55% of capacity of major sectors couldn’t be traced

In a startling revelation, the Federal Board of Revenue (FBR) had no clue of 55% of production lines in four tax evasion-prone sectors at the time of award of a multibillion-rupee track and trace contract three years ago, according to a survey that the contractor conducted after winning the contract.

The government had awarded an estimated Rs25 billion track and trace contract to Authentix Inc for monitoring production of roughly 290 lines of cement, fertiliser, sugar and tobacco sectors.

After winning the contract, the company found that there were about 649 production lines, according to people who have conducted the survey and seen its results. This shows that the FBR was unaware of 55% of the production in these key sectors, which is resulting in the evasion of income tax, sales tax and federal excise duty.

The company conducted the survey from December 2022 to January 2023; almost two years after the award of the contract. Its findings emerged after Prime Minister Shehbaz Sharif ordered disciplinary action against senior FBR officers for mishandling the track and trace contract. The FBR had asked the contractors to ensure that the system was suitable for real-time monitoring of production lines at various sites aimed at capturing tax revenues from these sectors.

The Authentix consortium is responsible for end-to-end installation and operation of the track and trace system connecting the manufacturing sites and import stations to the FBR’s central control room. The government awarded the contract in March 2021 for five years to track the production of cement, fertiliser, tobacco and sugar.

The FBR had advertised that in about 22 premises, the contractor would have to monitor 150 production lines of cement. However, the survey revealed that there were 25 factories having 211 production lines. The FBR was unaware of 29% of the production lines in the cement sector, which caused massive tax evasion.

The government has floated another tender to hire a company for the award of a contract to monitor 50 production lines. However, its efforts may end up in court due to the exclusive rights given to the Authentix Inc consortium. In the case of sugar, the FBR advertised that 80 factories had 160 production lines that the contractor would have to monitor.

But the survey revealed there were 82 sugar mills having 300 production lines. The FBR was apparently unaware of 47% of the sugar sector’s production capacity. In the fertiliser sector, the FBR mentioned 15 factories with 50 production lines. But the survey showed that there were 79 production lines, showing the lack of oversight over 37% of the production capacity.

Similarly, in the tobacco sector, the FBR mentioned 30 production lines but the company found 59 lines, nearly half of the capacity off the FBR’s radar. The 55% unmonitored capacity means that products left factory premises without the application of tax stamps.

The agreement’s effectiveness was subject to the signing of tripartite agreements between the FBR, the contractor and the factories. However, it took seven months to sign the tripartite agreement for implementing the tracking system in the sugar sector.

There was a delay of 13 months in the fertiliser sector, six months in the tobacco sector and 19 months in the cement sector. After signing the tripartite agreements, it took 11 months to implement the tracking system in the tobacco sector, which became effective in February 2022, showed official documents. It took seven months to start tracking sugar production and a record 29 months to apply the system in the cement sector, which got delayed to August last year.

Contrary to the perception that the contractor delayed the implementation of the track and trace system, an official correspondence of the FBR with the All Pakistan Cement Manufacturers Association showed that the FBR gave a four-month extension till April 30, 2024. The cement sector got five demonstrations despite nearly100% accuracy, according to industry people.

Former central bank governor Tariq Bajwa led the inquiry committee and blamed the contractor, the FBR and the industry for the unsuccessful implementation of the track and trace system. The implementation in the fertiliser sector began in May 2022 with a delay of up to 14 months.

The government had awarded the contract for five years on the assumption of average sales of 6 billion stamps per annum. But company officials claimed that so far less than five billion stamps had been sold during the past almost three years and one of the reasons was the delayed signing and implementation of the service delivery agreements.

The company also faces problems due to the erosion of the rupee value. The contract had been awarded at a price of Rs157 to a dollar but the rupee has sunk to Rs279 per dollar. This causes a huge loss of profit due to the conversion of the rupee into dollars before transferring abroad