FBR documents claim Rs3.2 bn revenue loss

ISLAMABAD: A mega scam has been brewing up in the steel re-rollers sector where the Federal Board of Revenue’s (FBR) given special regime is continuously being cheated allegedly to cause a loss of several billion rupees to the national exchequer on annual basis, FBR’s official documents reveal.
The official documents of FBR reveal that the LTU Karachi has served tax notices to steel re-roller units, directing them to pay taxes due.The tax authorities estimated that seven units of steel re-rollers had allegedly caused revenue losses to the tune of Rs3.021 billion only against which the government had received sales tax through electricity bills at Rs975.198 million only for the period from July 2013 to December 2014.
There are over 40 units all over the country; so misuse of special incentive is allegedly causing multibillion rupee losses to the national kitty.According to official communications sent out to FBR Chairman Tariq Bajwa by tax authorities from Karachi, exclusively obtained from FBR’s headquarters, alleged violation of Chapter XI (Special Procedures for payment of sales tax by steel melters- re-rollers, ship breaking) of sales tax under rules 2007 was continuously being made and it came on the surface when an exercise of physical verification of steel re-rollers falling in the jurisdiction of Karachi Zone was carried out to check the implementation of subject special procedure for payment of the taxes due in case of five selected units.
During the course of physical verification, it was observed that the furnaces were not being operated by the companies through electricity in their premises as required by the law. Meaning thereby, the major process of re-rolling i.e. heating/re-heating through furnace is outside the chargeability of sales tax, due to its operation through other energy source than electricity.
On query by the visiting teams, it was informed by the representatives of these re-rollers that as per business practice, the furnaces are operated through gas or furnace oil/LPG by all re-rollers of Pakistan.
The re-rollers falling in the jurisdiction of LTU, Karachi, were burning furnaces through gas or other energy sources which are not prescribed under Chapter XI of subject procedure.As per clause 58H, the payment of tax is to be made through single electricity meter only. Using any other source of energy in the manufacturing process causes loss to the national kitty.
The re-rollers of this LTU are of the opinion that furnaces are operated through other energy sources than electricity by all the re-rollers of Pakistan.Hence, as per business practice, they are not violating special procedure by way of fueling furnaces through gas/LPG/furnace oil etc, than electricity. As per their assertion, there is no bar of using natural gas or any other source of energy in terms of Clause 58F of Special Procedure wherein the applicability of the Special Procedure has been defined.
As per Clause 58H of subject rules, the steel re-rollers are required to discharge sales tax liability on the basis of consumption of electricity units as per electric meters installed at their declared manufacturing premises at the rate of Rs7 per electricity unit. Earlier, during the PPP-led regime, this rate was fixed at Rs4 per unit which was later on increased up to Rs7 per unit.
It was shared with the FBR’s headquarters that heating of re-rolling of billets were conducted in 20 to 25 minutes while only 2 minute process was done through using electricity while 23 minute process was done by using gas or other avenues.
The whole manufacturing process of steel re-rolling, the time and the operation through furnace covers almost 92% of the manufacturing process, which is not part of chargeability and payment of sales tax due to the reason that the furnaces are not being operated through electricity. Hence, the federal government is not recovering 92% sales tax on the production of steel re-rollers through electricity units due to operation of furnaces through other source than electricity.
In view of the position, the FBR’s Karachi office is of the opinion that the provisions of subject Special Procedure Rules have not been complied with in its right perspective for discharging sales tax liability by the abovementioned steel re-rollers falling in the jurisdiction of this zone.
The FBR was requested to direct all field formations to workout actual sales tax liability of steel re-rollers, where furnaces are being fuelled by sources other than electricity for uniform treatment and retrieval of loss of revenue to the government accordingly.
Another exercise was carried out by LTU Karachi in case of one specific unit of steel re-rollers whereby it was observed that the said taxpayer consumed electricity units with negligible variation for the tax years 2013 and 2014. However, its sales in terms of quantity in metric tons, has increased substantially as compared to previous year. The increase of 10.22% in quantity has not correspondingly resulted in increase in consumption of electricity units. The same might be due to advanced technology of energy saving. Since the special tax regime fixed tax is electricity consumption, the government has sustained revenue loss on this score as well.
When contacted, FBR high-ups said that they were reviewing the case in detail but nothing had been decided so far. There are two views in the FBR on this case. One argues that the steel re-rollers are paying taxes on usage of gas so it is business practice. But others view that the special procedures dealt with the production only through using electricity so either the special procedures should be abolished or it should be fully complied to discharge taxes fully.
This scribe contacted FBR Chairman Tariq Bajwa who advised this scribe to talk to Member IR Operation Ashraf Khan as he was dealing with this issue but despite efforts on phone and visiting his office, he could not be contacted to get his views on this subject.