The Federal Board of Revenue (FBR) is examining a proposal to transfer sales tax registration of all ship-breakers to Regional Tax Office (RTO), Quetta or RTO-III Karachi under one-zone to deal with all their sales tax matters through one window which enables proper monitoring.
Khawaja Tanveer Ahmed Director General Intelligence and Investigation Inland Revenue (IR) submitted viable proposals to the FBR for amending sales tax rules and procedures to ensure proper sales tax collection from ship breaking industry. Khawaja Tanveer Ahmed has analysed all aspects of the industry and proposed amendments in the tax laws with an in-depth analysis of the ship breakers operating in the country.
According to Director General I&I IR, the ship-breakers are registered with different RTOs, which contribute to the difficulty in monitoring and ensuring that how payments are made. There seems to be little justification for a ship-breaker operating at Gaddani to get sales tax registration at Lahore or Hyderabad, and the distant RTOs may not be able to appreciate the importance and significance of the post-dated cheques being deposited with them. Therefore, it is proposed that sales tax registration of all ship-breakers may be transferred to RTO, Quetta or RTO-III under one Zone so that their sales tax matters may be dealt through one window and proper monitoring may be done.
The FBR has also proposed amendment in the Special Procedure Rules by including a new provision. It says, ship-beakers shall pay sales tax at the rate of Rs 5,862 per metric ton of re-rollable scrap supplied by them. The quantity of re-rollable scrap shall constitute 90 percent of the total LDT of the ship imported for breaking. The ship-breakers shall clear their sales tax liabilities at the time of clearance of the vessels for demolition and before breaking begins, it added.
In its detailed analysis, Khawaja Tanveer Ahmed explained that on cross-checking the data obtained from Customs Gaddani with sales tax data, it was found that the ship-breakers had grossly abused the facility of deferred payment of safes tax available in Rule 58H(4) of Chapter XI of the Safes Tax Special Procedure Rules, 2007. Therefore1 there is a need for reviewing this facility with a view to rationalise the procedure and curb opportunities for evasion of tax. Also the RTO will be able to get the much need revenues up front in a timely manner.
The background of this facility is that the ship-breaking industry at Gaddani, Balochistan flourished during seventies and early eighties. In the 80's, it produced around a million tons of scrap metal each year. However, it then underwent considerable decline due to a combination of adverse factors, such as higher international prices for old ships, competition from ship-breaking yards in India and Bangladesh, and imposition of relatively high customs duty on import of ships for breaking. In order to support the industry, the government extended the following facilities: First, reduction in the rate of customs duty; deferred payment of sales tax and sales tax was charged under Special Procedure only on 70.5 percent of the weight of the vessel. These measures helped the industry to flourish, so much so that in recent years the industry has seen a boom, with a record number of ships being imported.
In order to facilitate the ship-breakers, deferment of payment of sales tax on ships was first allowed under the Ship-Breaking Industry (Special Procedure) Rules, 1997 notified vide SRO 1283(1)/97 dated 19.12.1997. According to these rules, input tax adjustment was allowed on the basis of a prescribed formula, and ship-breakers were allowed to clear their sales tax liabilities in certain prescribed periods of time. Similar facility continued when the aforesaid Rules were consolidated into the Safes Tax Special Procedure Rules of 2004, which were then replaced in 2006 and again in 2007.
Under the present Rule 58H(4) of the Sales Tax Special Procedure Rules, 2007, ship-breakers are required to clear their sales tax liabilities within four months and eight months in case of ships weighing up to and more than ten thousand LDT respectively. The sales tax liability is calculated @ Rs 5,862 per metric ton of re-rollable scrap. The quantity of re-rollable scrap is presently calculated as 70.5 percent of the total LDT (weight) of the ship at import stage. Thus, sales tax payable on a ship of 11,000 LDT would be Rs 45,459,810/-, payable over eight months (Rs 5,682,476 per month). The sales tax instalments so calculated are secured against post-dated cheques (without bank endorsement of good for payment) in the concerned RTOs for subsequent encashment. Due to lack of proper monitoring by RTOs the deferred liabilities were not paid by the ship-breakers, which resulted in the loss of billions of rupees detected by the Directorate-General I&I (IR), Karachi in September, 2012.
Since the ship-breaking industry is now flourishing, it is an appropriate time to reconsider the sales tax deferred payment facility and other facilities (which was introduced when the industry was nearly dormant), especially in view of the fact that the beneficiaries have been misusing the facility of deferred payment. It is as such proposed that sub-rule (4) of Rule 58H of the Sales Tax Special Procedure Rules, 2007 may be changed. The ship-breakers may clear their sales tax liabilities at the time of clearance of the vessels for demolition and before breaking begins.
It is further recommended that all post-dated cheques deposited with the RTOs for vessels that are already beached may be exchanged for "Good for payment post-dated cheques or pay orders". This will help the department to have certainty of revenues and RTOs will not be required to chase bounced cheques, Khawaja Tanveer Ahmed said.
In Pakistan, ship breaking is being carried out mainly to recover the usable materials like ship-plates of various kinds. Besides that ships also have machinery and equipment, ropes, furniture, electric motors, fittings, timber/wood, non-ferrous items, etc. The kinds of ships that are imported are bulk carries, tankers, cattle carries, drilling rigs, container vessels, etc. Mostly bulk carriers and tankers find their way to Pakistan.
The wastage element by way of rust etc for bulk carriers and tankers is approx 3 percent to 15 percent. In very rare cases it exceeds beyond 10 percent. In any case the average wastage for all vessels broken does not exceed 10 percent. Presently, sates tax is levied on only 70.5 percent of the weight of the ship. This figure was agreed at a time, some years ago when ship breaking activities were in a severe crisis and relief was given. Now that ship breaking activities are thriving and there is a need to correct the situation. The information shows that all kinds of re-rollable (heavy, medium and light) scrap including ship-plates, kona-brackets, bulb-angles, etc constitute a large chunk of the weight of the vessel. In addition to this; valuable machinery like workshop machines, motors, ropes, timber, non-ferrous items, bunker oil, spares, etc. are subject to 16 percent sales tax on much higher values but for ease of collection, it is included in 70.5 percent sales tax liable figures of the ships This adds to revenue loss. It is, therefore, proposed that wastage be reduced from 70.5 percent to 90 percent, Khawaja Tanveer Ahmed added.