Sindh, Punjab and KP: FBR unearths massive tax evasion by sugar mills

The Federal Board of Revenue (FBR) has identified massive tax evasion by sugar mills, operating in Sindh, Punjab and KP through under-reporting of stocks and fake sales. Therefore, it has been decided to carry out investigative audit of sugar manufacturers located in three provinces by special audit panels.

According to sources, the decision was taken in the light of the report on sugar sector analysis compiled by FBR, which observed huge tax evasion in sugar sector.

They said that the stock taking carried out by the FBR and the cane commissioners of three provinces had a difference of 641,000 metric tons which showed that the sugar mills were under-reporting their stocks to evade taxes.

They said that the local supplies during the tax period of July, 2019 decreased by 255 percent due to enhancement in tax rate (from 8% in June 2019 to 17% in July 2019). However, sugar mills have manipulated the sales data by declaring maximum disposal of sugar stocks in the tax period of June, 2019 at tax rate of 8%.

Furthermore sources said that the stocks of sugar mills till June, 2018 were 3,147,000 metric ton where as closing stock of the year ended on June 2019 was only 2,230,778 metric ton, depicting 29 percent less as compared to the preceding year, which the sources termed it as unusual and abnormal business practice.

Following the said reason, the manufacturers have declared higher quantity of sugar in the month of June 2019 to avoid paying sales tax at higher rate, sources said and added that tax evasion by the sugar manufacturers was generally based on these factors - undocumented raw material (cane) purchases, under-reporting production by showing less recovery of sugar and sales to fake buyers, sugar by-products such as baggasse, molasses and generation of electricity is also misreported by many sugar mills and different expenses leading to claims of huge input, which does not commensurate with the production results of the sugar mills.

Keeping the said in view, the board has decided to conduct investigative audit of sugar manufacturers by special audit panels constituted under section 32(A) of the Act, sources said and added that if the commission had information or sufficient evidence that such registered person was involved in tax evasion then he may authorize an IR office to conduct an inquiry or investigation under section 38 of the Act.

The board under section 32A may appoint as many special audit panels as may be necessary, comprising two or more members from the Inland Revenue and chartered accountants to conduct audit of a registered person and the scope of such audit shall be determined by the board or the commissioner Inland Revenue on a case-to-case basis.

Sources said that panel would prepare daily report of crushing, sugar production and number of bags etc and send to Pakistan Sugar Mills Association, FBR, Chief Commissioner Inland Revenue and would also compile total production of sugar and by-product at the end of the season with adequate information of opening and closing stocks. They said FBR had also directed tax offices to give their input within three days after consulting big four chartered accountant firms to initiate the investigation of sugar sector on the said guidelines.