FBR eyes output wastage to raise Rs15 billion additional revenue

KARACHI: Federal Board of Revenue (FBR) aims to generate up to Rs15 billion as additional sales tax revenue by fixing the limit of production wastage declared by manufacturers, officials said on Saturday.

To disallow the wastage and treat it as sales the FBR has notified rules under which wastage of raw material reported by a company will be at par with average wastage of relevant sector.

Officials said large entities were involved in the practice of declaring a significant percentage as production wastage and in some cases it was claimed to be as high as 40 percent.

Through Finance Act, 2020, a new amendment was introduced to Sales Tax Act, 1990, under which fixation of wastage would be determined on sectoral basis.

The FBR in a circular issued on August 6, 2020, had stated, “The change was made for eliminating discretion of the adjudicating officers and for according similar treatment across the board on allowing/disallowing input tax credit against input goods wasted during normal business processes, to the extent such credit is in excess of benchmarks/limits prescribed by the FBR”. The FBR on October 01, 2020 issued SRO 938(I)/2020 to notify rules to implement fixation of wastage on a sectoral basis.

As per rules, Input-Output Coefficient Organization (IOCO) of the FBR has been given mandate to fix wastage limit for a sector of the economy. “Where the extent of wastages has been fixed and notified by the board [FBR] under these rules, no registered person shall be entitled to take input tax adjustment in respect of wasted inputs over and above the extent so fixed and notified by the board,” the guidelines said.

A senior FBR official said at the time of budget-making for fiscal year 2020/21 the policymakers had estimated around Rs12-15 billion additional revenue by streamlining this process.

The FBR had detected huge variance of wastage claimed by manufacturing companies in different sectors including tobacco, steel, edible oil, food, sugar, cement, pharmaceutical etc, the official added. He further said the wastages claimed by some industrial concerns were far above the international benchmark.

The whole exercise would help the FBR to reduce the size of refund repayments, he said.

“Once wastage benchmark is set the FBR may make addition of wastage as sales and deduct the same from refund amount of a claimant,” the official added.

Zeeshan Merchant, President, Karachi Tax Bar Association (KTBA) said, the benchmarking of wastage was almost an impossible task due to the different production environments of different companies in the same sector.

“In case FBR fixes wastage limit for a particular sector, the implementation phase will be even more difficult because companies of the same sector may use machineries of different make, origin, and capacity,” he said, adding that such situations lead to a rise in litigation.