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FBR plans hiring private auditors to target tax evasion in sugar industry

By Shahnawaz Akhter
November 12, 2019

KARACHI: Tax collectors have planned to hire private auditors to scrutinise books of sugar millers to catch tax cheats as they spotted a number of discrepancies in various production and supply cycles, sources said on Monday.

The Federal Board of Revenue (FBR) has advised the regional tax offices (RTOs) and large taxpayers units (LTUs) to conduct special audit of sugar millers through ‘independent chartered accounting firms’.

“The audit would be conducted under various provisions of Sales Tax Act, 1990 and would be done by special audit panels comprising officers of Inland Revenue and independent chartered accountants,” the FBR said in a note to its regional offices.

The FBR said sugar sector analysis revealed huge tax evasion in sugar sector and it was evident that the stocktaking carried out by field formations of FBR, and the sugarcane commissioner of three provinces had a difference of 641,000 tons. “This showed that the sugar mills were under-reporting their stock in order to evade tax payments.”

It was also identified that the local supplies during the tax period of July 2019 fell by 255 percent due to enhancement in tax rate to 17 percent in July 2019 from eight percent in June 2019.

The FBR analysis further revealed that the stock holding last year ending June 2018 was 3,147,000 tons, whereas closing stock of the year ending on June 2019 was only 2,230,778 tons, which showed 29 percent decline. “The sugar manufacturers had declared high quantity of supplies during June 2019 to evade sales tax as the tax rate was to increase in July 2019.”

The FBR said sugarcane is the biggest raw material of sugar industry. “The undocumented/under-documented nature of this agriculture sector poses a great challenge to accurately gauge the quantity of sugarcane produced and supplied to a particular mill.” It was also discovered that sugar recovery rate from 11.52 to 8.59 percent and molasses recovery rate from 4.59 to 3.8 percent was undocumented and unsubstantiated, as it was based on self declaration by mills.

“This phenomenon has inherent risk of under-reporting of production,” the FBR said, adding that un-registered dealers/distributors were the main factors which might lead to concealment of sale data.

It said sale of sugar was shown to unregistered persons or fake buyers to suppress sales, quantity and value. Another issue raised by the FBR analysis was that the sugar by-products such as bagasse, molasses and generation of electricity were also misreported by many sugar mills.

“The rate of sale of bagasse per kilogram is different from the actual price of bagasse. Besides, the conversion rate of molasses to alcohol and the quantity of alcohol produced can be manipulated by sugar mills.” The FBR also issued terms of reference (TORs) of chartered accountants appointed under the Sales Tax Act, 1990. Besides, the FBR directed chief commissioners Inland Revenue of RTOs and LTUs to give their input within three days.