WB, FBR analyse huge tax gap in sugar, cement, steel

ISLAMABAD: The Federal Board of Revenue (FBR) has decided to extend the scope of Track & Trace System (TTS) to other major sectors including cement, sugar, fertilizer and beverages in order to gauge real time production for the purpose of materialising full tax collection.

The Track and Trace system was perceived as monitoring production of cigarettes only but the FBR has decided to expand its scope to bring more sectors under the electronic monitoring and tracking system.

With the help of Track and Trace System, the FBR will be able to detect tax evasion through getting real time production information and it will also enable tax collection machinery to trace any unaccounted production with the aim to evade taxes. With installment of Track & Trace System, the FBR has estimated that the tax machinery could increase billions of rupees taxes.

The World Bank and the Federal Board of Revenue (FBR) have analyzed the tax gap of three powerful sectors — sugar, cement and steel — and estimated that tax collection could go up by Rs100-150 billion on per annum basis.

According to the executive summary of tax gap analysis done by the World Bank and endorsed by the FBR, the top 15 sugar firms out of 89 contributed 59.3 percent of total annual General Sales Tax (GST) collection, while 80 percent of sugar firms paid less than Rs250 million annual GST individually in the financial year 2017-18.

The tax gap analysis under input/output methodology provides GST potential of Rs27.163 billion for financial year 2017-18 at 90 percent compliance rate whereas actual collection was Rs19.919 billion. This leads to tax gap of 26.7 percent with an average of 38.5 percent for last six years.

The analysis shows that the income tax gap is quite large even at the compliance rate of 75 percent for the same period. The income tax potential stands at Rs10.616 billion against actual collection of Rs3.755 billion. This tax gap increases as compliance rate improves.

The analysis under production methodology shows that the GST potential is Rs21.757 billion while actual collection is Rs19.919 billion. The income tax potential is Rs46.707 billion for the same period whereas the actual collection was Rs3.755 billion.

The production methodology also provides another insight. It shows that around one million tons of sugar may be unaccounted. This is because if the GST potential calculated under input/output methodology at 75 percent compliance rate is computed backward to find production using productivity ratios, there should be 7.7 million tons of sugar production in the same period to match this GST potential figures. Whereas the reported figure is 6.6 million tons of sugar.

The tax gap analysis done by WB and FBR recommended four steps including capacity development plan, human resource & infrastructure support, data collection mechanism follow integrated approach for data sharing among government departments such as Pakistan Bureau of Statistics, provincial agriculture departments and Pakistan Sugar Mills Association and business process mapping and survey.

Cement Sector: The report provides tax gap analysis of cement sector in Pakistan to facilitate policy makers and tax administration to increase tax collection efficiency. The results showed that there is gap of 19 percent in GST on goods while 75 percent in income tax for financial year 2017-18 in this sector considering the compliance rate of 75 percent.

There are only five firms in cement sector out of total 25 and they contributed 65 percent in annual GST collection in FY 2017-18 while 42 percent firms paid less than Rs250 million GST in the same period.

The GST gap is not very significant for last five years at compliance rate of 75 percent. However, incomer tax gap is notable since the potential figure are four times more than actual collection for the same compliance rate. The income tax potential is Rs46.934 billion whereas actual collection stood at Rs11.811 billion.

The major recommendations for increasing compliance are concentrating on books of accounts because it can help overcome income tax gap.

According to the FBR’s statement issued here on Monday stating that in order to prevent leakage of revenue, under-reporting of production and sales, and to ensure proper payment of FED and Sales Tax on the manufacture and sale of specified goods/ products, the FBR has decided to implement a Track and Trace System for specified goods/products i.e. cement, sugar, fertilizer and beverages imported or manufactured in Pakistan.

The FBR Project Office confirmed that they have finalised all bidding documents relating to issuance of licence of Electronic Monitoring of Production/Sales and Track and Trace System of the four major sectors sugar, cement, fertilizer and beverages, the press release stated. Instructions for Licensing (IFL) and related documents will be published in January, 2020 after consulting all major sectors/stakeholders.

In order to arrive at the best possible solution, FBR plans to hold meetings with all stakeholders for their input, suggestions and recommendations. First meeting in this regard was held on Dec 2, 2019 with cement manufactures. Second meeting with the fertilizer manufacturers was held on Dec 5, 2019 and third meeting is scheduled on Dec 12, 2019, the statement concluded.