Steel furnaces using locally procured scrap: Govt losing Rs8bn in taxes every month due to not imposing 18pc sales tax

LAHORE: The government is losing nearly Rs 8 billion in taxes every month due to the unexplained reluctance of the FBR to implement a budgetary decision to impose 18 percent sales tax on the steel furnaces using locally procured scrap to stop tax evasion by the melters.

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 an order - SRO - to notify the change in the tax regime for the steel producers using local scrap from unregistered suppliers is a reflection on the FBR’s lack of seriousness to plug tax evasion to boost tax revenues at a time when the country is facing a cumulative tax collection shortfall of Rs 93 billion in the target for the first quarter of the present fiscal year to September.

According to a press statement issued here, Chairman Mughal Steel Javed Mughal said that the government had approved this change in the tax regime to bring billet produced from local scrap into the tax net and document the unregulated part of the steel manufacturing industry.

The tax compliant companies using imported scrap pay a total tax of 18pc or Rs 40,500 per tonne of billet – Rs 25,000 at the scrap import stage and Rs 25,500 on their sales. On the other hand, those who use local scrap got away with only a trickle of tax on their value chain.

“This situation had not only been causing significant tax revenue shortfall to the government but also massive sales losses to the taxpaying organised steel sector as the tax evaders would undercut their retail prices. In order to resolve this anomaly, the prime minister had ordered to exempt the sale of local scrap and instead made the furnaces using it liable for payment of total tax in lump sum at the rate of 18pc, like the rest of the industry, in the current year's budget,” Javaid Mughal, said.

However, he lamented, the tax bureaucracy is delaying issuance of a simple SRO to start collecting the tax for unexplained reasons for the last three months. “The steel sector supported this reform, highlighting the immense revenue potential and stressing the critical need to control the illegal trade crippling the sector. It was expected that this single measure would have helped the government to net Rs 85 to 100 billion annually.

“This delay seems strange given the fact that the FBR is developing a transformation plan for tax compliance and enforcement,” he added. “In this grim landscape of economic mismanagement, Pakistan is left grappling with the fallout of a disastrous tax policy that has brought an important industry on its knees.” According to him, at least two major steel mills in Karachi had shut down their operations after suffering massive losses due to price competition from the tax noncompliant furnaces. “Sadly, there is no accountability of FBR officials for not taking timely decisions, even if it amounts to huge revenue loss,” Mughal concluded.

Copyright Business Recorder, 2024