Directorate General of Intelligence and Investigation Inland Revenue (IR), Federal Board of Revenue has unearthed massive evasion of sales tax and federal excise duty (FED) by the beverage manufacturers and launched country-wide drive against the sector, covering multinational companies, big franchises, locally registered companies and un-registered manufacturers of juices, soft drinks and other beverages.
Sources told Business Recorder here on Thursday that the directorate of intelligence IR FBR has detected unique kind of tax evasion by certain well-reputed beverage manufacturers including some local units. The agency has also found organised tax fraud being committed by few beverage manufacturers pointing towards investigation of the entire sector. The agency was shocked that un-registered beverage manufacturers are openly making and supplying juices and other products to the market, but the concerned Regional Tax Offices are totally unaware of un-registered manufacturers engaged in business and supply of huge quantity of juices and soft drinks etc without obtaining any sales tax registration numbers. The agency was surprised that the big names in beverage industry are evading taxes by adopting sophisticated techniques.
The agency has started investigation against multinational companies engaged in the manufacturing of soft drinks and juices. The second category covers locally registered units engaged in the production of beverages including soft drink and juices. The third category covers un-registered beverage units, who have been actively involved in manufacturing and supply of juices and soft drinks etc.
According to sources, the directorate of intelligence IR has detected local beverage companies which are operating without obtaining any sales tax registration numbers and actively engaged in the business. In one case, a company was freely supplying juices without mentioning any sales or excise duty on the bottles within the jurisdiction of federal capital. However, the directorate has started investigation against the said company. It is apprehended that similar kind of other un-registered companies are doing their business without any check by the concerned RTOs.
The agency has also found that technical evasion has been committed by certain beverage units. The multinational giants have been involved in manufacturing and sale of concentrate to different bottling franchises in Pakistan. In the light of Central Excise General Order, 53 of 1967, aforesaid business is liable to FED at ad Valorem basis on ex-factory price. The ex-factory price is also inclusive of any other expenditure incurred (wholly or partially) by the wholesaler at that stage eg marketing/advertisement.
Directorate General I&I-IR has gathered reliable information that certain companies while paying FED have been understating ex-factory price by not declaring advertisement/ marketing expenditure, which is incurred/paid by them under the agreement with the Bottling concerns. In this way, they pay less amount of the FED by not including advertisement/ marketing expenditure in the cost of the product. The advertisement/ marketing expenditure must be included in the cost for accurate payment of the FED. In one case, it is clearly mentioned in the said agreement that the bottler will actively advertise the beverage, and vigorously engage in sales promotion activities for the beverage, in the territory and will spend for such purpose during each calendar year Bottler's share of that year's advertising and sales promotion 'Expenditure' as fixed by mutual agreement between the Bottler and the Seller in the 'Advertising and Marketing Agreement' which shall be signed each year by the Bottler and the Seller. In the absence of such Agreement, the Bottler's share of said 'Expenditure' shall be for every case of the Beverage sold by the Bottler during the prior calendar year, two and one-half percent (21/2 %) of the gross wholesale price per case to retail outlets, and the Seller's share shall be, for every Unit sold to the Bottler during the prior calendar year, a sum of money equal to five percent (5%) of the price paid by the Bottler for each such Unit with respect to sales of the Beverage in the Territory and the 'Expenditure' will be spent as directed by the seller.
Sources added that the most frequently used technique by certain beverage manufacturers is that they set-up family concerns under the cover of distributors of beverage etc. The beverage manufacturers establish offices of distributors etc with their own investment. However, such beverage manufacturers do now disclose their relationship of family links with the said distributors. On record, it has been shown that these distributors are only engaged in business with the manufacturers and they have no family relationship. This whole setup has been established to evade the tax department by showing less supply of juices and soft drinks to the distributors. For example, if the actual supply of 100 bottles has been made to the distributor, only 50 bottles have been declared in the records. As both the beverage manufacturer and distributor belong to one family, they both would declare supply of 50 bottles and maintain tax record of 50 bottles. If anyone including tax official would check records, both the manufacturer and distributor would verify supply of 50 bottles and they would also maintain all kind of proper documentation and records for 50 bottles.
How a tax officer would confirm supply of 100 bottles when both the manufacturer and distributor would verify supply of 50 bottles? Thus, sales tax and FED would be paid on the manufacture/supply of only 50 bottles and no sales tax/duty would be paid on the remaining 50 bottles. How the tax officer would establish family link between the manufacturer and distributor? This organised tax evasion has been committed by certain beverage manufacturers by using their own money to establish offices of distributors for evasion of sales tax and the FED.