Edible oil sector: FBR detects new techniques of tax evasion

The Federal Board of Revenue (FBR) has detected different techniques of tax evasion by the edible oil sector, including commercial importers and manufacturers of ghee and cooking oil units, whereas all Chief Commissioners of Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) have launched large-scale investigation against edible oil sector to improve revenue and compliance during 2011-12.
Sources told Business Recorder here on Friday that the FBR has distributed a working paper on tax evasion to all Chief Commissioners of the LTUs/RTOs for immediate action to improve revenue collection from this high potential sector. The FBR has also taken help of the analysis/research conducted by the Competition Commission of Pakistan for analysing different trends in the edible oil sector.
The FBR instructions to the field formations said that the sector is contributing over Rs 50.5 billion in the form of duties and taxes at the import stage, but most of the beneficial stakeholders have yet not been brought into the tax net. The difference of tax rates within the edible oil sector creates sufficient room for tax evasion, and this opportunity is hardly missed by the businessmen. This discriminatory withholding regime reflects the following patterns of tax evasion:
First, as import of raw material by the manufacturing concerns at concessional rate is not linked with their manufacturing capacity; therefore, this concession is being misused, and imported raw material is being sold in the open market. Secondly, there is a gross misuse of discriminatory withholding tax regime, and outright trading activity is taking place in the garb of manufacturing.
Thirdly, tax deduction at import stage is minimum tax liability in this sector, but production activity generated through locally produced raw material requires incisive audit as profits arising from the said line are being grossly deflated. Fourthly, a recent study by Competition Commission of Pakistan said that Pakistan''s edible oil sector imports over 72 percent of its raw material ie palm oil, which constitutes major component (up to 80-85 percent) in production cost.
The other factors include freight charges, utility bills, labour, packaging, wastage and administrative/marketing expenses. On the basis of aforesaid findings, if the cost of imported palm oil during the fiscal 2010-11 is analysed, the cost of one kg imported edible oil comes to Rs 111 (Rs 197.392 billion/l.772 billion kg Rs 111 per kg); minimum sale price of one g ghee/cooking oil in the local market ranges at Rs 140-190 (depending upon the brand).
Thus, manufacturing/selling cost per kg ranges between Rs 29 and Rs 79, as claimed by the said concerns is too high to be accepted as true. Such a claim is only made to deflate the real profitability. Gross suppression of actual profits can be judged from the case of Shujaabad Oil Mills (Pvt) Ltd, RTO Multan, where the tax payer revised the return declaring net income at Rs 155,00,000 against the originally declared income of Rs 2,596,936, when confronted by the department on professional/scientific lines, FBR working paper said.
Fifthly, the FBR said that despite the fact that cost of imported palm oil is the biggest component in this sector, it is not made the basis for the determination of the prices for the end consumers. While increase in the price of palm oil is immediately trickled down, the benefit of even the abnormal decreases are not passed on to the consumers. Audit of this sector from this angle would show the real picture of abnormal profits earned by this sector over the last few years.
Sixthly, large number of distributors and wholesalers who are not registered under Sales Tax Act, 1990 are also non-existing taxpayers (Income Tax). Seventhly, in addition to the distributors/wholesalers there are other classes of persons who are beneficial stakeholders in this sector, but they are out of the tax net. Like oil brokers/commission agents, oil stockists, godown owners, oil tanker transporters running special purpose oil vehicles. Currently there are three major transport groups involved in oil shipments ie Edible Oil Carriage Contractors Association, All Pakistan Oil Tankers Owners Association, and NLC.
The FBR working paper said that the Pakistan''s edible oil and vegetable ghee sector has witnessed phenomenal growth during the last one decade and "today it is more than Rs 384 billion the industry contributing a huge amount to national exchequer." Real tax potential of this sector can be judged from the following facts.
Apart from the purchase of locally produced edible oil, which constitutes around 1/4 of the total national consumption, during the first 11 months of the financial year 2010-11, import bill of 96 processing/import units stood at Rs 197.392 billion including duties/taxes.
In addition to the above imports of oil seeds (mainly soybean and canola) during the same period stand at Rs 40.248 billion, (including duties/taxes). Currently, around 160 small and medium sized vegetable and ghee plants are operational in Pakistan. Around 100 units constitute the organised sector (with installed capacity of around 3 million tons) under the umbrella of Pakistan Vanaspati Manufacturing Association, while the remaining form the unorganised sector.
The FBR''s working paper further said that Pakistan''s edible oil sector comprises 10 refining units and 64 solvent extraction plants are also operating in Pakistan. Taxation patterns in this sector have been analysed by Directorate General Intelligence and Investigation Inland Revenue FBR and are hereby shared with the field formations.
