ISLAMABAD (Khaleej Times) – Pakistan’s government plans to get tough against the iron and steel production units as they are not paying their due income tax and general sales tax (GST).

According to an official report, this state of affairs invites further probe and research to find out the facts and the reasons behind the expected gap between the possible revenues potential and the actual tax paid by the iron and steel production units.

The possible reason could be the absence of audit by the sales tax and income tax department and weak enforcement.

The study was conducted jointly by Secretary Umar Wahid and Second Secretary Naeem Ahmed of Fiscal Research and Statistics CBR to identify the reasons for the low revenue realization from the sector and poor compliance level at all categories of businesses in the sector.

The direct and indirect tax contribution of the industry to the exchequer has been quite amazing. Whereas the collection from indirect taxes increased from Rs13.6 billion in fiscal year 2003-04 to Rs18.1 billion in fiscal year 2004-05 and further going up to Rs23.7 billion in fiscal year 2005-06, the direct tax receipts saw wild fluctuations during this period.

The collection increased from a paltry sum of Rs326 million in fiscal year 2003-04 to Rs3.9 billion in the next year, but declined to Rs748 million in fiscal year 2005-06. In fact, industry's contribution was only 0.32 percent in total direct taxes.

To add insult to injury, out of total direct tax receipts, the Pakistan Steel Mills (PSM) alone has contributed Rs607 million or 81.1 percent of the total income tax paid by the sector. On the other hand, the remaining 598 manufacturing units other than PSM, all distributors, wholesalers, and retailers collectively could barely contribute Rs141 million on account of income tax.

The GST (domestic) collection from iron and steel products has declined over the period of last three years to Rs1,976 million in 2005-06 against Rs3,540 million in 2003-04. The disaggregated position by GST registered persons shows that the major chunk (more than 95 percent) of sales tax domestic is being realized from the manufacturers.

Within manufacturers, the contribution of the PSM was 90 percent in fiscal year 2003-04, 69 percent in fiscal year 2004-05, and 30 percent in fiscal year 2005-06. It is rather difficult to understand why the contribution of other categories, especially the wholesalers, distributors and retailers is so low.