Ship-breaking industry probed: FBR unearths Rs2.34bn sales tax evasion

SOHAIL SARFRAZ

ISLAMABAD: The Directorate-General of Intelligence and Investigation Inland Revenue (IR) of the Federal Board of Revenue (FBR) unearthed massive sales tax evasion worth Rs2.34 billion by the ship-breaking industry on the import of 503 vessels between July 2007 and June 2012 and launched recovery proceedings in coordination with tax departments in Karachi and Quetta.

Sources told Business Recorder on Sunday that since assumption of charge as Director-General by Khawaja Tanveer Ahmed, this is a major breakthrough of the agency, which focused on ship-breaking industry seemed neglected in the past.

The Director-General and his team of investigators thoroughly probed the data of ship-breakers and detected evasion of sales tax and withholding tax. Persistent efforts of the agency enabled the Board to start recovery of billions of rupees from the ship-breaking industry. For the first time, directorate of intelligence IR has simultaneously checked sales tax and income ax record of 28 major ship-breakers of the country.

According to preliminary estimates, sales tax evasion of Rs2.34 billion has been committed by ship-breakers during the said period. The actual recovery may increase as the investigation progresses. In this connection, Khwaja Tanveer has submitted a detailed report to FBR Chairman Ali Arshad Hakim to report about the ongoing tax evasion by the ship-breaking industry.

Details of the case showed that the directorate of intelligence IR had received information that a number of ship-breakers allegedly evaded sales tax by not paying due tax as required under the Sales Tax Act of 1990. The procedure for revenue collection from ship-breakers is provided in Special Procedure Rules where sales tax is leviable on breaking of ships, instead of release at import stage.

The 70.5 percent of the weight (tonnage) of ship /vessel determined at import stage is considered as ship plates. The sales tax liability presently is calculated @ Rs.4848 per ton of ship plate. When the ship/vessel is beached for breaking, the Sales Tax determined on the basis of above calculation is deferred and secured against post dated cheques in the concerned RTOs for subsequent encashment/payment of tax. The ship-breakers claim credit of these payments in their Sales Tax returns.

Reportedly a number of ship-breakers have not cleared their sales tax liability by abusing the self assessment system. The Regional Tax Offices (RTOs) failed to monitor their liability. The procedural loopholes were abused by vast majority of the ship-breakers thus causing loss to the national exchequer.

The directorate repeatedly requested ship-breakers’ association to provide import data of their members, but they failed to respond. Accordingly the Collector of Model Customs Collectorate (MCC), Gwadar was requested for obtaining data of ships imported for breaking at Customs House, Gaddani. A team of expert officers was deputed by Karachi Office in the first week of August to collect data in this regard.

Director-General’s Karachi Office I&I IR complied and worked on the data of imported ships/vessels for breaking earlier, obtained from MCC Gwadar for the period between July 1, 2007 and June 19, 2012. According to the data; total number of vessels imported during the period was 503. The sales tax liability of various ship-breakers calculated during the period July 2007 to June 2012 is over Rs.20.82 billion, sources said.

During tax period of 2008, the number of ships /vessels imported was 57 during 2008 and their sales tax liability has been worked out at Rs784,865,893. The number of ships/vessels imported in 2009 was 86 and their sales tax liability has been worked out at Rs3,949,969,957. In 2010, the ship-breakers’ sales tax liability stood at Rs4,115,496,288. The number of ships /vessels imported up to June this year stood at 130 and their sales tax liability was worked out at Rs7,433,582,676. Thus, a total of 503 ships/vessels were imported between 2008 and June 2012 and the sales tax liability stood at Rs20,822,470,464.

The directorate said that the tax liability calculated was cross-matched by the amount of payment of sales tax made by various ship-breakers during the tax period 2008-2012 available in the Sales tax record and in the CPRN system. The preliminary amount of short payment is worked out at Rs2.34 billion. Ship-breakers concerned are being informed for immediate payment. The legal process for the recovery is being initiated in coordination with RTO III, Karachi and RTO, Quetta. The directorate of intelligence IR has also estimated sales tax liability of each ship-breaker. The agency has also submitted names of ship-breakers, NTN, Sales Tax payment as per CPRN, sales tax liability as per Sales Tax Act and difference payable to the tax authorities.

This clearly indicated that ship-breakers during 2007-2012 have abused facility of deferred payment of sales tax and have not deposited due tax.

Accordingly, an exercise is being conducted to ascertain the actual sales tax liability of ship-breaking units and data was retrieved in August 2012 from MCC Gwadar. The total sales tax liability of ship-breaking units from 2007 to June, 2012 is calculated at Rs20 billion which is in the process of cross verification from the sales tax payment record of concerned units. So far evasion of Rs2.4 billion has been determined.

The directorate of intelligence IR further said that the supplies / sales of ship-breakers are liable to withholding of tax under Section 153 of the Income Tax Ordinance, 2001. The list of purchasers of supplies made by the ship-breakers obtained from sales tax returns and their withholding statement under Section 153 of the Income Tax Ordinance 2001 are also being examined. This exercise will verify whether the buyers of ship-breakers which were liable for tax deduction under Section 153 have made their due deductions or not.

Reportedly no withholding is made on the plea that tax is charged at import stage and when the imported goods are sold in the same condition as imported, no further tax is to be charged in terms with the provisions of Section 153(5)(a) of the Income Tax Ordinance 2001. The plea is not correct as the plates sold after ship-breaking are not in the same form as were at the time of import. Clarification in this regard has also been issued by FBR. The recovery on this account is also being determined, sources said.

The directorate of intelligence IR intends to investigate the evasion of withholding tax cases thoroughly, sources at the directorate of intelligence IR said.