Tax evasion by melters causes Rs8b monthly loss to govt

The government is losing nearly Rs8 billion in taxes every month due to the reluctance of the Federal Board of Revenue (FBR) to implement a budgetary decision to impose 18% sales tax on the steel furnaces using locally procured scrap to stop tax evasion by the melters, said people associated with the steel industry.

This is in spite of repeated meetings of senior executives of major steel companies with the previous and present chairmen of the FBR.

The delay in the issuance of a Statutory Regulatory Order (SRO) to notify the change in the tax regime for the steel producers using local scrap from unregistered suppliers was a reflection of the FBR's lack of seriousness to plug tax evasion to boost tax revenues, they said.

It comes at a time when the country is facing a cumulative tax collection shortfall of Rs90 billion compared to the target for the first quarter (Jul-Sept) of the current fiscal year.

The government approved the change in the tax regime to bring the billets produced from local scrap into the tax net and document the unregulated part of the steel manufacturing industry.

Industry players claimed that the tax-compliant companies using imported scrap were paying a total tax of 18%, or Rs40,500, per ton of billet – Rs25,000 at the scrap import stage and Rs25,500 on their sales. On the other hand, those who use local scrap get away with only a trickle of the tax on their value chain.

"This situation has not only caused a significant tax revenue shortfall to the government but also massive sales losses to the taxpaying organised steel sector as the tax evaders will undercut their retail prices," said Javaid Mughal, Chairman of Mughal Steel.

"In order to address this anomaly, the prime minister has ordered to exempt the sale of local scrap and instead made the furnaces using it liable to pay the total tax in lump sum at the rate of 18%, like the rest of the industry, in the current year's budget," he elaborated.

However, he lamented, the tax bureaucracy had been delaying the issuance of a simple SRO to start collecting the tax for the last three months.

"The steel sector has supported this reform, highlighting the immense revenue potential and the critical need to control the illegal trade crippling the sector. It is expected that this single measure will help the government to get Rs85 billion to Rs100 billion annually," Mughal said.

According to him, at least two major steel mills in Karachi have shut down their operations after suffering massive losses due to price competition with the tax non-compliant furnaces.

"Sadly, there is no accountability of FBR officials for not taking timely decisions, even if it amounts to a huge revenue loss," Mughal remarked.