How to minimise revenue loss: edible oil sector submits proposal to FBR
May 25, 2013
The Federal Board of Revenue (FBR) has received a budget proposal forwarded by edible oil industry to reduce revenue loss which may occur following setting up of new industrial undertakings under Section 65D of the Income Tax Ordinance of 2001.
Sources told Business Recorder on Friday that the industry proposed a revamped taxation structure of income tax and federal excise duty (FED) to continue with the existing laws to avoid revenue loss to existing manufactures in case new industrial units were established. A senior FBR official confirmed that the Board would not abolish Section 65D of Income Tax Ordinance, 2001 in the coming budget, as it was introduced to attract new investment with the facility of tax credit to new industrial undertakings. The Section was specifically designed to attract investment for the establishment of new units.
Details of the proposal showed that the manufacturers of vegetable ghee/cooking oil import edible oil to the tune of approximately 2 Million Metric Tons annually out of which 95 percent consists of Palm Oil and its sub-products. After the in-corporation of Section 65 D in Income Tax Ordinance, 2001 through Finance Act, 2011 and few additions through Finance Act, 2012 all those industrial under-takings established between July 1, 2011 and June 30, 2016 shall be given a tax credit equal to one hundred percent of tax payable under any of the provisions of ordinance including sub-section (8) of section 148 to which import of edible oil falls at the rate of 5 percent in ”Minimum” Mode”.
At the prevailing international market price of Palm Oil products the charge-able income tax (WHT at import stage) on landed cost per metric ton is Rs 5,480 or nearly Rs 5.5 per kilogram. The advantage granted to new set ups by virtue of said section would push existing state of the art units out of competition hence closure or collapse and rise to bad debts.
It is pertinent to note that at present cumulative installed capacity of refining and manufacturing sector is over 5 million tons against requirement of around 3 Million tons only per annum, consequently most of the units are struggling and surviving next to verge of closure. Under given circumstances there exist no room for installation of new units and shall be a mere wastage of national resources and hard earned foreign exchange being consumed for import of plant and machinery, sources said.
Moreover it is easy to ascertain that national exchequer may lose to the tune of Rs 11 billion per annum and shall continue to lose the similar amount for next five years consecutively, since one such unit has already availed the facility of tax credit and more or less eight others shall apply in the last quarter of current year. Likewise 10-12 more units would enter into production by the mid of the year 2014 and so on. In this backdrop it is imminent that existing over 100 units would go out of production and only 20-25 units would monopolise the entire sector in the wake of Section 65D of the Income Tax Ordinance, 2001, proposal maintained.
Experts said that the cost of raising a company formed and operating a new industrial undertaking is negligible than the huge income tax concession of 5 percent or say Rs 5.5 per kg, meaning an average manufacturing concern with an average production of 300 tons per day (300,000 kgs) shall benefit under Section 65 D to the tune of Rs 1,650,000 per day over and above normal operating profit range of existing manufacturing concerns. The rate of profit by virtue of section 65 D stands at Rs 49,500,000 per month, and translates into 594,000,000 per annum more or less thrice the cost incurred in erecting a new plant.
Like-wise, a similar amount of short-fall shall be experienced by national exchequers which shall continue to increase in proportion with the establishment of new units already in pipeline. Hence by the mid of year 2014, when 2 Million Tons of edible oil shall be exempted from levy of income tax vide section 65 D, the net loss to the national exchequer is forecasted around Rs 11 billion per annum.
In this backdrop it has been proposed to reduce the rate of income tax from existing 5 percent in Minimum Mode” to 1 percent in ”Final Mode” and enhance the prevailing FED in value addition mode at the rate of Re 1/kg to Rs 5.50 per kg. Resultantly the revenue of national exchequer shall be enhanced by Rs 422 per ton which total up to Rs 8.44 Billion per annum on import of two million tons of edible oil. Like-wise the existing units may also be able to continue its manufacturing and the other industrial undertakings availing concession under Section 65D shall continue to be availing advantage of 1 percent exemption in income tax.
The one percent income tax exemption so availed by new undertakings means over Re1 per kg or Rs 1,019 per ton. Subsequently, they shall be able to recover their hundred percent equity well within three years of initiation of productions, without any sudden and sizeable loss to the national exchequer, experts added. Moreover after the issuance of SRO 140(I)/2013 dated February 26 this year, the WHT at the rate of 3 percent in ”Minimum Mode” was applicable on import of edible oil by industrial concern located in settled areas. However vide said SRO the reduced rate facility has been omitted resulting into enhancement of rate up to 5 percent in ”Minimum Mode”.
Since Fata/Pata enjoy immunity against levy of taxes under the Sales Tax Act, 1990 and Income Tax Ordinance, 2001, therefore, earlier in 2004-05 the government levied Federal Excise Duty (FED) in lieu of Sales Tax on edible oil vide Serial No1 of the First Schedule read with Section 3 of the Federal Excise Act of 2005.
The rationale behind imposition of FED on edible oil at the rate of 16 percent was to provide a level playing field to manufacturers of vegetable ghee and cooking oil located in settled areas and check the influx of products from un-settled (FATA/PATA) to settled areas.
As of now, the manufacturing units of FATA/PATA are enjoying exemption of 5 percent WHT on import of edible oils in addition to total exemption of payment of sales tax on inputs like tin-plate, chemical, electricity, natural gas etc. Resultantly the units are at advantage of Rs 6,500 per ton over units located in the tariff areas with break-up revealed the impact of exemption of 5 percent withholding tax is Rs 5,500 per ton and impact of exemption from sales tax on inputs is Rs 1,000 per ton.
If the said benefits are taken into consideration, the FATA/PATA units enjoy margins of Rs 6.5 per Kg, which translates into Rs 39 million per annum over units in tariff areas on average weighted monthly input/production of 5,000 ton. Consequent upon reasons, so stated, the closure of industry in settled areas is imminent, in near future. With reference to loss to the national exchequer, the proposal added that the units located in Fata/Pata imported approximately 150,000 tons of edible oil in the past three years and shortfall in revenue is around Rs 1 billion, they maintained. Business Recorder