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Some Interesting cases of CBR

Chunian was declared an industrial estate in 1987 through SRO 400 (10/87) when Mohammad Khan Junejo was Prime Minister, Dr Mahboob ul Haq was finance minister and Nawaz Sharif was the Chief Mininster of Punjab. The SRO was issued on June 17, 1987 but it gave Chunian the retrospective benefit of SRO (500/1/84) under which industries set up in industrial estates were given specific tax holidays. It was not coincidence that House of Ittefaq was operating five industrial units in the Chunian Industrial Estate.

According to the notification issued by the Punjab govt the estate was to be developed on 60,466 acres of land, of which 55,000 acres was private and balance was State land. In a departure from the established pattern it was decided that govt will provide infrastructure and other facilities in the industrial estate but the industrialists will be required to procure land directly from the land owners in the area. According to the various press conferences by Salman Taseer, then Information Secretary PPP and other opposition leaders at least 10% of the land in Chunian Industrial Estate had been bought by the members of Sharif family prior to its declaration as an industrial estate.

In September 1989, Bhutto govt rescinded SRO/1/84 with retrospctive effect from Chunian Industrial Estate meaning thereby that industries set up in the area after 1984, were no longer exempted from payment of income tax and other tax concessions. CBR issued the new SRO as spinelessly and without any rigor of conscience as the one that had provided exemptions with retrospective effect.

The see-sawing of import duties on Steel by Benazir and Nawaz govts also show how unscrupulously the two employed to line personal pockets or tried to kill the bird that was laying the golden eggs for the other.

The federal budget for 1986-87 annouced by Finanace Minister Dr Mahboob ul Haq reduced the flat duty on imported Steel from Rs 750 per tonn to Rs 418 per tonn, yielding net savings of Rs 200 million to Ittefaq Foundary but hardly hit ship breaking industry for which the rate of duty remained at previous level.

However, July 1988-89 budget was announced by the PPP govt which imposed a uniform rate of duty on ship plates and ingots but doubled the rate of duty for billets used by Ittefaq Foundary, causing an annual loss of Rs 580 million to Ittefaq.

In 1991-92 with Nawaz Sharif as Prime Minister, CBR issued SRO 584/91 reducing the custom duty on shredded and bundled scrap from Rs 1,500 to Rs 500 but the custom duty on ship breaking was reduced from Rs 1500 per tonn to Rs 1000 only. This difference in custom duty inflicted death blow to the ship breaking industry but yeilded Rs 1,024 million to Ittefaq Foundary, according to Zahid Sarfraz, Chairman, Accountibilty Committee when Nawaz Sharif govt was dismissed in April 1993 who also claimed that the said SRO was issued without any lawful authority.

In this battle of SROs, ship breaking industry fell victim to Nawaz govt policies to benefit Ittefaq Foundary and subsequently efforts was made by PPP govt to close down the Ittefaq Foundary. In both cases CBR was used by them to issue SRO;s for personal ends and settling personal scores.

The Indus Toyota project is a clear case of politicking between two main political parties and their govts but for reasons known only to a few, both are reluctant to talk about the real bone of contention.

The Indus Toyota project sponsored by the Habib group was sanctioned by Benazir govt in 1988. It was meant to start progressive manufacture of Toyota Car in Pakistan but immediate effect of the sanction of the project was transfer of franchise for import of Toyota from State owned Pakistan Automobile Corporation (PACO) to the house of Habib yeilding them the windfall revenue of 500 dollars for every Toyota imported into Pakistan.

Before nationalization the Toyota franchise was held by Monnoos and obviously this was a big coupe managed by Habib since several other leading groups including the House of Ittefaq were flexing their muscles to enter the auto industry. But within months of coming into power in 1990, Nawaz govt cancelled the license of Indus Motors Project and demanded of the Toyota Motor Company of Japan to restore the franchise to PACO which had lost the main source of revenue. The matter was resolved only after the intervention of Japanese Embessy and the visit of a delegation of Toyota Company from Japan.