Broadly speaking, though duties/taxes paid at the import stage are quite substantial (Rs 50.5 billion); yet the taxability of value-addition and real profits remains lopsided and imbalanced, because from the import stage onwards most of the beneficial stakeholders in this sector have yet not been brought to the tax net. Detailed discussions covering both streams of taxes are as under.
Taxation of edible oil and vegetable ghee sector showed grey areas, which needs to be looked into. The import of raw palm oil is subject to Federal Excise (in VAT mode) and Rs 1 per kg as value-addition, but import of oil seeds attracts sales tax at the import stage. This dichotomy is apparently unexplainable because in most of the cases importers of oil seeds are the oil manufacturing/processing units.
At the same time, taxation of value-addition @ Re one per kg, at import stage, in the hands of both manufacturing units (who import raw material for their own consumption) and the commercial importers, takes due cognisance of the aforesaid classes of tax payers, but the major chunk of other beneficiaries are still out of the tax net. Evasion of taxes can be judged from the fact that out of aforesaid 101 manufacturing/import concerns, audit of only one unit (Associated Industries, (Pvt) Ltd, Aman Garh Nowshera) for the period 2008-09, shows that sales worth Rs 3.91 billion were made to 114 unregistered distributors/wholesalers, who neither charged nor paid sales tax on subsequent supply of vegetable ghee and cooking oil due to the reason that they were not registered under Sales Tax Act, 1990.
The FBR further said that as all the manufacturing units market their products through the chain of distributors and wholesalers, who do not enjoy exemption from payment of sales tax under Serial No 24 of the Sixth Schedule to the Sales Tax Act, 1990. Therefore, identifiable details of all such distributors/wholesalers need to be obtained from the manufacturing/import units.
List of units has been annexed with instruction for necessary action by concerned RTOs/LTUs. This exercise is expected to unearth over 10,000, hitherto unregistered persons/potential sales tax payers. In order to streamline the registration of hitherto unregistered distributors/wholesalers, the FBR will have to condone the delay in filing of returns and input invoices.
Though supply of locally produced crude vegetable oil is exempt, yet processed vegetable ghee is taxable item. Similarly, sales tax is payable on supply of all locally produced cooking oils. Examination of different manufacturing units shows that in some cases the quantum of purchase of local raw material runs into billions of rupees and, ironically, the sale price for the end consumer is inclusive of sales tax. This area needs immediate attention, the FBR said.
The FBR said that there are certain manufacturing units which have installed oil extraction plants, where locally produced oilseeds are used for oil extraction. Though no sales tax is payable on supply of some of the oilseeds like sunflower, soybean, canola, etc, the oil extracted and finally converted into vegetable ghee/cooking oil is sold at the price which is inclusive of sales tax.
Taxability of supply of cottonseeds needs to be looked into because without ginning process cottonseed cannot be extracted and after the said process cottonseed cannot be categorised as tax-exempt agricultural produce. There are certain manufacturers who purchase locally produced edible oil or imported raw material from the commercial importers and after processing finished product is sold to the distributors and wholesalers.
Incidence of sales tax at the supply of locally produced edible oil to these units is yet to be ascertained. Likewise, sales tax by their distributors/wholesalers is another grey area, the FBR said. The FBR said that different players in this sector are involved in a host of taxable activities but holistic view of all the offshoots of their production line is missing, with the result that most of their taxable supplies are out of tax net. A few such instances are worth sharing.
The FBR said that manufacturers are involved in import and trading as well as, in certain cases, the imported material is being sold in the open market. There are certain manufacturers who have installed oil solvent plants/units where locally produced oilseeds/oil cakes are used as raw material. This additional activity along with the supply chain of its bye products is worth looking into, the FBR said.
The FBR further said that most of the ginning factories, in addition to their ginning activity, are involved in oil pressing, manufacturing of oil cakes, etc. Oil solvent plants/units supply basic raw material, called ''meal to poultry feed'' manufacturing units, in addition to supply of oil to ghee manufacturers. The major manufacturing concerns are running fully owned dummy oil units, which are used for the siphoning of profits. Thus, the unorganised sector is yet to be brought into the tax net.
The FBR working paper also gives detailed analysis of the taxation of edible oil and vegetable ghee sector pertaining to income tax. While sales tax regime witnesses semi-unified taxation patterns at import stage, income tax withholding provisions create wide distinction between the commercial importers (who are charged 5 percent at import stage- part II, First schedule) and manufacturing concerns pay 3 percent on the import of raw material for their own consumption (Clause(9A), Part II, Second Schedule). On the other hand, manufacturing concerns pay 2 percent on the purchase of locally produced edible oil, under clause (13C) of Part II, Second Schedule) and manufacturing concerns purchasing cottonseed for oil extraction are paying 1.5 percent withholding tax u/s 153 (Part III-Division III, First Schedule), the FBR said.