Pakistan: Complex tax system perturbing cement industry

Byzhangli

Updated Tue, 19 Nov 2013 00:00:00 GMT

Karachi—The cement industry sources wonder as to why cannot the Federal Board of Revenue keep taxation simple and easy instead of coming with policies that hurt the consumers, manufacturers and ultimately the national exchequer itself.

Through Finance Act 2013, cement has been placed in 3rd Schedule to the Sales Tax Act, 1990 whereby sales tax is chargeable at 17% of the retail price which along with amount of sales tax is required to be legibly, prominently and indelibly printed or embossed on each bag, container or vessel containing cement meant for retail sale.

Under this regime the manufacturers will have to factor in the transport cost, which is very high for a commodity such as cement, for the purpose of calculating the sales tax.

According to a source in cement industry, the cement transportation cost for every destination would be different. It would be lower for short distances but higher for cement dispatched to dealers located away or in hilly areas.

“Since a manufacturer can fix one retail price for charging sales tax it would be a dilemma because if they fix the price on the basis of transport cost of the longest distance the consumers at short distances will pay a very high sales tax and if the calculation is based on short distance deliveries then the manufacturer will suffer,” he added.

“Before introduction of this amendment we were selling cement through wholesale mechanism and collected sales tax on ex-factory prices fixed by the company for different market areas. All dealers, retailers and customer and wholesalers were responsible for the freight and related costs and price was decided by the Market forces in each area,” he said while adding that the wholesalers were compensated through payment of commission and price match. “The business was a viable proposition for the company as well as for the wholesalers and retailers of different areas of market,” the source said.

“Fixation of single market price for across the country is likely to turn our retention price negative due to heavy transportation costs, and will force manufacturers to abandon the far areas and concentrate selling in nearby areas avoiding the hilly areas where the transportation cost gets even higher. It is worth submission that almost 10% of cement goes to hilly/hard areas and remaining 90% to plains of the country. Fixation of MRP on the basis of 10% sales pertaining to hilly/hard areas is unviable option. There should be a mechanism to treat the anomaly in MRP system for facilitating sale in those areas otherwise it will affect consumers/retailers/dealers of these abandoned areas adversely as they will be forced to purchase cement from secondary markets situated in plains and transport it at their own cost without any likelihood of further revenue collection for FBR.

Fixation of single MRP for all plain area of markets is also anomalous as dynamics of each province and region are different, to cater for which FBR may allow MRP fixation on the basis of broad regions for each manufacturer as transport factor for each manufacturer depends upon the manufacturing site is different. Otherwise as aforementioned this will ultimately force manufacturers to restrict sales only to nearby market areas and stop sales to other venues including hilly/hard and far flung areas to avoid unfavourable impact on their profitability and secondary markets will get established which will work against targeted revenue measure taken by FBR.

It may be added that cement is an entirely different commodity from the items listed in the third schedule before Finance Act, 2013. Due to absence of monopolistic competition, unified rates and homogeneous market the mechanism of sales as practised in case of existing items embodied in the schedule is not practically applicable and hence a fresh mechanism has to be evolved in consultation with all the stakeholders.

Besides selling in market cement is also sold through contracts entered with Government agencies, big corporate buyers etc at the prices fixed through the contract which some time include special conditions like fixation of price for contract period, credit terms, delivery in hilly and far areas and the price charged are above to the General prices and no may be above general MRP. The mechanism has to be taken care of under the changed system and invoicing on actual rates be allowed for safeguarding the interest of these potential big customers.

While laying the contours of the change policy due care has to be taken to ensure that MRP is the maxim price in general for markets and selling at lower prices with price match on MRP on the parts of the manufacturers do not become income of manufacturers/ dealers/ retailers/ end consumers/institutions.