Importers of mobile phones received more value added tax (VAT) refunds than what they paid to the government by misusing the VAT Act’s provision, according to the Office of Auditor General (OAG).

As per the Act, the importers can get 60 percent VAT refund if the imported handsets are sold to VAT-registered firms, and they can get 100 percent refund if the handsets are re-exported.

The OAG said in its 53th Annual Report that there has been gross violation of this provision, resulting in the government refunding Rs134 million to the importers of mobile devices who had paid just Rs84.4 million in VAT.

According to the report, some of the importers have been found to have created fake firms to which they sell mobile sets to claim the 60 percent VAT refund, and resell the handsets through such fake firms to exporters

to claim 100 percent refund.

“Giving VAT refund on the import of mobile sets is worthless and this provision has also been grossly misused,” said OAG Spokesperson Baburam Gautam.

The government put in place the VAT refund provision after finding the importers were not issuing VAT bills. “The provision was adopted to encourage firms importing mobile sets to issue VAT bills,” said Ram Mani Duwadi, deputy director general at the Inland Revenue Department (IRD). “If the provision is being misused, we will recommend the government through the Revenue Advisory Committee to change it.”

Duwadi termed the issues “serious” and said it needs to be investigated.

OAG has also been criticising the provision of tax exemption. It has been arguing the huge tax exemptions the government gives every year to businesses and government agencies have failed to yield desired results. According to the latest OAG report, the government awarded tax exemptions worth Rs49.1 billion in 2014-15, up from the previous fiscal year’s Rs45 billion. Moreover, an additional Rs5.76 billion received by the government in value added tax (VAT) was returned to businesses.

Oil and ghee industries and importers and exporters of mobile devices received the highest (Rs5.33 billion) in VAT returns, followed by government agencies and diplomatic agencies.

“As per the international good governance practice, there is a trend of presenting details about tax exemption to the Parliament along with budget,” said OAG. “But the government has not maintained the details about deficit in revenue from tax exemption and presented in the Parliament.” The government gave tax exemption to a total of 171 goods related to animal feeds, health equipments, vehicles, electrical and energy related products.