Former FATA becomes tax haven

Businesses have established shell or small setups to evade taxes

ISLAMABAD:

The erstwhile Federally Administered Tribal Areas (FATA) have gradually started becoming a tax haven within Pakistan as businesses have either established shell or small setups to evade taxes due to a five-year tax holiday.

The incentives that had been given for bringing tribal areas to the mainstream and triggering development process are being abused by businesses that have presence in developed parts of the country, according to representations given to the Federal Board of Revenue (FBR).

These businesses produce and sell goods in the developed parts and show production and consumption in tribal areas aimed at evading taxes.

To avoid misuse of the tax and duty exemption, the federal government had selectively imposed federal excise duty on sales of iron and steel and edible oil.

However, these sectors enjoyed political backing and got the legal lacuna fixed in the last fiscal year while some that did not have clout were struggling.

The small sector of foam manufacturing is now being threatened by the shell companies that a few foam manufacturers have either set up in erstwhile FATA or are planning to establish in coming months, according to the sector’s representation to the FBR. The foam manufacturers, from the platform of All Pakistan Foam Manufacturers Association, have already taken up the issue with the FBR. But so far the matter remains unresolved.

The FBR had granted exemption from 17% general sales tax (GST) on supplies and 2% withholding tax to the erstwhile FATA and Provincially Administered Tribal Areas (PATA) from June 2018 to June 2023.

The foam manufacturers are now threatened as some big industry players have either set up or are planning to establish shell firms to claim exemption.

The manufacturers that are producing goods in Punjab are worried that the exemption could continue beyond June 2023, as has happened in the case of Azad Jammu and Kashmir (AJK).

In 1995, sales tax exemption had been granted to factories working in AJK, which continued for decades and factories set up in Pakistan also made parallel setups in AJK to evade taxes.

The AJK sales tax exemption was finally withdrawn last year, which also became a reason for the shifting of factories to tribal areas. Foam is being manufactured by importing 100% raw material - polyol and TDI chemicals.

There had been a significant surge in imports of chemicals meant for tribal areas in the past 11 months.

TDI chemical imports jumped 33% while PPG chemical imports increased 318%, according to figures compiled by the association. Overall imports of chemicals for FATA-based factories have increased by 142%, although the quantity still remains low at half a per cent of total imports meant for Pakistan.

The association calls the 19% duty exemption on production in tribal areas a “tax anomaly”. Existing taxes on foam manufacturers are 17% GST and 2% withholding tax on the import of chemicals.

These exemptions meant for FATA “are being illegally misused by importing foam raw material in the name of an old shell company or by setting up a new low-cost small or manual box foaming unit in FATA/ PATA and illegally inland smuggling of non-duty paid imported raw material for exempted FATA/PATA to their foam factories situated in non-exempted areas in Pakistan,” said the association.

The manufacturers argued that the total raw material imported for foammaking during the past six months was sufficient to provide foam products to the entire population in the region, suggesting that the raw material was being smuggled into settled areas.

The manufacturers alleged that tribal areas-based foam factories prepared fake certificates for their imported raw material and sales invoices being provided to the FBR commissioner.

They claimed that there was very low manufacturing of furniture and retail activity in the tribal areas.

“Ultimate beneficial owners of FATA foam units have already established foam factories and dealer networks in non-exempted areas of Pakistan.”

A foam company registered in erstwhile FATA is owned by people having residential addresses in Punjab, according to the company’s incorporation certificate.

FBR’s position The FBR accepts that there is a sales tax and income tax anomaly at the import stage between settled areas and FATA-based manufacturing units.

However, the FBR claims that this anomaly is being taken care of by setting up check-posts to control the influx of goods from FATA to mainland areas.

The FBR has submitted a response in the Islamabad High Court in a case filed by four foam manufacturers.

“The recommendation of the anomaly committee was duly considered and it was found that with the insertion of Section 40D in the Sales Tax Act 1990, the issue of petitioners has already been addressed,” according to the court filing.

But the manufacturers have doubts about the FBR’s ability to effectively check the smuggling into settled areas.

They said that if the checkposts based monitoring were that effective, then why the FBR imposed FED on the manufacturing and production of steel and edible oil units. Industry players are demanding 17% GST in the federal excise duty mode, as has been done in the case of iron and steel and edible oil.