Criminal Proceedings against Tax Frauds

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Criminal Proceedings against Tax Frauds

Bilal Hassan

The sales tax and value-added tax form an indirect mode of tax collection, the full incidence of which passes to consumers of goods and services. The sales tax is charged on taxable supplies and, after input tax adjustment, the net amount is paid in the national exchequer by the sales tax payers. However, almost all countries collecting sales tax/value-added tax for balancing budgets are suffering revenue losses due to tax evasion and fraud – the size and extent of tax evasion and fraud are not the same, though. In countries with sufficient financial and technological resources, tax authorities are dealing with tax evasion and frauds effectively and, therefore, revenue losses are limited in such countries whereas countries where the capacity of the tax authorities is limited are suffering huge revenue losses due to evasion and frauds. Pakistan is a low-income, developing country facing huge economic challenges. The country’s economic growth in the financial year 2022-23 was only 0.29%, declining from 6.1% in 2021-22. The current account remained negative due to large financial outflows compared to small inflows, largely due to massive imports and huge debt-servicing costs – contributing to the balance of payments issue. Massive foreign and domestic debt is also a major issue that we face due to inadequate tax collection and non-tax revenue. Tax-to-GDP ratio has been almost stagnant at around 10% for the last many years. Although a number of factors are responsible for the low tax-to-GDP ratio, tax evasion and tax fraud are the end product of these.
Fines and punishment are prescribed in the Sales Tax Act, 1990, for tax fraud. Submitting false or forged documents to tax authorities; destroying, altering, mutilating or falsifying the records including a sales tax invoice; knowingly or fraudulently making a false statement, false declaration, false representation, false personification; and giving any false information or issuing or using a forged or false document, are crimes that attract fines and punishment which, for such frauds, are the penalty of Rs. 25,000 or 100% of the amount of tax involved, whichever is higher. Moreover, the tax fraudster is liable to imprisonment up to 3 years or a fine up to the amount of tax involved or both upon conviction.
For committing tax fraud or abetting or conniving tax frauds as defined under section 2(37) of the Sales Tax Act, 1990, there is a fine and punishment of Rs. 5,000 or 100% of the amount of tax loss or both. Moreover, the tax fraudster is liable to imprisonment for up to 5 years or a fine up to the amount of tax loss or both upon conviction by the Special Judge.
In cases of sales tax fraud, the initiation of criminal proceedings against the fraudsters is provided under Sections 37A and 37B of the Sales Tax Act, 1990. The tax authorities have initiated criminal proceedings in a number of tax fraud cases by registering the first information reports (FIRs). However, many cases wherein criminal proceedings were initiated have been brought before the high courts with the prayer that the tax authorities cannot initiate criminal proceedings prior to the determination of civil liability under Section 11 of the Sales Tax Act, 1990.
The Sindh High Court in its judgment dated 20.03.2011 in a case titled “Waseem Ahmed and other v. FBR, etc.” cited the 2014 PTD 1733 which observed that the tax department can impose a penalty on a person by determining his tax liability/amount evaded on the civil side. However, the criminality has to be adjudged by the Special Judge through a trial which is a separate proceeding and punishments mentioned in Section 33 come within the exclusive purview of the Special Judge. However, the appeal of the taxpayer against the aforesaid judgment is pending adjudication before the Supreme Court of Pakistan.
A division bench of the Lahore High Court took a divergent view in its judgment in “Taj International (Pvt) Ltd v. FBR, etc.” The LHC declared the initiation of criminal proceedings against a person before the final adjudication of the tax liability on the civil side to be illegal and unlawful. The Court reached the aforesaid conclusion by holding that the fines prescribed in Section 33 of the Sales Tax Act, 1990, are dependent upon the amount of tax recoverable from the person which makes it abundantly clear that the purpose of imposition of fines is not mere retribution but recovery of tax evaded also. As such, prior determination of the amount of tax evaded is mandatory before initiation of criminal proceedings. This dictum laid down in the Taj International judgment has been followed by the Lahore High Court in its various judgments rendered from time to time. F.M Textile judgment cited as 2017 PTD 1875 is one of the aforesaid judgments.
The Taj International judgment is under challenge before the Supreme Court of Pakistan in C.P No. 1852 of 2014. It is pertinent to mention that the Supreme Court of Pakistan suspended the operation of the aforesaid judgment vide Order dated 10.12.2014. However, the aforementioned suspension was withdrawn vide Order dated 24.02.2016 resorting to the judgement delivered in the Taj International case and connected cases and therefore, is applicable to the extent of the province of Punjab.
On the other, the Islamabad High Court in its earlier view in the judgment dated 05.06.2015 passed in W.P No. 483 of 2015 cited as PLJ 2015 Isl 322 dissented with the view taken in the Taj International judgment while holding that criminal and civil proceedings can proceed simultaneously and both the proceedings are not mutually exclusive. The aforesaid judgment was challenged before the Supreme Court of Pakistan in CPLA No. 1342 of 2015. However, the same was dismissed as withdrawn vide Order dated 16.03.2017. As such, the judgment dated 05.06.2015 passed in W.P No. 483 of 2015 has attained finality. Recently, the Islamabad High Court, in its subsequent judgment dated 11.12.2018 cited as 2021 PTD 107, took a different view and concurred with the view taken by the division bench of Lahore High Court in the Taj International judgment and declared the initiation of the criminal proceedings under Section 37A and 37B to be illegal without prior determination of the tax liability.
The Supreme Court must be apprised of the necessity and urgency involved in the matter as the business of fake and flying invoices is causing a loss of billions of rupees to the national exchequer. There is no cavil to the fact that preparation, usage and dealing in fake invoices do not only constitute an offense of tax fraud under the provisions of the Sales Tax Act, 1990. The apex Court is also needed to be apprised that divergent views taken by different High Courts have resulted in different practices being followed in different provinces due to which the taxpayers are not being treated at par. The criminal proceedings are being initiated in Punjab after adjudication on the civil side. In Islamabad, previously the criminal and civil proceedings were being conducted simultaneously, however, after the recent view of the Islamabad High Court, the Taj International Judgment is being followed. Whereas in all the other Provinces, criminal and civil proceedings against the persons involved in tax fraud are being undertaken side by side.

The writer studied Taxation Policy & Management at Keio University, Japan, and is serving as Additional Commissioner (Inland Revenue), Corporate Tax Office, Lahore.

Muhammad Ali Asghar

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