Apparetly the matter has been resolved. But in the 1993-94 budget, govt drastically reduced the import duty on completely built up (CBU) cars, thereby completely upsetting the feasibility of Toyota plant. Fortunately for Habib, Nawaz Sharif resigned in August 1993 and general elections brought Benazir in power.

On January 12, 1994, within two months of coming into power, PPP govt banned the import of reconditioned cars and drastically reduced the import duty on Completely Knocked Down (CKD) kits for cars, thus accruing windfall gains of billions of rupees to Indus Toyota Motor which was the only private sector car assembly plant nearing completion at that time.

During first Sharif govt, PPP leaders were always accusing the govt of victimising the House of Habib but with Benazir in power it was a turn of Muslim League to accuse the govt unduly favouring the Habibs.

A " chronicle of failure, the PPP govt " released by Sartaj Aziz, on January 2, 1994 observed that " the decision of Economic Committee of the Cabinet on January 23, 1994 reducing duty by 30% on CKD and restricting import of reconditioned cars is meant to give tremendous benefits to certain local assemblers of a particular brand whose owner is personal friend of Asif Zardari. This decision is based on personal consideration and will adversely affect the local industry".

While condemning each other over their treatment of the Indus Toyota Project, the leaders of both PPP and PML were shy to fully talk about reasons for which one was allegedly supporting and other was opposing a project of national importance, launched by one of largest industrial groups in the country. A former cabinet minister speaking on condition of anonymity traced the origin of the dispute to a bid by the house of Habib to offer a donation of Rs 10 million to PML govt of Mohammad Khan Junejo. The offer was refused. The minister reported the matter to President Zia ul Haq leading to an official inquiry. Obviously offer of a similar donation was made to the other party which was accepted. Even thieves have a code of honour and so have out polliticians.

A week before Prime Minister Benazir Bhutto was to visit Japan in January 1996, the Ministry of Finance withdrew the fiscal package for Special Industrial Zones (SIZ) that was announced by the PPP govt with great fanfare in January 1994, within weeks of coming into power.

Pakistan had worked hectically for the coveted visit to Japan where Prime Minister was to inaugurate an investors conferences arranged by the Board of Investment. The withdrawal of the package for SIZ was a major embarrassment for the visit, particularly because the publicity matter relating to investment opportunities in Pakistan printed in Japanese language had already been dispatched and contained references to SIZ, as jewel of the crown of the govt economic policies. It was V A Jaffery, the Economic Advisor to Prime Minister who had accepted the IMF demand for withdrawal of the fiscal package for SIZ but Prime Minister House came to know about the withdrawal of the package only when it wanted to issue a contradiction to reports in the newspapers.

Mohib ullah Shah, Secretary, Board of Investment told reporters at several press conferences that he was holding protracted negotiations with IMF delegations, seeking restoration of the concessions. A question that remained unanswered at his press conferences was why IMF had demanded the abolition of the SIZ scheme. At a loss to answer the question, he contented that " SIZ's will generate economic development and employment at the cost of tax collection". He was unaware of the fact that Pakistani entrepreneurs have enjoyed such exemptions and holidays since 1950's. A chronology of tax-exemptions granted by successive govts to encourage industrial investment will prove it.

The 1959 budget announced a two years tax holiday for industries set up anywhere in Pakistan which was extended to four, six and eight years i.e upto 1967 but the exemption for Karachi was allowed to expire after four years.

First budget by Zia ul Haq in 1978 provided a 5-years tax holiday for industries set up between March 1, 1977-June 1983 in Baluchistan, certain parts of NWFP and approved industrial estates in NWFP, Punjab and Sindh.

1983-84 budget extended " all these facilities for another period of five years" i.e up to June 1988. In 1988 Benazir came to power and she announced exemption to all industries set up in the rural areas.

