Lack of proper monitoring hindering due tax levying

Lack of proper monitoring hindering due tax levying
Published: 08 January 2007

The production of cement in Pakistan is not being strictly monitored in certain factories, which is hindering proper tax audit of the industry for levying taxes, reports the Business Recorder. Sources said on Saturday that the Large Taxpayer Unit (LTU) at Lahore had conducted a tax gap analysis of cement industry, which showed variation in production and tax levy. 
Tax gap is the difference between the tax which taxpayer should pay and what he actually pays on regular basis. The department collected data of 18 cement manufacturer units in different areas for tax years 2004 and 2005 to ascertain their production capacity, actual production, sales, average sale rate, GP rates before depreciation and financial cost, sources said. 
The LTU detected an important loophole after visiting certain cement factories. But, representatives of the concerned cement association said that independent and neutral system of production monitoring was in place. 
According to manufacturers, monitoring is done by an independent task force, which documents the actual production of cement. Contrary to this, during their visit, the tax officials did not see any member of a task force and no information could be provided by the management. This proved that production was not being strictly monitored by independent agencies, as pleaded by manufacturers. 
Referring to the report, sources said that cement production of 17 units during tax year 2005 amounted to 12,575,584t, against production capacity of 14,795,000t, while the capacity utilisation was worked out as 85 percent.
Unless certain cases of manufacturers are properly audited and application of benchmarks is ensured, commenting on suppression of cement production seems risky, sources said. 
During the period from June 30, 2004 to June 24, 2005, the comparison of average per bag sale rate of Rs 205, as disclosed by the cement mills with market price of Rs 265, revealed that the gap in market prices and comparatively low ex-factory prices needed to be investigated with a view to find who is bagging it. It is also worth noting that for the previous two years the gap between the market price and ex-factory prices continued to widen. Neither the manufacturers nor the distributors admit their involvement in their profit sharing venture. However, it is not understandable that manufacturers of the scarce commodity, acting as a cartel, do not share any portion of massive profits in an oligopoly situation, sources said quoting Lahore cement units data. According to the study, sources said, the average sale rate per bag was worked out to Rs 205 for tax year 2005 (market rate of cement in Lahore), sources said. They said that the tax gap, in lieu of excessive prices, is believed to be shared by manufacturers and dealers in the shape of underhand agency arrangements. This is evident from the informal survey conducted in cases of cement dealers. 
The LTU, Lahore, added that the difference between the escalating market prices and ex-factory price may not be considered straightaway as tax gap because it actually refers to the under-reported and untaxed income in the sector. 
The tax collection data of six leading units, falling in the jurisdiction of LTU, Lahore, showed significant increase in tax percentages in all cases, which averaged to 30.66 percent for Tax Year 2005 and expected increase of 32.1 percent in Tax Year 2006. However, the increase in tax was attributed to enhanced production capacity and increase in turnover. Besides paying this income tax, six units contributed nearly Rs 6.6 billion as sales tax and central excise in Tax Year 2005, which is likely to increase to Rs 9 billion in Tax Year 2006. 
The projected increase in income tax revenue for tax year 2006 is based on the assumption that market conditions will continue and manufacturing units would keep on expanding their existing production capacity. As most of the units have gone for major investment in areas of plant and machinery as well as buildings in Tax Year 2006 and particularly Tax year 2007, most of the units would declare huge losses owing to depreciation allowance, LTU study added.