Monitoring of Withholding Tax: FBR launches mega operation against textile, sugar companies for tax evasion

ISLAMABAD: Federal Board of Revenue (FBR) has launched mega crackdown against textile and sugar sectors for suppressing sales and evading tax by issuing fake and flying invoices.

Sources in FBR told PkRevenue.com on Wednesday that through monitoring of withholding taxes under Section 236G and 236H of Income Tax Ordinance, 2001 it had been observed that the companies in textile and sugar sectors concealed huge amount of sales tax besides issuing fake invoices in the name of individuals including freight drivers and daily wage employees.

The FBR investigated the individuals who refused to have such activities and they submitted affidavits that their CNIC were misused.

A senior FBR official said: “The fake sales, is an attempt to prevent whole sellers and retailers, which are in billions of rupees with hundreds of companies but so far affidavits have been filed in around 20 cases by the persons whose CNICs have been misused.”

According to FBR investigation the manufacturers deducted tax under Section 236G and 236H of the Income Tax Ordinance, 2001 and deposited the same in the name of freight drivers coming to pick up goods for onward delivery, daily wage employees etc.

As per the Income Tax Ordinance, 2001, the two sectors are reproduced as under:

236G. Advance tax on sales to distributors, dealers and wholesalers.—

(1) Every manufacturer or commercial importer of electronics, sugar, cement, iron and steel products, fertilizer, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector, at the time of sale to distributors, dealers and wholesalers, shall collect advance tax at the rate specified in Division XIV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made.

(2) Credit for tax collected under sub-section (1) shall be allowed in computing the tax due by the distributor, dealer or wholesaler on the taxable income for the tax year in which the tax was collected.

The rate of withholding tax under Section 236G is:

On sale of fertilizers: 0.7 percent for filers and 1.4 percent for non-filers.

On sale of other than fertilizers: 0.1 percent for filers and 0.2 percent for non-filers

236H. Advance tax on sales to retailers.—

(1) Every manufacturer, distributor, dealer, wholesaler or commercial importer of electronics, sugar, cement, iron and steel products, motorcycles, pesticides, cigarettes, glass, textile, beverages, paint or foam sector, at the time of sale to retailers, “and every distributor or dealer to another wholesaler in respect of the said sectors”, shall collect advance tax at the rate specified in Division XV of Part IV of the First Schedule, from the aforesaid person to whom such sales have been made.

(2) Credit for the tax collected under sub-section (1) shall be allowed in computing the tax due by the retailer on the taxable income for the tax year in which the tax was collected.

The rate of advance tax under Section 236H is:

On sale of electronics: 1 percent from filers and 1 percent from non-filers.

On sales by others: 0.5 percent for filers and 1 percent for non-filers.

The FBR officials said that these companies are showing fake sales and to misguide the department, they are showing sales to persons who are drivers and others who are transporting the goods.

“This way they are concealing the profit from whole sellers to the retailer.”

“Most of them have their own distribution companies run by their directors and to conceal their identity this practice is adopted,” the official disclosed.

By doing so, the entire chain us successfully evading the income tax as well as the sales tax.

This is also the case of shifting of profit through sales splitting and suppressing the sales to evade taxes.

Giving example, the official said that if a person shows sale of sugar at Rs35 per kg to a registered person, then it becomes his verifiable sale and he also withholds tax on it.

“The chain ends here as this person who is ghost entity would not file any return and the department would not challenge company’s return as the sales are to a verifiable person whose tax is also withheld,” the official explained.

The official further explained that now actually the person is selling this sugar to the retailer at Rs55 per kg through his own distribution company being run in the name of director, then this distribution company would earn income of Rs20 per kg which would not come under tax net and successfully remain hidden under the cover of that fake sale.

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