The Department of Revenue Investigation has filed a case at the Kathmandu District Court against 24 individuals on the charge of evading taxes amounting to Rs1.75 billion by producing and issuing fake Value Added Tax bills.

This is the second time in nearly a decade that a racket of producing and issuing fake VAT bills has been busted. In the fiscal year 2010-11, the Inland Revenue Department had busted such a racket. The action made national headlines as influential businessmen and their firms had also been named in the fake VAT bill scandal.

The department told a news conference on Tuesday that they filed the case against Jaya Kishore Sah, who, the department believes, is the mastermind behind the scam, his associates including Parameshwor Shah, Mukesh Kumar Jha, Devraj Upadhyaya, Toyanath Adhikari, Subodh Sah and Pradeep Sah and 16 poor and ignorant people in whose names 24 firms were registered to issue fake VAT bills.

The department handed over 11 individuals including six promoters to the court on Sunday.

“We have  filed the case based on transactions related to the 24 firms which had issued fake VAT bills,” said Dirgha Raj Manali, director general at the department. “We are investigating additional 16  firms which have also been involved in issuing fake VAT bills.”

The department found that the 24 firms had sold fake VAT bills for taxes amounting to Rs2.5 billion. “From the fake transactions, we have calculated 80 percent tax evasion, which amounts to Rs1.75 billion as per the law,” said Mainali.

According to the department, it found income tax evasion of Rs1.09 billion and VAT evasion of Rs654.42 million. It has sought confiscation of the amount equivalent to the evaded tax amount, fines three times the evaded tax amount and three-year jail against the defendants as per the Revenue Leakage (Investigation and Control) Act.

The department has also initiated parallel investigation into the companies which purchased the fake bills issued by the firms. “We have already seized documents from around a dozen companies that had received the fake VAT bills in order to evade tax.”

According to the department,  most of the firms that received fake VAT bills have been delivering goods and services to government agencies, contractors, multinational companies, hydropower companies and hospitals, depriving the government of significant revenue.

“We have come to understand that officials of those firms have started knocking at the door of power centres to save themselves after we arrested two racketeers.  But we won’t stop going after them,” said Mainali.

According to the department, the initial investigation into the firms that procured fake VAT bills found huge tax evasions. It had launched a probe about two months ago after it was informed by a number of sources, some even registering complaints in writing,  about the issuance of fake bills by a number of firms.

Based on the information, the department had arrested two individuals—Parameshwor Sah on January 17 and Jaya Kishor Sah on  January 14. The department said their arrest opened the door to deeper investigation.

Another defendant, Mukesh Kumar Jha, who remains at large, was also allegedly involved in the previous fake VAT  bill scam. Defendant Devraj Upadhyay is a registered auditor who had endorsed 13,125 details of firms that were issuing fake bills for the last two years. Toya Nath Adhikari was involved in getting the signature of the auditor and finding clients for fake VAT bills.

The racketeers reportedly lured poor workers with financial offers, to get the  firms registered in their names and opening bank accounts in their names. One of the racketeers—Parameshwar Sah—presented himself as the employee of one of these firms and was authorised to sign cheques.

According to Mainali, the 24 firms were issuing fake VAT bills in the name of a number of companies and would receive the amount as per the bills they had issued. “But racketeers used to return most of the amount by charging certain commission for using their fake VAT bills,” he said. “They are found to have charged commission as high as five percent.”

The department has found weaknesses in both the Inland Revenue Offices and banks for failing to notice ‘suspicious transactions’ in the names of these firms. “These firms were found to have done transactions worth millions of rupees within a month of their establishment while there was none in another month. The Inland Revenue Offices failed to notice such unusual behaviour,” said Mainali.

On the other hand, banks also failed to notify suspicious transactions even though an employee singed all the cheques despite the presence of proprietors, according to the department. “These evidences suggest a failure of the tax and banking systems,” said Mainali.

The latest incident suggests that the country has failed to eradicate the practice of doing transactions through fake VAT bills even after the scandal nearly a decade ago.

In 2010, the use of fake VAT bills to evade tax came to light when the Inland Revenue Department monitored suspicious bills found while taking action against two companies dealing in mobile sets.

The department nabbed a few persons involved in fake VAT bill transactions in November 2010. The arrestees revealed that even big business houses were involved in the illicit practice. As the probe progressed, the IRD brought 518 firms under its watch.

Following the probe, it had calculated taxes to be recovered from these firms at Rs6.59 billion that includes: VAT amount worth Rs 3.06 billion, income tax worth Rs3.32 billion and excise duty worth Rs205.27 million.

A total of 227 trading firms, 83 construction companies, 58 industries, 44 automobile dealers, 37 hardware shops, nine service providers, four departmental stores and 56 other businesses were investigated. Most of the cases involving fake VAT bills were settled through the Revenue Tribunal, Kathmandu  and a number of them have reached the Supreme Court.