ISLAMABAD: Auditor General of Pakistan (AGP) has declared 13 customs concessionary/ exemption notifications of the Federal Board of Revenue (FBR) as high-risk SROs, which are massively misused at the import stage.

The thematic audit of the FBR on the SROs focuses on 13 high-risk SROs issued during the last five years from 2016-17 to 2020-21.

This study focuses on SROs issued under Sections 19, 18 and 181 of the Customs Act 1969.

During desk audit, all SROs issued by the FBR under the Customs Act 1969 during the last five years were collected and tabulated. These were 41 SROs, from which 13 SROs were identified as high-risk and requiring field audit. During field audit, FBR HQ was requested to provide approval files of these SROs while the field formations were requested to provide data of all transactions under these SROs since their issuance.

Firstly, the SROs issued under Section 19 of the Customs Act 1969: i. SRO 642(I)/ 2016 dated 27.07.2016; ii. SRO 39(I)/ 2017 dated 31.01.2017; iii. SRO 40(I)/ 2017 dated 25.01.2017; iv. SRO 580(I)/ 2017 dated 01.07.2017; v. SRO 644(I)/ 2018 dated 24.05.2018; vi. SRO 833(I)/ 2018 dated 03.07.2018; vii. SRO 1640(I)/ 2019 dated 31.12.2019; viii. SRO 558(I)/ 2020 dated 22.06.2020; ix. SRO 593(I)/ 2020 dated 01.07.2020 and x. SRO 79(I)/ 2021 dated 22.01.2021.

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Secondly, the SROs issued under Section 18 of the Customs Act 1969: i. SRO 630(I)/ 2018 dated24.05.2018, as amended by SROs 848(I)/ 2018 dated 04.07.2018 and SRO 108(I)/ 2019 dated 31.01.2019; ii. SRO 680(I)/ 2019 dated 28.06.2019, as amended by these notifications a. SRO 949(I)/ 2019 dated 22.08.2019 and SRO 38(I)/ 2020 dated 15.01.2020. b. SRO 119(I)/ 2020 from 19.02.2020 to 31.03.2020. c. SRO 127(I)/2020 dated 24.02.2020. d. SRO 633(I)/2020 dated 21.07.2020 e. SRO 1352(I)/2020 dated 23.12.2020.

Thirdly, the SRO 1455(I)/2018 dated 29.11.2018, issued under Section 181 of the Customs Act 1969.

The terms of reference (TORs) for the thematic audit is to check the cost effectiveness of such exemptions in stimulating existing and new investment, employment generation and new technology; check whether there is arbitrary use of discretionary powers conferred by the Rules; check whether proper mechanism of monitoring and supervision by senior management is available; check whether customs authorities apply exemptions with precision in order to minimize chances of misuse; and check the misuses of exemptions, audits and periodic reporting thereon.

Following SROs expressly issued under Section 19 of the Customs Act 1969 do not appear to be covered by any of the emergency or extraordinary conditions specified in that section: SRO No. 39(I)/2017, dated 23.01.2017, effective from 16.01.2017, grants exemption from whole of customs duty on import of textile goods such as cotton, aramids, rayon, nylon, and artificial staple fibres. Moreover, the fact that the SRO is made effective retrospectively by 8 days raises further doubts about its purpose.

Similarly, while Section 18(3) itself is problematic to the extent that there is no power in the Customs Act 1969 to grant exemption from the regulatory duty levied under Section 18(3), or remove any item from the list of items subject to regulatory duty, the following SROs expressly issued under Section 18(3) not only remove certain items from the general list of items subject to regulatory duty but also do so in a manner that raises doubts about their purpose. The SRO 680(I)/2019, dated 28.06.2019, imposed regulatory duties at different rates on 569 different items. This SRO was amended about two months later vide SRO 949(I)/2019, dated 22.08.2019, to impose RD @ 3% on cotton under PCT Codes 52.01 and 52.03. However, about five months later, these amendments were withdrawn vide SRO No. 38(I)/2020, dated 21.01.2020.

This chain of events suggests that Federal Government is using its power to levy regulatory duty under Section 18(3) in a discretionary and arbitrary manner without any apparent legal or practical rationale. The fact that these amendments relate to an important textile item also suggest ulterior motives.

The aforementioned SRO 680(I)/2019, as issued on 28.06.2019, imposed RD on wheat (PCT Code 1001.1900) and other wheat (PCT Code 1001.9900) @ 60%. However, about eight months later, vide SRO 119(I)/2020, dated 19.02.2020, these rates were reduced to zero. The initially very high RD and its later reduction to zero again suggests that Federal Government is using its power to levy regulatory duty under Section 18(3) in a discretionary and arbitrary manner without any apparent legal or practical rationale. The fact that the item in question is wheat also suggests ulterior motives.

The AGP observed misplaced interpretation of the SROs in general at the assessment and collection stages that caused a total revenue loss of Rs 6.25 billion. The relevant audit observations are clubbed together in nine audits. The first seven involve wrong assessment worth Rs 6.25 billion and the last two involve non-collection despite correct assessment worth Rs 13.96 million.

The AGP has recommended that the process of issuing Customs SROs granting exemptions and concessions often lacks transparency and appropriate legal cover. Moreover, there are no internal monitoring reports by FBR with regards to the objectives and performance of such SROs. Therefore, it is currently impossible to determine the cost effectiveness of such exemptions in stimulating existing and new investment, employment generation and new technology.

The arbitrary use of discretionary powers conferred by the law on the Federal Government and FBR is evident in both issuance and application of several SROs granting exemptions and concessions.

No proper mechanism of monitoring and supervision by senior management is available to prevent misuse of SROs in the field and Customs authorities do not apply exemptions with precision, which is obvious from the audit observations yielded by this Thematic Audit amounting to Rs 6.25 billion. It is hoped that the observations made in this study will lead to the withdrawal of questionable SROs and better application of both concessionary and levying SROs in the field, AGP added.

Copyright Business Recorder, 2022