The Federal Board of Revenue (FBR) is facing a big challenge to pursue a tax evasion case against a Mardan based cigarette manufacturing company and seal the excess capacity cigarette manufacturing machines as per the law.
According to sources, Regional Tax Office (RTO) Peshawar had issued a notice to a tobacco company located at Swabi Road of Mardan and assigned a team for sealing of the idle machinery and stock taking exercise under Sales Tax Act 1990 and Federal Excise Act 2005. RTO Peshawar had issued the notice to the unit under rule 28A of the Federal Excise Rules 2005.
However, progress has yet to be seen in this case of Mardan based cigarette manufacturing company that is likely to be involved in fiscal and regulatory evasion. The exercise was initiated to seal the excess capacity of tobacco manufacturers using powers authorized under Rule 28 A of the Federal Excise Rules, 2005.
However, an FBR official on condition of anonymity said that apparently due to political pressure, no progress has so far been witnessed on this account. The unit has been owned by a politician. It is learnt that the said notice has been withdrawn, but nobody in FBR or the field formations is ready to confirm the same.
On one hand, the documented tobacco industry has estimated that tax contribution of leading cigarette manufacturers to the Federal Board of Revenue (FBR) would reach Rs 120 billion in the next two years if third tier (third slab of federal excise duty) and enforcement against illicit cigarettes continue with full force. The contribution into taxes can go up to Rs 120 billion and enter into club of paying over $1 billion mark in next 1-2 years against Rs 90-92 billion projected collection for outgoing fiscal year. The outgoing fiscal year is also showing an increase from the previous Rs 72 billion collected during the last fiscal year. The third tier of FED on cigarettes has resulted in sudden increase in FED collection in 2017-18 which would cross Rs 90 billion by the end of 2017-18.
However, still the market share of illicit cigarettes stands at 35 percent and by reducing 10 percent, the tax collection can easily go up by Rs 10 billion. This will also reduce the rampant criminality by illicit cigarette companies.
There is no audit to check trends of payment of FED by cigarette manufactures in Mardan and in this case despite issuance of notice, no action has been taken to pursue the case. "Whether has the FBR checked that main cigarette manufacturing units located in Mardan have shown increase or decrease in payment of FED during the last three years? In case there is a declining trend in payment of the FED by the Mardan based units during the last three years, what are the reasons behind such decrease or this is due to tax avoidance?" sources questioned.
As per Rule 28A of the Federal Excise Rules, 2005, machinery installed should cater for the production requirements and any excess capacity should be sealed off. According to official documents (notice to the company), the FBR had sent a notice to the tobacco company that they would seal off their excess capacity, ie seal six number of cigarette manufacturing machines since they have shown those machines as idle. As per the document, the declared production at company was around 15,318 pack rites, however, the unit was required to produce about 84,672 pack rites.
The notice stated that the unit has installed capacity of seven cigarette manufacturing machines. The FBR officials calculated on shift basis production of these machines that one-hour production capacity is 8 pack rites, while 1200 cigarettes are produced in a minute, and 72,000 cigarettes are produced in an hour. One machine per hour operational capacity is 7.2 packrites and produced 50.4 packrites in a day in seven hours production in one shift. The total production of the unit from July 2017 to April 2018 with one machine and one shift would be 12,096 packrites. Thus, the total production of the unit should be 84672 packrites on the 7 machines operational in one shift.
However, the unit declared production of 15,318 packrites only during the same period which shows that 6 machines are idle and are no longer being used for manufacturing of cigarettes. Thus, the FBR intended to seal the six machines under Rule 28A of the FED Rules 2005. Commissioner Corporate RTO Peshawar constituted a four-member team including Deputy Commissioner Arshad Abbasi, Audit office Azizur Rehman, Senior Auditors Haseenud Din and Ishfaq Ahmad for this sealing of the idle machinery and stock-taking exercise of raw materials and finished goods under Section 38 of the Sales Tax Act 1990 and Section 45 of the FED Act 2005.
As per the document, the declared production at the unit was around 15,318 packrites, however, the unit was required to produce about 84,672 packrites.
Over the years, the government has put in place a robust regulatory regime intended to ultimately eliminate illicit cigarette trade, which prescribes strict laws regulating virtually every step of the industry supply chain. They include laws and rules controlling crop, procurement and use of raw materials, manufacturing, distribution, and finally import and selling of tobacco products. Despite this comprehensive regulatory framework, illicit segment occupies almost a shocking half of the overall market, which shows that affordability is a major concern and that enforcement of fiscal and regulatory laws needs to be increased and made consistent.
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