Major corporations account for half of total tax evasion: Aurangzeb

Finance Minister Muhammad Aurangzeb revealed that major corporations account for approximately half of the total tax evasion in Pakistan, which is estimated at Rs3.4 trillion. He cautioned the chief financial officers (CFOs) of these companies against signing inaccurate tax returns to evade severe penalties, including potential imprisonment for up to 10 years, along with hefty fines. This statement came during a press conference alongside Federal Board of Revenue (FBR) Chairman Rashid Mahmood Langrial, where they outlined an action plan aimed at combating tax evasion. Recently, the owners of Pakistan’s fifth-largest footwear company were arrested for similar offenses.

Minister Aurangzeb emphasized the urgent need for rigorous enforcement measures, stating that sustainable growth in Pakistan is unattainable with a current tax-to-GDP ratio hovering around 9-10%, which ideally should be about 13%. He warned that non-filers would face significant challenges, with the FBR chairman announcing that starting October 14, there will be no classification for non-filers.

Mr. Langrial referred to input tax adjustments as fraudulent practices endemic to Pakistan and urged CFOs to avoid signing inaccurate returns, particularly before the October 14 deadline. Tax evasion will lead to consequences for those involved, he warned.

The FBR chairman announced plans to transition towards a VAT-based sales tax structure, while acknowledging the current human resource shortages within the FBR that hinder such implementation. He expressed confidence that specialized training would bolster staff capabilities and audit efficiency. Moreover, he maintained that no individuals would escape scrutiny, including tax officials found complicit in tax evasion. The automation company associated with the FBR — Pakistan Revenue Automation Ltd — is also set for reforms.

Data analytics have revealed that many firms across five sectors—iron and steel, cement, beverages, batteries, and textiles—manipulate turnover figures, file excessive input tax claims, and utilize counterfeit invoices. The finance minister noted that the FBR has already identified evidence of tax fraud across several industries, with 11 cases in batteries, 897 in iron and steel, and 253 involving bogus input claims related to coal purchases, totaling Rs227 billion in sales tax fraud.

Further details indicate that out of 33 major businesses in the iron and steel sector, which account for more than half of total reported sales, tax evasion was found through claims of excess input tax amounting to Rs29 billion, primarily involving scrap metal and coal purchases. In the battery sector, six active cases—which constitute 99% of total sales—showed claims of excess input tax adjustments worth Rs11 billion, mainly from lead purchases. Similarly, the cement sector revealed 19 active cases with Rs18 billion in excess input tax claims for FY24, largely stemming from coal purchases.

The beverages sector, with 16 active cases representing 99% of aerated water sales, claimed Rs15 billion in excess input tax, primarily through purchases of sugar, plastics, and services, while the textile sector recorded 228 active cases claiming Rs169 billion in excess input tax, mainly from services, chemicals, coal, and packaging expenses.