In 1990 Nawaz Sharif came into power and " all industries set up throughout Pakistan between December 1990 and June 30, 1995 were given tax holiday for three years". He also announced a tax holiday of 8 years for all industries proposed to be located in NWFP, Baluchistan (Except Hub), Federally Administered tribal areas (FATA), Azad Kashmir, Division of Dera Ghazi Khan and Bahawalpur in Punjab and Sakkur and Larkana in Sindh, between December 1, 1990-June 1995.

Thus tax holidays that was first introduced for two years in 1959 has lasted for 26 years. The number of industrial estates enjoying tax holidays and exemptions already numbered 44 and the concept of SIZ was simply another effort of keeping the industrialists hooked on exemptions. It was old wine in new bottles.

The misuse of rebates and duty drawback scheme has emerged as one of the most frequent and remunerative white collar crime in Pakistan during recent years as is evident from the proliferation of stories in newspapers about frauds involving customs officials, exporters and business houses. This facility has also been exploited by political heavy weights with immunity to reap large windfall gains simply by getting the right SRO issued by CBR.

" The system of duty drawbask on exported goods is thoroughly corrupt" under which govt ends up paying more than the amount of taxes collected. Tariq Saigol observed in an interview with Friday Times issue of April 6, 1995.

No consolidated account is available of the rebates and refunds made annually by the CBR in the CBR year book, Economic Survey or any other budgetary publication and the figures of revenue collection periodically released by CBR give only an estimate of net revenue receipts. Gross revenue receipts are never mentioned. An estimated 10-12% of the annual gross tax receipts are currently being refunded by the CBR by way of duty drawbacks and rebates to the exporters and manufacturers. The figure is expected to go up astronomically in 1998, since second Nawaz Sharif govt has increased the use of duty drawbacks as a measure to boost exports. The trade policy for 1997-98 has envisaged host of incentives for boosting export of engineering goods and it provided that " the duty drawback rate of engineering industry will include all inputs including fuel oil". It is not difficult from the ambiguity and enormity of the provision to guess, for the benefit of which engineering industries this policy decision has been taken.

Duty drawbacks and rebates are refunds of the duties and taxes paid by the manufacturers on duty-paid imported raw material used in the value added exports. When the scheme was introduced in the late 1980, it was limited to refunds of import duty, sales tax and presumptive income tax but with a proliferation of taxes, its coverage has been expanded to include all the taxes and incidences paid by exporters including exporters including the municipality taxes. The Collector of Customs, Collector of Sales tax, Income tax directorate, Sea Due Department make refund of billion of rupees every year which are not reflected in the gross revenue receipts.

Rebates are permissible at different rates for different items, under such a complex system that a small favour by the taxation officials can mean a difference of millions of rupees. Two of Pakistan's notorious business groups, the Tawakkal and Schon grew around the export houses known to be claiming rebates based on fake exports, made through letters of credit opened with banks that existed only on papers in South Africa and Cyprus.

The CBR officials told the National Assembly Standing Committee on Finance and Economic Affairs in January 1998 that one of the main reasons for a shortfall in the revenue projections for the fiscal year 1997-98 was the proliferation of SROs that were issued by the CBR for the benefit of individuals and groups. A number of these SRO's have been issued for the benefit of individual industrial units by name, entitling them to rebates with retrospective effect. For example, a notification issued by CBR in July 1997 mentioned Nayyar Industries (Pvt) Ltd, Gujrat and Lahore, owned by relatives of Interior Minister Chaudry Shujaat Hussain to be entitled to refund with retrospective effect, at the rate of 16.9% and 9.4% of FOB prices, respectively, for custom duties and sales tax.

In 1986 when Pakistan was facing acute shortage of sugar, Dr Mahboob ul Haq announced rebates in payment of excise duty to sugar manufacturers, under which sugar mills were entitled to claim rebate of 50% of excise duty on sugar produced in excess of average of last three years. The decision was meant to encourage domestic production and discourage imports but payment of rebate has continued even during years of surplus production.

