Ed­i­tor’s Desk

Enterprise - - Contents -

The gov­ern­ment has abol­ished ca­pac­ity tax on the bev­er­age in­dus­try in bud­get 201415 and has in­tro­duced re­vised rates of Fed­eral Ex­cise Duty (FED) and sales tax. This is ac­tu­ally a re­ver­sal as the gov­ern­ment has gone back to the pre­vi­ous sales tax regime which was in force be­fore ca­pac­ity tax was im­posed in 2013 on aer­ated wa­ters on the com­mit­ment of ma­jor man­u­fac­tur­ers to en­hance rev­enue by 25 per­cent. Con­trary to claims, the ca­pac­ity tax scheme did not achieve the de­sired re­sults and led to lit­i­ga­tion.

Since the pur­pose is to pro­vide a level play­ing field to the en­tire bev­er­age in­dus­try, it is hoped that go­ing back to the sales tax sys­tem would cre­ate the re­quired pos­i­tive con­di­tions and all bot­tlers, whether large or small, would be treated in an eq­ui­table man­ner.

With re­vival of the old sales tax plus ex­cise duty sys­tem, there is even more need to bring con­sid­er­able ef­fi­cien­cies into the over­all tax col­lec­tion of the FBR. The an­nual rev­enue tar­gets of the econ­omy should now be met and the de­sired ben­e­fits of tax col­lec­tion passed on to all sec­tors of so­ci­ety through an even play­ing field.

The ca­pac­ity tax regime for the bev­er­age sec­tor was termed lop­sided in favour of the big bot­tlers. But now the sales tax sys­tem is ex­pected to trans­fer the tax bur­den to the smaller bot­tling units as well.

Un­der the ca­pac­ity tax sys­tem, rev­enue was said to be lost due to in­ef­fi­ciency in tax col­lec­tion or dodg­ing tac­tics by the smaller play­ers. Ca­pac­ity tax, for its part, had many ad­van­tages be­cause tax per valve was de­ter­mined at the start of the year by the FBR, based on the pre­vi­ous year’s per­for­mance of the plant and col­lec­tion tar­gets were agreed upon.

The bot­tlers also knew how much tax they had to pay while the tax col­lec­tors knew how much tax would be com­ing from each source. This led to some level of ef­fi­ciency both at the tax­pay­ing and tax col­lec­tion ends, lead­ing to bet­ter pro­duc­tiv­ity, elim­i­na­tion of wastage and more eco­nomic ac­tiv­ity.

The down­side of the levy was that the smaller bot­tlers took un­due ad­van­tage and man­aged to dodge tax against in­stalled ca­pac­ity be­cause their pro­duc­tion fa­cil­i­ties were not duly de­clared at the FBR and, in the end, they did not pay any tax based on ca­pac­ity as­sess­ment. They con­tin­ued to follow the old sys­tem of self-dec­la­ra­tion and thereby con­tin­ued tax eva­sion.

Cer­tain el­e­ments that were not in favour of pay­ing ca­pac­ity tax also chal­lenged the levy in the courts and were given a stay so that they could con­tinue with the pre­vi­ous sys­tem of pay­ing sales tax and ex­cise duty on self de­clared quan­ti­ties. In their case, tax was not ap­plied on ‘ca­pac­ity in­stalled’. The re­sult was that a large part of the ca­pac­ity did not come into the sys­tem and the tax col­lec­tion tar­get was not achieved.

Dur­ing the pe­riod when ca­pac­ity tax was in force, there were al­le­ga­tions that the scheme di­vided the bev­er­age in­dus­try, caused em­bar­rass­ment to the gov­ern­ment and re­sulted in bil­lions of ru­pees of losses to the FBR.

It was ob­vi­ous that the FBR did not han­dle the mat­ter prop­erly and did not show the re­quired lead­er­ship in terms of reach­ing a res­o­lu­tion to the is­sue. Per­haps this was be­cause almost the en­tire lead­er­ship team at the FBR changed after the 2013-14 fis­cal bud­get (due to change of regime) and the new team did not seem to take own­er­ship of the ca­pac­ity tax is­sue.

Ca­pac­ity tax also suf­fered from lack of a proper en­force­ment mech­a­nism and the ac­tual tax li­a­bil­ity based on sales ac­tiv­ity was not de­ter­mined on pre-de­clared ca­pac­ity, re­sult­ing in loss of rev­enue for the FBR and a higher tax bur­den on those who had not planned their ca­pac­ity cor­rectly. They con­tin­ued to main­tain a higher num­ber of valves de­spite the fact that they had an op­por­tu­nity to plan their ca­pac­ity ac­cord­ing to their ex­ist­ing mar­ket off take and fu­ture plans.

It is heart­en­ing to see that now the old sys­tem of sales tax is in place de­spite its in­her­ent draw­backs. Its suc­cess is to­tally de­pen­dent on the ef­fi­ciency of the FBR which should en­sure that each and ev­ery player is treated alike, based on pro­duc­tion vol­umes, and no one is al­lowed to dodge the sys­tem by un­der-declar­ing.

As such, for the sales tax sys­tem to be suc­cess­ful, the chal­lenge is its full and com­plete en­force­ment. Whether this is done un­der Sec­tion 40-B of the Sales Tax Act or through some other means, the im­por­tant thing is that due tax re­cov­ery is made from bot­tlers at all lev­els.

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