Steel sector, others: FBR revises ‘STR-7’ form

The Steel Model (excluding FATA – which has Nil duty on inputs & ST & ED concessions) Modus Operandi - Part 1 Context • Steel is subject to ED (Excjse Duty), which is a VAT able tax • In a 1 million ton steel plant,2-3 % of production can be explained to the state as wastages, yields, input mix issues,variation in power factor ,deviations in material quality,vagaries of supply chain,production mix etc. Step 1 2% of 1 million tons is 20,000 tons,& the steel unit will NOT record that production in the logs & that production will be met from CPP & not Grid Power (as power is a proxy for output). • If 20,000 tons of steel, is sold in cash – there is enough cash generated by the steel unit – & the steel is sold,to a user,who does not need VATABLE steel (as his product is VAT exempt or his supply chain is financed by cash) o If inputs are bought in cash (by the steel maker),then more steel can be sold, in cash –as the sales HAVE TO BE OFF THE BOOKS OF ACCOUNTS.dindooohindoo

Modus Operandi - Part 2 Step 2 The Steel unit makes the ED/GST invoice of the 20,000 tons of steel,for steel which has been sold already in cash (This is a paper sale – there is no movement of steel) o THE ED/GST invoice (of the 20000 tons) is sold to a steel user, WHO CAN AVAIL OF THE VAT BENEFIT – AT SAY,40% OF THE VALUE OF THE VAT/GST INVOICE (by a backdated invoice).dindooohindoo THE STEEL USER IS USING STEEL BOUGHT IN CASH,but he has recorded some steel product sale,say a steel gate, in the books as a ED/VATable sale.TO OFFSET the VAT on that Sale (for which the buyer of the steel gate has already paid him the VAT) the steel user is BUYING this ED/VAT invoice from the Steel make .If the steel user is buying a VAT component,in an invoice of Rs 1 crore at 40%, he is paying Rs 40 lacs and using Rs 1 crore VAT credit to offset from HIS VAT LIABILITY.SO THE STEEL GATE MAKER HAS COLLECTED THE VAT FROM BUYER & NOT MADE A DEPOSIT TO THE GOVERNMENT due to the VAT bill PURCHASED)

Modus Operandi - 3 Step 3 • THE STEEL USER (THE GATE MAKER) MAKES A WIRE TO THE STEEL MILL (FOR THE GATE SALE VALUE), AND THE STEEL MILLS PAYS BACK IN CASH TO THE STEEL USER, FOR THE BASIC STEEL PRICE BILLED + 60% OF THE VAT ON THE STEEL BILLED • THE CASH PAID TO THE STEEL USER BY THE STEEL MILL, IS GENERATED FROM THE 20,000 TONS OF STEEL, SOLD IN CASH SO THE BUYER OF THE GST PAYS RS 40 LACS TO BUY A VAT BILL AND GETS A 1 CRORE BENEFIT = NET PROFIT OF RS 60 LACS IN 1 DAY THE SELLER OF THE VAT BILL HAS EARNED 40% FOR DOING NOTHING - AND EVEN THAT HAS BEEN OFFSET BY THE VAT ON INPUTS (WHICH ARE ALSO A FICTITIOUS ENTRY).ON TOP OF THAT BY SELLING THE STEEL IN CASH - THE BUYER HAD PAID HIM 30-40% OVER THE BASIC PRICE AS THE SALE IS FREE OF VAT. THIS IS THE PAPER MANUFACTURING BUSINESS - SPECIALITY PAPER MADE FROM BUCKEYE NORTH AMERICAN PULP ! 3 steps to happiness ! dindooohindoo