Worse still, investigations are continuing to unveil one firm after another involved in the racket, indicating that the racket is much wider and deeper than officials suspected.
"It´s pretty shocking. But the volume of fake VAT transactions we have traced so far is already as high as Rs 10 billion (over US$ 138 million)," said a source. This is estimated to have caused the state revenue losses of well over Rs 4 billion.[break]
The involvement of so many firms in the racket was traced when the department in December, 2010 scooped down on 32 major firms using fake VAT bills. They included not just small traders but even leading corporate houses.
The firms had either bought genuine VAT bills from smaller firms or printed the bills of some other registered traders to create fake transactions in order to evade tax and also claim VAT refund, thus siphoning money from the national treasury.
IRD reckons that the efforts of the department alone will not be enough to deal with the mess that was detected as long as four years ago. On Wednesday it handed over the 460 cases involving fake VAT bills to the Inland Revenue Offices (IRO) for further investigations.
"We have instructed the IROs to deal with the cases with high priority," said Revenue Secretary Krishna Hari Baskota. IROs have been asked to complete the investigations and recoup the leaked revenue with fines, by the end of this fiscal year.
To facilitate investigations, IRD has identified high revenue risk areas and developed strict monitoring tools to track the activities of firms dodging tax as well as IROs investigating the cases.
"The tools suggest the types of firms and sectors to be monitored and also guides them on how to carry out investigations," said the source.
The department has instructed the offices to cross-match all procurements by wrongdoing firms over the past four years, tracing out vendors, size of the firms, PAN and volume of revenue evaded.
An internal committee formed at IRD has developed a format and software to track vendors and make sure that VAT refund claims and expenses shown to deduct from income are genuine.
These steps were taken to expedite reforms within the tax administration. The department is also working out policy responses to plug loopholes. It plans to incorporate these in the next budget.
Tax evaders seek amnesty
After being traced out, entrepreneurs involved in the fake bills racket have continued to approach political parties and influential leaders, including Deputy Prime Minister and Finance Minister Bharat Mohan Adhikari, to withdraw action against them.
"They are mainly pushing for amnesty as they claim they cannot afford the fines slapped in the current industrial gloom," said a highly-placed source.
Their initial approach was to influence senior officials at the Ministry of Finance. However, after that failed, they promised IRD not to repeat such mistakes. They also sought non-disclosure of their names to the public.
"They even brought to our notice a clause in the Income Tax Act guaranteeing taxpayers´ rights," said the source. Under the Act tax official concerned could face up to two years in jail.
The tax evaders have since stopped dealing with the bureaucracy. "But we are dead sure the wrongdoers are not keeping still," said an official.
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