This has resulted due to allegations of collusion between officers of FBR and 16 manufacturing units operating in district Swat under an annual agreement between the group of companies and member FBR. FBR Chairman Ali Arshad Hakeem was informed by TI-Pakistan through a letter sent to him on November 23 that it had received a complaint pointing to the fraud and informing him about the law of FBR which was that the sale of cosmetics made in Swat and sold in Swat were tax free, but if sold outside Swat and in Pakistan, 10 percent CED is to be charged from public and deposited with FBR.
The complainant had reported following violations:
1. That during the period July 1992 to June 2007, approximately Rs 6 billion fraud in CED/FED has occurred due to the allegation of collusion between officers of FBR and 16 manufacturing units operating in district Swat, under an illegal annual agreement between the group of cosmetics manufacturers' of tariff zone, and an ex-member FBR.
2. That the SRO 649 (1)/2005 dated 01-07-2005, which confirms that CED was payable at the rate of 10 percent on cosmetics on retail value.
3. That 16 manufacturing units were collecting FBR Revenue, Federal Excise Duty from public on their products at the prescribed rates of 10 percent and 7.5 percent, and some are charging sales tax (ST) at 16.5 percent since 1992. That the 16 manufacturing units are not depositing with FBR the revenue collected by them at 10 percent and 7.5 percent, which is estimated to be around Rs 450 million to 500 million per year, but under an illegal arrangement with a an ex-FBR member sales tax and federal excise, without any SRO being issued, based only on minutes of a meeting of June 13, 2006, are paying to the Government on fixed-basis, Rs 130 million/year.
4. That by using the illegal "agreement" as a vehicle to evade taxes, and claiming additional amount of excise duty, these firms are declaring the savings as their miscellaneous income in the audited statements of accounts in the income tax returns/assessments as Royalty Income, license fee, share of advertising expenses and additional receipts on account of their operation at Mingora, Swat.
5. Closure of any member unit of the group does not affect on the agreed amount/ payment of CED/FED for the year. However, the group has claimed partial waiver of FED for the calendar year 2009 at the time when actual army operation was taking place in the area because other units have not affected as they simply closed down and were not required to pay FED on fixed basis. Actually the agreement expired on June 2007 and was not renewed for the years onward. However, member units of the group enjoyed payments of FED on fixed basis during 2007-8, 2008-9 and 2009-10, which could be verified from the audited accounts of the members.
6. That instead of taking action against the group and recovering over Rs 6 billion from them, and other cosmetics' manufacturers evading revenues at least 80 percent of their production and sales, which are luxurious items not a life saving drug and a potential sector to generate huge revenues, FBR fraudulently exempted cosmetics and toiletries from application of CED/FED. FBR SRO 598 (1)/2012, dated June 1, 2012 had omitted cosmetics, toiletries etc from levying of FED.
7. That these 16 firms have availed tax amnesty scheme of 2008, and as an example only one member unit had whitened their bounty of Rs 400 million in ITS-2008. This fact could be verified from FBR records.
8. Tax evasion scam was been reported in newspapers in July 2012, and serious criticism had been made on FBR for abolishing the taxes. Adil Gilani had requested Chairman FBR to investigate this alleged fraud, and find out under what authority, FBR has not been collecting CED/FED since 1992 from these 16 firms as per law at 10 percent, and why in 2012 FBR had exempted cosmetics and toiletries from application of CED/FED when the Government needed to increase its Tax-GDP ratio from nine percent to 18 percent.
Transparency International Pakistan is striving for across the board application of Rule of Law, which is the only way to stop corruption. Copies of the letter were forwarded for the information and action under the authority vested in their respective jurisdictions to: Chairman, Public Accounts Committee, Islamabad; Chairman, NAB, Islamabad; Minister Finance, Islamabad; Federal Tax Ombudsman, Islamabad, and Registrar, Supreme Court of Pakistan, Islamabad.