Tax evasion in fuel industry and how to bring back sanity

THE Government is being held at ransom by illegal fuel dealers who apply all available methods to evade taxes on imported fuel.

This has adverse effects in the general functioning of the economy as smuggled fuel only benefits the few barons and their colleagues. The effect on the economic chain is so disastrous yet only a few realise it.

Fuel smugglers dilute imported fuel with other fuels that are duty free, for example paraffin and Jet A1 fuel, further depriving the Government in due taxes along the line.

It is high time the Government implemented a fuel marking system to control this madness in the economy. Diluted fuel further damages vehicle engines with unforeseeable future expenses in repairs. This is an unnecessary expense to unsuspecting consumers. Funds that are supposed to be earmarked for other development projects are indirectly diverted to repairs and spares. This has to stop.

The fuel marking programme will help the Government recover excise taxes, reduce subsidy abuse and protect the environment with cleaner and more efficient fuels. Fuel fraud is a serious worldwide problem, stealing hundreds of millions of dollars from governments and the programmes that serve their people. Fuel fraud most commonly occurs through tax evasion, when criminals dilute taxable fuels, sell them at the full taxable rate and pocket the difference. Not only does this practice deprive governments of tax revenue, it often degrades the quality of the affected fuel, harming equipment and the environment.

Fuel fraud also occurs through subsidy abuse when subsidised fuels are diverted from their intended beneficiaries and used to dilute taxable fuel supplies. This compounds the damage of fuel fraud as money spent by governments for these subsidised products does not deliver its intended benefit to programmes such as fuel subsidies for cooking affordable home lighting, or economic development programmes for farming and fishing, but instead contribute to the illicit profits of criminals.

Price differences caused by tax and subsidy programmes between neighbouring countries create an incentive for criminals to smuggle fuels across borders in order to take advantage of the arbitrage. The country needs to embrace a fuel marking programme that delivers a comprehensive solution to combat fuel fraud.

This requires a system that can mark the various taxed and subsidised fuels so that they can be monitored as they move through your supply chain. Fuel moving through borders can be tested onsite to prevent smuggling, and retail outlets can be tested to show if taxed fuel has been diluted. Results can be produced in just minutes, detecting dilution or even trace amounts of adulteration.

Marking programmes enable governments to take a stand against fuel tax evasion and subsidy abuse to benefit their citizens, their economy and their environment while bringing jobs, leading technologies and best practices to their country.

These can audit and trace all previously sold fuels, help the tax revenue collector calculate all lost tax revenue by the illegal fuel dealers. By the use of open data sources, analytics investigation tools will uncover the scam in a few days.

There is always one mistake a criminal does when committing a crime, that’s leaving behind forensic evidence, either by negligence or ignorance. There is so much structured data sources to work from to help governments recover all due taxes from the sale of the illegal fuel dating back to which ever date the tax revenue collector sees fit.

The output of fuel integrity programmes must allow a state to effect changes in business relationships, impose financial penalties and legally prosecute violators. To enable enforcement, the programme operations must be performed with the highest level of integrity, ensuring the chain of custody for fuel samples, and providing valid and accurate test results. Effective fuel integrity programmes will prescribe an escalating path of successively more severe deterrent actions for authorities to follow. If compliance is not achieved initially, the next more severe action is taken. Several deterrent actions not requiring legal proceedings could be included in this path. While a successful integrity programme will reduce the availability of illicit fuel in a country as well as demand for it, a certain level of organised criminal activity will always remain and seek new opportunities for fuel fraud. To affect this layer of criminal activity, local laws, politics, infrastructure, the character of the workforce and several other factors should be taken into account when defining the enforcement model best suited to a particular fuel integrity program.

That’s where analytics investigation tools come into play to help the prosecution authority with valid evidence beyond any reasonable doubt.

The cost to a government of an effective fuel integrity programme is quickly recovered. Fuel tax evasion fraud is reduced, increasing the tax revenues collected by the government. Fuel subsidy abuse and overall subsidy spending are minimised, ensuring the intended recipients benefit and providing additional government funds for other services to benefit the country. Depending on the complexity of the implementation, financial benefits to the government will definitely begin accruing during the first year. By the second year, the programme will not only be self-funding but will have achieved a sizeable return on investment.

To recover excise tax revenue lost to fuel fraud, a fuel integrity programme is a wise investment no matter the annual fuel volumes or amount of tax levied. The Government has lost billions of dollars in unpaid taxes versus the amount of fuel imported into the country. We need to recover these funds as a country and the technology to do so is locally available.

Every day when they fill their gas tanks, citizens will experience firsthand the effectiveness of their Government and efficiency of the economy. Foreign investment and economic growth will be encouraged as businesses, factories, farmers and all aspects of society will have greater trust in the fuel supply. The economic growth resulting from a fuel integrity programme will benefit law abiding citizens — not criminals — adding to the prosperity and stability of the country.

Chris Ndlovu is a specialist in Government ICT monitoring systems & Critical Public Infrastructure Protection Government Business. He is the managing director of Duodecimar Technologies PL and writes in his personal capacity. Feedback on 0776 574 356: email duodecimartechnologies@gmail.com