Fizzling revenue: Capacity tax could be increased further

Industry players and government to enter new agreement.

ISLAMABAD:

As the tailor-made capacity tax on production of beverages industry failed to yield results, the three-main players of the industry who designed the system to their benefits are now ready to enter into an agreement with government to increase the tax by another 60%.

Despite significant increase in tax rates the obligations of these players are not likely to go up, as they are successfully under-declaring their capacity to evade taxes, said sources in the beverages industry. However, the obligations of other industry players are likely to increase further.

They are willing to enter into a new arrangement after they failed to uphold their promise of ensuring a 25% increase in tax revenues from the industry after the change in the tax regime.

The change in the mode of taxation from percentage to the fixed amount has already made many small and medium size players uncompetitive, and any further increase in rates will also force major players, except the influential three, to knock the door of the court, according to sources in the Ministry of Finance and the industry. Some of the small players have already gone to the court.

According to the proposal, the tax rate of Rs4.7 million per filling valve or spout on factories, which only have foreign origin filling machines or a mix of foreign and local origin filling machine, is recommended to be increased to Rs7.5 million per filling valve – a 60% increase.

The proposal was pushed by three out of seven main dealers of Pepsi, after the government’s revenues from the industry turned negative despite promises made by these players that there will be a 25% increase in revenues, the sources added. They added that Coca Cola was willing to accept this proposal as its concentrate price was far less than Pepsi, keeping it competitive even after paying higher taxes.

On the recommendation of the players, the rate for the second category which includes factories using local machinery, and third category which includes factories with less than 40 filling valves or spouts installed, had been set at Rs3.76 million per filling valve and Rs1.2 million per filling valve respectively.

The sources said these rates will also be proportionally revised upward.

In the current budget, the PML-N government had increased the rate of federal excise duty on aerated water from 6 % to 9%. However, on the recommendation of these three players, a capacity tax was introduced.

The sources said that these three players were under declaring their capacity, putting other major players at disadvantageous position. The capacity tax system had been abandoned in the 90s after it failed to yield the desired results.

Finance Minister Ishaq Dar and Federal Board of Revenue Chairman Tariq Bajwa had expressed reservations to some of these decisions, revealed sources in the Ministry of Finance.

The sources said that if the capacity system continued, it could become a potential case for National Accountability Bureau (NAB).

The big three sold the capacity tax idea to check massive evasion of a small player that was gradually growing bigger as a result, and hit the interests of one of the major players while taking a significant share of the Faisalabad market, the sources said.

Instead of advising the government to bring the evader under the radar by monitoring and tracking its production and sales through electronic and other means that are available under the Sales Tax law, these players decided to exploit the system to their benefit by using their clout, revealed the sources.

A commission, formed by the Lahore High Court, recommended suspending the capacity tax system.

Published in The Express Tribune, February 27^th, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.