FBR not collecting full duties from cigarette manufacturers: FTO

ISLAMABAD: Federal Tax Ombudsman (FTO) has found that the Federal Board of Revenue (FBR) was not realising its full potential of Federal Excise Duty (FED) and General Sales Tax (GST) from majority of cigarette manufacturers by either failing to conduct proper audit or ensuring account of production of these units.

FTO Mushtaq Ahmad Sukhra has directed FBR to develop a special, focused and across the board monitoring and enforcement regime for high revenue yielding sectors like cigarette, cement, sugar, beverages and fertilizers. The FTO observed that in these major sectors rules for record keeping of raw material, production, storage, compliance and monitoring be re-aligned with classic mode of Central Excise, and implemented in IT based system.

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According to the findings of FTO, the information provided by FBR and its field formations was reviewed in order to investigate the effectiveness of monitoring and audit provisions of relevant laws for collection of due government revenue. It was found that audits had not resulted in major tax detections, the cases for normal audit of manufacturing units particularly need to be selected by the FBR and its field formations after desk audit of data of these units available with FBR and its field formations in the form of periodic returns and statements prescribed by it (FBR) under various tax laws/rules.

According to the FTO report despite the fact that snap monitoring of production of the cigarette units was in place for smaller units, since 2016-17 revenue from cigarette sector had considerably declined. This negative trend appears to be triggered by departmental action under Section 40B of Sales Tax Act read with 45B of FED had been diluted to mere physical presence of FBR staff at the manufacturing premises of the small cigarette manufacturers without having access to the record of production, sale of goods and stock position and posting of FBR officials at manufacturing premises without checking their integrity and competence, the exercise goes counter to the interest of revenue. In some cases it practically amounts to certification/stamping the evasion. FTO observed that even this monitoring regime is confined to the small KPK cigarette manufacturing units. Large units run by multinationals are not covered under this regime. In order to provide electronic monitoring and tracking in the Sales Tax and Federal Excise Duty regime both Sales Tax Act 1990 and Federal Excise Act, 2005 were amended and new Section 40C and 45A were inserted respectively vide Finance Act, 2013.

Even after lapse of more than five years, these provisions remained dormant and electronic monitoring system is yet to see the daylight. Instructions for maintaining record of raw materials, production, sales and invoicing are scattered across rules, SROs, STGOs which renders both compliance and audits, difficult. FTO has recommended it to FBR to introduce electronic record keeping and real time data exchange between manufacturers of cigarettes and FBR formations till electronic monitoring, tracking and tracing system is operationalised.

FBR has to develop a special, focused and across the board monitoring and enforcement regime for high revenue yielding sectors like cigarette, cement, sugar, beverages and fertilizers. In these major sectors rules for record keeping of raw material, production, storage, compliance and monitoring be re-aligned with classic mode of Central Excise and implemented in IT based system. FTO has recommended to form a dedicated enforcement IT team focused on evasion in tobacco/cigarettes and other evasion prone sectors; entrusted with suitable powers to intervene across the jurisdiction, promptly. FBR to extend the procedure prescribed for monitoring Green Leaf Threshing (GLT) units under rules notified vide SRO 1149(i)2018 dated 18.09.2018 to cigarettes manufacturers as well.

FBR has to license for introducing electronic monitoring, tracking and tracing system in respect of tobacco products in terms of SRO 250(1)/2019 dated 26-02-2019 has recently been issued to National Radio Telecommunication Corporation (NRTC). Close liaison should be maintained with NRTC for placing the requisite system at all relevant Units expeditiously.

The FTO has recommended to prescribe standard operating procedures should be devised for the staff posted to manufacturing units under Section 40(b) of the Sales Tax Act, and Section 45 of the Federal Excise Act, 2005. FBR to assign higher weightage to integrity and competence in defining parameters for selection of staff to be posted to manufacturing units under Section 40(b) of the Sales Tax Act and 45 of the Federal Excise Act 2005 and define performance indicators for monitoring their performance.

FBR has to consolidate rules, SROs prescribing procedures and general orders to ensure transparency and facilitation of registered persons in compliance and to take effective enforcement measures including: coordinated profiling of smugglers, targeting of routes, warehouses and transport of smuggled cigarettes to check the smuggling of cigarettes from abroad and in the guise of local manufacturing.

FBR has to request the AJK government to adopt similar electronic system for record keeping and exchange of data as would be developed by FBR and sign MoU with AJK government to work out a mutually agreed procedure for cigarettes manufactured in AJK including live electronic exchange of clearance data of the consignments destined to the tariff areas of Pakistan so as to ensure that only duty paid cigarettes enter the areas of Pakistan.