A study conducted by the Central Board of Revenue (CBR) suggests withdrawal of fixed tax scheme for iron and steel sectors to check low level of compliance without any significant increase in the number registered units within these sectors.
The report issued on Thursday reveals that uniform tax assessment and collection procedure is required for the industrial sector including iron and steel units.
According to the report, the low level of compliance vividly demonstrates that despite special concessions and exemptions, including the special (fixed) tax regimes, the system is being abused. Such distortions not only reduce tax collection (realised collection remains below potential), but also discourage documentation and make the audit exercise more cumbersome.
Keeping in view the size and volume of business transactions of this industry, its contribution in federal taxes has been insignificant. The industry as a whole has paid Rs 24.5 billion tax in 2005-2006, out of which income tax has been only Rs 0.8 billion. The lower contribution in income tax by the sector is a disturbing aspect.
Secondly, major contribution, particularly with regard to domestic taxes, comes from the Pakistan Steel Mills (PSM). The share of the remaining industry, other than PSM, has been quite low. It appears that the state owned entities are more reliable and dependable source of tax revenue as compared to private enterprises. Thirdly, on the basis of geographical location of industrial units, the compliance ratio both in terms of sales tax and income tax is not satisfactory.
There is a need to review whole taxation system of this sector to make it tax compliant. Major chunk (95 percent) of sales tax on domestic consumption is collected from manufacturers where contribution of Pakistan Steel Mills was 30 percent in 2005-2006. Sales tax contribution of other categories including wholesalers, distributors and retailers was very low.
It has been found that the regions like Lahore and Gujranwala, where maximum industry is located, are not paying their due share of taxes. Direct and indirect tax contribution of the industry to the exchequer has been quite amazing. Whereas the collection from indirect taxes increased from Rs 13.6 billion in 2003-2004 to Rs 18.1 billion in 2004-2005 and further going up to Rs 23.7 billion in 2005-2006, direct tax receipts saw wild fluctuations during this period.
The collection increased from a paltry sum of Rs 326 million in 2003-2004 to Rs 3.9 billion in the next year, but declined to Rs 748 million in 2005-2006. In fact, industry's contribution was only 0.32 percent in total direct taxes.
To add insult to injury, out of total direct tax receipts, the Pakistan Steel Mills alone has contributed Rs 607 million or 81.1 percent of the total income tax paid by the sector.
On the other hand, the remaining 598 manufacturing units other than PSM, all distributors, wholesalers, and retailers collectively could barely contribute Rs 141 million on account of income tax. According to the study, the tax database of iron and steel sector remained defective. The required information, especially on production, capacity, and capacity utilisation, is not readily available.
Within GST, the tax base of iron and steel industry consists of 2260 registered units/persons of different categories, including manufacturers, importers, distributors, wholesalers and retailers etc. The manufacturing units registered in the sector are 599 in 2005-06.
Whereas around 7 percent growth has been recorded in the total number of registered units, during 2005-06 the number of manufacturing units has grown by 9.9 percent, exporters by 33.3 percent and importers by 9.2 percent. The base is expanding partly due to enhanced economic activities in the country and partly due to improved process of GST registration after simplification of the registration procedures and automation.
The study reveal that it is mandatory for the registered persons/units to file sales tax return each month, however, the compliance level in respect of Iron and steel sector has not been satisfactory. Overall compliance level has declined over the period of last three years from 78.7 percent to 71.8 percent. The compliance level within each category including that of manufacturers has declined during the same period.
The two reasons attributed to the declining compliance level are: Majority of the newly registered units have not started functioning -the natural time lag problem, and secondly existing base continue to be plagued by around 500 non-functional units still registered with the sales tax department that require rectification.
The CBR has made efforts to verify the sales tax filers' data with the Income tax data to cross match the available information in the iron and steel sector. The outcome of this research is quite revealing as well as perturbing. Since NTN information is mandatory of GST returns, the CBR found that out of 1622 GST returns filers only 1360 or 84 percent of them have reported NTN.
The distributors have shown 90.4 percent compliance to this requirement followed by importers 89.9 percent and so on. As a whole 84 percent taxpayers have indicated the NTN while filing returns, the report said. The interesting part of the analysis is that out of 1360 NTN holders, the income tax returns for 2005-2006 (tax year 2005) have been found for 759 cases in this sector.
Thus, the compliance ratio has been around 56%, which is quite low. Ironically, the lowest compliance of 51.6% has been witnessed for manufacturers in the iron and steel sector, study added.