Nawaz Sharif's House of Ittefaq was a major beneficiary of the decision to pay rebate on sugar in 1986 and PPP leaders claimed at the press conferences that Ittefaq group benefitted to the tune of Rs 500 million, by the decision. Again in 1997 when Nawaz Sharif came into power, one of the several moves by Ittefaq group was seeking payment of arrears of rebates which were allegedly not paid by Benazir Govt.

The duty drawback scheme and the manner in which these rebates are sanctioned is self-explnatory about the in-built provisions for corruption. For example, consider the following examples.

    One hundred percent man-made fibres yarn and blended yarn (65% man-made and 35% cotton fibre) are both entitled to refund at Rs 6.75 per KG. However 50 percent blended yarn (50% man-made and 50% cotton) is entitled to rebate at Rs 3.33 per KG, with the result that a small favour by the custom official could double the amount of rebates paid to exporters.

    Order no SI/MIsc/20/95-EXR-dated April 6, 1996 issued by the Collector of Customs Karachi revealed that discretionary powers of the Customs officials and the complex manner in which rebates are worked out. The order said that rebate of central excise duty is admissible on tents and tarpalin at a rate of RS 2.50 per KG, on the net wight of textile matirial but exporters have been claiming rebate of non-textile component of their export consignment also. Exporters were therefore, advised that in future, they shall declare weight of textile and non-textile matirial seperately on the bill of export and with relevant export documents. It asked the processing section to ensure that the wight of textile and non-textile material is declared seperately and that rebate of central excise is paid only on the textile component.

    While corruption cases in customs rebate have been freqently reported, very little is known about the drawback of income tax permissible, in respect of income earned from export of 258 locally manufactured items. Of these 220 items enjoy 90% rebate, 35 items 75% and only one item i.e yarn enjoy 25% rebate. An article in daily Dawn elaborated how the facility was grossly misused "by deducting huge amounts of income tax at importation stage and then equally huge refunds were made, after the final tax liability was determined".

    In the first week of January 1995, high officials of Export Promotion Bureau and Collectorate of Customs, Lahore were arrested for involvement in the rebate scandal of Atlantic Carpets. According to newspaper reports, the firm claimed to have sent 94 consignments of carpets to Europe and USA in a single day and claimed a rebate of Rs 60 million on the cosignment valued at 17.8 million dollars.

    In January 1995, customs collectorate Karachi seized a consignment declared as 6000 dozens of knitted T-shirts of various colors and prints valued at Rs 1.5 million but on inspection the lot was found to be consisting of second hand T-shirts, 100 percent substandard factory rejects and semi-stitched pieces of different garments. The consignment was only meant to file rebate claim.

    In the fiscal year 1991-92, Messers Concorod Export House, Quetta and Charly Enterprise, Quetta, in collusion with official of customs department registered export of 48 consignments of art silk cloth through Gwader Port and claimed rebate of Rs 131 million of which 121 million was paid to them. However, subsequently, it was found that no export had taken place at all and the export was faked to claim the rebate. A case was registered against the custom officials and the company which is still pending in court till 1996. 69 textile mills were found guilty of fraud by trying to obtain rebates by mis-declaration of quality and description of goods during January 1990-92.

But the best use or misuse of rebate facility was made by a tobacco company in late 1980s exporting cigarettes to Afghanistan and claiming rebates on sales tax and excise duty. Since duties account for 80% of market price of cigarettes, Finance Ministry found out that one dollar being earned by the company, through fake exports to Afghanistan was costing Rs 54 to Pakistan govt. Hence rebate facility on cigarette export was withdrawn. As soon as the federal govt plugged the misuse of cigarette rebate facility, the same company started importing cigarettes from its sister concern in Malaysia in Afghan transit trade, with the connivance of the custom officials.
 
 

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