It was inevitable. White sugar has long been censured as a non-essential food commodity; and those in the policymaking circles already sick of the concessions enjoyed by the industry often pointed to the distortion enjoyed by the mill owners, namely: collection of GST on white sugar at the reduced slab of 8 percent instead of the regular 17 percent.
The lowered bracket enjoyed by sugar was not a result of an SRO stealthily issued in the dark of the night; rather, the ‘distortion’ has been in place ever since the Sales Tax Act, 1990 came into place. It now appears that the days of white sugar comfortably ensconced with other reduced rate items such as seeds and agricultural inputs are numbered.
Expect battle cry raised by industry stakeholders in the upcoming days, at least until the passing of finance bill, lest the legislators may interpret ‘lack of complaints’ to mean that the measures are not harsh enough. However, it is worth recalling here that GST rate by itself is not the primary tax policy challenge facing the sector, rather, its successful collection at prescribed rates.
Back in 2016, FBR vide SRO 812(I)/2016 set taxable price of sugar at Rs60 per kg, even though ex-factory and retail price of sugar are unregulated. According to monthly CPI, retail price of sugar in the domestic market averaged at Rs61.43 in the following year; yet collection remained considerably below potential.
After all, for most industry players, since the selling price of a commodity may be set freely, it is rarely ‘their’ negotiated price that is set above or at market (average) rate. Especially in a goods market facing a surplus supply, most producers are ‘forced’ to sell at a discount. Never mind that many players sell the commodity to related parties/group companies in the value-adding sectors such as confectionaries and beverages, etc.
At average reported domestic consumption of 5 million tons per annum during the last three years and taxable price of Rs60 per kg, annual sales tax potential from white sugar comes out at Rs24 billion. FBR estimates put the potential much higher, given the presumptive further tax of 3 percent on sale to unregistered person.
The budget document reports last year collection from the sector at Rs18 billion, three-fourths of the conservative target. Government’s claim that domestic household shall bear additional cost of Rs3.6 per kg is also based on the presumption that all retail sale is through unregistered person. That would put last year’s target at Rs33 billion.
Now that the three percent further tax penalty is removed as well, sales tax potential (volume constant at last year levels) comes out at Rs51 billion. That means the government expects the sector to contribute three times its current levels, a tall order indeed!
Thankfully for the government, it appears that the retail price of sugar has bottomed-out in the domestic market and shall point nowhere except north in the upcoming fiscal year. That means millers’ narrative of selling price averaging below Rs60 per kg will find few buyers – at least until sugarcane crop shows signs of recovery.
However, industry players privately note that actual volume off take from the industry is much higher, and sales suppression has gone rampant ever since the setting of taxable price at Rs60 per kg. Arguably, now that the GST rate has been jacked up, collecting sales tax at a lower selling price is better than missing sales altogether.
Given the industry’s political footprint, the government has shown courage by increasing the GST rate. It is time to show reason and let the distortion go as well - remove fixed valuation of sugar for tax collection.
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