; name of AR, apparent similarities of various cases, difference of signatures in one single case, quality of photo copy of the challan specially comparing the front page with back page, commonality of hand writing (crosses and strokes etc.) especially in respect of the details of payees appended at reverse of the Multiple Challan de-facing the original data. Request third party verifications wherein WHAs stand identified but original deduction certificates were not brought on record, calling in attested copy of Multiple Challan (both sides) and authentication or contradiction of the contents of verse side of the Multiple Challans as it exists on departmental record. Take into account as to whether refund claims were received by Tax Facilitation Division / Centre and subsequently forwarded to concerned TO (E&C) or alternatively tendered in directly before the TO (E&C). In case the same were tendered in before the TO (E&C) as to whether the same were duly recorded in the Inward Dairy of the Unit or not.

ii. iii. iv.

v.

vi.

vii.

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viii.

Identify alleged AR or staff member to whom the Taxation Officer (E&C) or Refund Officer handed over Refund Vouchers in violation of the laid down process and directions on the issue. Requisition details from State Bank of Pakistan or authorized branch of the National Bank of Pakistan (acting as treasury) in respect of the accounts credited and subsequently requisition attested copy of account opening form to identify criminals involved including the Taxation Officer, Staff, DPC official, Introducer and Banker for initiation of criminal proceedings if deemed fit.

ix.

(MUHAMMAD MUSTAFA KAMAL) ADDITIONAL COMMISSIONER/ICC P. Code 01 90 - 0499

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