PALSP lambastes dual tax system

Criticises preferential treatment given to tax-evading factories in FATA/PATA

KARACHI:

Large steel producers in Pakistan have raised strong criticism against the prevailing dual tax system in the country, expressing concerns over the unfair and preferential treatment given to untaxed regions such as the Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA). The Pakistan Association of Large Steel Producers (PALSP) has strongly criticised the existence of this dual tax system, highlighting the burden faced by fully regulated taxpayers and industries compared to the lenient tax policies in FATA/PATA regions.

In a statement, PALSP, a prominent voice representing large steel producers, protested against the preferential treatment given to tax-evading factories operating in FATA/PATA regions. These factories exploit the lenient tax policies in these areas while law-abiding taxpayers and fully regulated industries bear the brunt of a heavily burdened tax system. This disparity is not only seen as unjust but also as a criminal offense against honest taxpayers.

The severity of the issue is evident from the long steel industry alone. The steel industry in Non-Metered Districts (NMDs), with the sanctioned load from Peshawar Electric Supply Company (PESCO)/ Tribal Areas Electric Supply Company (TESCO) has the capacity to produce 944,851 tonnes of steel, accounting for approximately 25% of Pakistan’s total steel consumption. However, the actual steel consumption within the NMDs is a mere 2% of Pakistan’s total steel consumption, indicating that around 92% of the steel produced in NMDs is being smuggled to settled areas without the payment of sales tax.

Steel sector analyst at Optimus Research, Mehroz Khan highlighted how the exemptions for FATA/PATA regions have historically manipulated prices, resulting in price distortions of discounted long products in the north region and fluctuations in the prices of imported scrap. This unfavourable environment restricts future investments in the sector, he said.

According to PALSP estimates, this rampant tax evasion has led to an annual loss of Rs30.61 billion to the national exchequer, with a staggering total of approximately Rs150 billion over a span of five years in the long steel industry alone. The burden of compensating for this loss falls onto honest taxpayers and fully regulated industries, placing a significant strain on them.

Adding to the burden, the stringent International Monetary Fund (IMF) restrictions have led to a dramatic increase in income tax levels for the salaried class, further burdening taxpayers while tax evasion continues in FATA/PATA industries. This lopsided situation not only exacerbates injustice but also raises questions about the fairness and equality of the tax system.

Muhammad Ali, a steel industry analyst at Akd Research, emphasised that while the steel industries in FATA and PATA areas may not be considerably large, they have a significant effect on the overall market. These industries enjoy exemptions from paying sales taxes in their electricity bills and at the stage of raw material import. The government extended these tariff relaxations for one year in June 2023. This enables them to compete fiercely with major players operating in mainland Pakistan, leading to accusations of dumping as these steel industries expand their sales beyond the tribal regions.

PALSP underscored the need for immediate action to rectify this ‘unjust tax system’ and level the playing field for all businesses in the country. The extension of the exemption period in the Finance Bill 2023 is seen as a step in the wrong direction, deepening the divide between untaxed FATA/PATA regions and heavily taxed areas. This extension perpetuates the unfair advantage enjoyed by tax-evading entities while hindering the growth of legitimate taxpayers and fully regulated industries.

“It is imperative that the government addresses this serious concern and ensures a fair and transparent tax system that applies uniformly across all regions of the nation,” stated PALSP spokesperson. “The recovery of lost revenue from tax evaders should be a top priority, and a just and equitable tax landscape should be established to encourage compliance and foster a conducive environment for all industries to thrive.”

Published in The Express Tribune, July 6^th, 2023.

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