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September 24, 2020

Reluctant decision


September 24, 2020

LAHORE: The Federal Board of Revenue (FBR) has finally decided to monitor the production of major industries electronically – a practice it was reluctant to pursue in the past in case of the cement industry.

Ironically, the importance of electronically monitoring production was first realised by the cement sector. Its association awarded a contract to a private sector party to electronically monitor the production and despatches of all its member mills from their premises.

At the end of each month, the association had the data of actual cement production in the country. The interest of the cement association was to ensure that all government levies were paid on the cement produced by each cement mill.

This was they avoided unethical competition from some mills that used to under report their production and released a large quantity of the commodity without paying government taxes. This put the fully compliant cement units under pressure. Many wondered why the non-compliant mills agreed to this arrangement.

The Competition Commission of Pakistan (CCP) also probed the issue about 17 years back. In fact, it was the monitoring of cement production of each mill by the association that led the CCP to allege that cement cartel exists as each mill was allowed to produce the commodity according to the quota allotted to it.

This according to CCP was done to manage higher uniform prices. The All Pakistan Cement Manufacturers Association (APCMA) was slapped with heavy penalty. Some individual mills were also fined heavily.

The decision of CCP was challenged by the industry and the matter is still pending in the courts even after 15 years.

The CCP however, stopped the association from electronic monitoring. The APCMA then asked the FBR to monitor the production and despatches of all cement plants either itself or through a third party.

The FBR declined the request. The cement association thought that this monitoring would at least eliminate pilferages of sales tax and other government levies and increase the state revenues.

The flaw in electronic monitoring from the point of view of corrupt elements was that it would deprive the sales tax inspectors stationed at each mill from the income they generate on undocumented production.

The reluctance of tax collectors to take benefit from technology might have enriched few officials and the cement mills, but deprived the exchequer of huge revenue.

The FBR should have ensured electronic monitoring of all production and despatches in the manufacturing sector. This would have plugged revenue leakages that we witness in all sectors.

There is pilferage worth billions in beverages, in edible oil industry, chemical manufacturing, soaps and detergents and numerous other industries. Electronic surveillance would to large extent plug these leakages and increase government revenues.

But there is a catch. The government would also have to totally eliminate smuggling and under-invoicing. It may be noted that many manufacturers resorted to under-reporting of their production when they were marginalised by under-invoiced imports and smuggling.

The bureaucracy has played its cards cleverly. It reduced the duties appreciably on imports on the plea that it would discourage under-invoicing.

However, at the same time it increased the rate of sales tax on duty paid value to 17 percent. This high sales tax is the main reason for under-invoicing even on items where the import duty is zero or 5 percent.

Under-invoicing gives the importer an advantage on locally produced goods as it helps save 90 percent of duty and sales.

There is a way out to this problem if the bureaucracy applies mind. They may keep the present taxes intact.

But, link the sales tax to the value that is paid by the local manufacturer on the similar product.

For instance, if the sales tax on a particular size of tyre is Rs3,400 (on retail value of Rs2,000), the sales tax on imported tyre should be Rs3,400 plus additional tax on import duty. This way the under-invoicing would become unattractive. The present procedure of fixing Import Tax Price (ITP) is manipulative and should not be used.

The main problem would then be the smuggling. This would have to be controlled with an iron hand. Smuggled goods should be confiscated and destroyed forthwith.

It should be done at the border and custom level. Taking action against retailers would create chaos.

Retailers however should be asked to declare their current stock that should be waved from penalties on smuggled goods. But any new addition in stock after that should be purchased legally and undocumented purchases must be confiscated and destroyed.