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.