FBR launches tax evasion probe against stationery industry

KARACHI: Tax authorities have launched a tax evasion probe against the stationery businesses manufacturing books and pencils by scrutinising their returns after the government restored zero-rating facility for multibillion rupees industry from July 1, officials said on Thursday.

The officials said strong lobby of stationery industry convinced the government to withdraw the exemption regime and restore the zero-rate sales tax facility after from July 1.

The officials at Regional Tax Office, Karachi said the government withdrew sales tax zero-rating through Finance Act, 2016 because of a massive misuse of the facility.

Former finance minister said zero-rating of stationery items is open to misuse. “In order to prevent the misuse, it is proposed that zero-rating on these items may be converted to exemption,” the minister said in his budget speech for 2016/17. Tax exemption for stationery items began from July 1, 2016.

“The stationery manufacturers are required to submit their report of stock taking for the period ended June 30, 2016,” a RTO official said. The official said the registered taxpayers availed zero-rating sales tax on their inputs on purchases made on June 30.

“However, there is no further record of closing balance and their subsequent supplies due to exemption regime,” the official added. The purpose of scrutiny of income tax returns for tax year 2017 is to probe into the income declared by registered individuals on the basis of their sales, the tax official said.

The official said the industry availed zero-rate sales tax as input on ending stocks by June 30, which was subject to zero-rate sales tax on output for subsequent supplies. “Since output was exempted from July 1, 2016 the zero rate input became payable.”

The stationery industry, especially businesses selling raw materials for the manufacturing of books and exercise note books, is largely undocumented. “This resulted in flying invoices and issuance of illegal adjustments,” the official added.

Actual size of the market is not available, but it was estimated at approximately Rs6 billion a decade ago. There is no specific data on imports of stationery items in the country. But, the country imported $527.14 million of paper and paper board during the first 11 months of the last fiscal year of 2017/18, the Pakistan Bureau of Statistics (PBS) data showed. Chinese products made inroads into the market benefitting from free trade agreement signed with Pakistan over a decade back. Industry officials said Chinese products currently account for more than 50 percent of the local market.

The tax official further said the exemption regime was introduced to provide relief to the masses as there were tax-free purchases and supplies of goods at manufacturing stage. Stationery manufacturers said there was no concept of input adjustment in the exemption regime, which was increasing the cost of production and leading to high prices in the market.

A manufacturer said the FBR has a mechanism to monitor sales and purchases of any sales tax-registered person, “so there was no question of misuse”.