In a troubling development, Pakistan’s Federal Board of Revenue (FBR) has uncovered a widespread tax fraud scheme implicating fake companies in facilitating tax evasion for major corporations. Power Cement, one of the country’s key industrial players, stands accused of evading taxes worth Rs 32 crores through two fictitious entities—Trader Zone and Al Junai Impex. The story has been covered in great detail in this week’s issue of this paper’s sister publication, Profit.
While alarming in itself, this case only scratches the surface of a more pervasive issue. The FBR estimates that these two fake firms have enabled tax fraud to the tune of Rs 11 billion, dwarfing the involvement of individual companies like Power Cement. The true issue lies, not only in the fraudulent actors, but in Pakistan’s unique taxation system—a system that may unintentionally allow such loopholes to flourish.
Unlike most nations that have adopted the Value-Added Tax (VAT) system, Pakistan operates under a model that diverges from the global norm. VAT is designed to create multiple accountability checkpoints by levying tax at each stage of the supply chain, from raw materials to the finished product. This method discourages underreporting and reduces opportunities for fraud by distributing the tax burden across the chain and ensuring checks at every transaction. In contrast, Pakistan’s tax system frontloads the collection process by imposing taxes primarily at the beginning of the supply chain.
This method, designed to capitalize on the government’s leverage to enforce tax payments at critical choke points such as ports, is rooted in practical necessity. With a history of inefficient tax enforcement and a limited ability to track internal transactions across the country, the government has opted to maximize revenue at the earliest opportunity. However, this approach creates blind spots. By focusing on collecting taxes upfront, it weakens the government’s ability to enforce tax compliance further down the supply chain—opening the door to fraudsters who manipulate or fabricate invoices with little fear of detection.
This is precisely the loophole that fake companies like Trader Zone and Al Junai Impex are exploiting. These entities create counterfeit invoices that enable businesses to claim fraudulent tax exemptions, all while skirting the rigorous oversight that should ideally exist within the system. The Rs 11 billion lost to tax fraud through these fictitious firms represents a significant blow to Pakistan’s already strained fiscal resources, underscoring how the current system is ripe for exploitation.
What makes this scam even more problematic is the fact that this is not an isolated incident but part of a larger, systemic vulnerability. The sheer scale of the fraud, and the involvement of major companies, shows that it is more than just a few bad actors at play; the loopholes in the system itself are incentivizing tax evasion on an industrial scale.
