FTO Recommends FBR to Take Action Against Sugar Mill Owners Evading Taxes

Federal Tax Ombudsman (FTO) has strongly recommended Federal Board of Revenue (FBR) to implement the ‘Sugar Commission Report’ to take action against sugar mills owners, who declare fake and ‘benamidars’ buyers of sugar worth billions of rupees in their monthly sales tax returns.

The FTO office has made this recommendation in its budget proposals (2021-22) for consideration of the FBR. One of the key budget proposals of the FTO is the immediate implementation of the report.

The budget proposals of the FTO office revealed that the Report of the Commission of Inquiry constituted by the government to probe into the increase in sugar prices, indicated that after a change in the law in 2005, FBR officials had no powers of inspection and they simply relied on data provided to them by the sugar mills management.

Commission also observed that fake and ‘benamidars’ buyers of sugar worth billions of rupees were reported to FBR by the mills’ management in their monthly sales tax returns. The Commission recommended that FBR should initiate appropriate actions to rectify this situation and take action against Benami buyers as per law, FTO recommended.

The FBR deputed its officials under the relevant provision section 40B of the Sales Tax Act, 1990 to monitor the affairs of sugar Mills related to the GST whose duties are to monitor production and sales on a 24/7 basis, in the premises of the Sugar Mills. FBR also scrutinizes monthly sales tax returns and purchase declarations submitted by the mills and prepare a comparison of the sales record of the mills with the FBR Data/Returns filed by the company.

“Pakistan Customs Service is responsible for monitoring the export of sugar. Observations/Findings: 295 During visits to the sugar Mills by the Inquiry Commission teams, it was observed that officials of FBR deputed in the sugar Mills were silent spectators.”

The FBR officials said that after the change in the law in 2005, the powers of the inspection and supervisory functions were curtailed and therefore, they simply rely on the data provided to them by the sugar mills management.

It is interesting to note that the mills’ management had reported the same data in the same format to FBR through the electronic medium on a daily basis to the concerned LTU/RTO. The total production and total sales of the sugar mills are, therefore, misrepresented which means that ‘off-the-books” activity goes unreported. Unaccounted for sales translate into tax losses of billions of rupees to the national exchequer. 296 The Commission also observed that fake buyers and benamidars of sugar worth billions of rupees were reported to FBA by the mills’ management In their monthly sales tax returns. FBR has started taking action by issuing notices to the fake buyers but still, a lot remains to be done.

The Commission has also unearthed the fictitious benamidars sales and the recommendations have been made in the section on benamidars for taking action against such transactions by the mills. FBR should initiate action to identify such brokers/dealers and investors and take action against them as per law. The capacity of the department to meet this challenge needs to be reassessed and enhanced accordingly, the report stated.

The budget proposals for 2020-21 stated that in order to safeguard the government revenue, FBR should implement the relevant recommendations of the “Sugar Prices Inquiry Commission” by creating dedicated units at respective field formations. It should also expedite arrangements for electronic monitoring of activities of the major revenue-generating units/industries, FTO further recommended.

According to the “Sugar Prices Inquiry Commission” report, the FBR functions as a silent spectator, relying on mill-supplied data for the compilation of sugar costs, which do not properly exclude the revenues made from ethanol manufacture out of crushed sugarcane.

It fails to catch billions in Benami transactions. Since Jan 2015, the mills have received over 29 billion rupees as subsidies whilst the tax demand is under half that amount. They are a strain upon public resources, a loss to the exchequer.

The report recommended that the matter needs to be referred to FBR with the instructions to recover the sales tax evaded by the sugar mills during the last one year on the additional amount of ex-mill price exceeding the FBR threshold of Rs.60 per kg. Further, FBR should take steps to Immediately start collecting sales tax on actual prevailing ex-mIll rates instead of benchmark rates of Rs. 60 per kg.

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