ZERO RATED CEMENT MARKED FOR EXPORTS BEING SOLD IN LOCAL MARKET

AMANULLAH BASHAR
(feedback@pgeconomist.com)
Apr 18 - 24, 2011

Zero ratghanistan is being sold in the local market which is depriving the exchequer of millions of rupees.

In last three or four years the previous month of March 2011 has been the best month for domestic sales on account of end of winter season in the Northern area, which drives bulk of domestic demand as well as completion of farmers' cash receipt from cotton crop.

As far as export of cement to the Middle East was concerned, it looks on a slower side primarily due to lower prices in the Middle East region and absence of inland freight subsidy, which is expected to hamper seaborne exports of cement producers especially in the Northern part of the country.

Hence, the marked recovery in domestic cement consumption is a triggering factor for domestic sales that is apparently higher than that on exports in the current situation.

According to the informed sources, the price of cement marked for export to Afghanistan does not contain duties and taxes amounting to around Rs90 per bag. These levies are included in the price of cement bags sold locally and the cement manufacturers could be exploiting loopholes in the system to sell those bags locally minting more profit.

The experts said that there is a strong need to monitor the exports to Afghanistan and Federal Board of Revenue (FBR) should take concrete measures to curb this malpractice, which is depriving the national exchequer of millions of rupees.

"This practice is also injurious for the cement mills that market their product in local market after paying all government levies," said an analyst on condition of anonymity. He said that mills selling cement in local market after availing Rs90 duty concession on export marginalize the other producers who are already posting huge losses due to low sales and high cost of production.

"This unethical practice has surfaced in recent years," said another expert. He said that there should be a credible system that should monitor the physical delivery of cement to Afghanistan. He said that the FBR is the competent authority to devise a transparent system in this regard.

The solution to eliminate evasion of duties lies in proper monitoring of production and dispatches by the federal board of revenue which will also ensure fair play for all cement units and check tax evasion.

He said that in the past this monitoring was done by the All Pakistan Cement Manufacturers Association, which for some reason was stopped by Competition Commission of Pakistan.

He said that the FBR could replicate the monitoring system adopted by APCMA in the past, and that was designed by credible chartered accountant firms. The technology, he added, is available and its transparent use could boost FBR revenues.

Experts said that this leakage of taxes should not be taken lightly as it does not only hurt tax collection but also has grave repercussions for the cement industry. They said that the industry is passing through testing times and tax evasion by few mills is further affecting the viability of tax paying mills.

They pointed out that monitoring of production would also address the issue of under reporting as under reporting of production by some units goes to the disadvantage of the majority of the compliant units. Moreover, they added if the practice disposing of cement meant for export in domestic market is not dealt with sternly, it would be spread to other products being exported to Afghanistan.

"The dilemma is that most mills are disposing cement at loss in the domestic as well as foreign markets to utilize some capacities," said one expert adding that still the industry is unable to utilize over 60 per cent of its installed capacity.

The industry historically posted growth during the years when the production was fairly and transparently monitored, but after the practice stopped, the industry is continuously posting negative growth.

The total operational cement production capacity was 44.682 million tons in 2009-10 that declined to 41.235 million tons due to closure of some cement plants.

Exports that increased by 140 percent in 2007-08 to 7.716 million tons and then by over 39 per cent next year to 10.752 tons registered nominal decline of 0.86 per cent in 2009-10 to 10.657 million tons.

However, the industry's hope of increasing production through accelerated exports suffered a setback due to exceptionally high increase in transportation cost and government's failure to provide its promised transport subsidy and the exports have declined by 17.03 percent in the first seven months of this fiscal to 5.194 million tons.

Actually, loss of revenues on one account or the other contributes to the fiscal deficit for the government, which having found no option introduces new levies or enhances the rate of existing taxes to reduce budget deficit. The best example in this respect is the increase in power tariffs and petroleum prices recently. Though such taxation measures help bridging the financial gap, yet they add to the hardships of the common person in the form of price inflation.

In fact, the inflated prices should be the major concern of the government as the uncontrolled prices can be a major cause to bring down the graph of popularity for an elected government.

The prevailing situation calls cautions about implications of the economic decisions.

It may be noted that the provincial government put a ban on inter-district movement of the wheat, which annoyed the flour millers and they decided to shutdown their mills for three days to lodge protest over what they called the unnecessary ban on wheat movement imposed by the Sindh government last week.

Representatives of flourmills association said that the supply of wheat to the Karachi flourmills has stopped, following the enforcement of section 144, resulted in depletion of stock of the mills even to meet one-day requirements.

The suspension of work by the flourmills naturally creates a shortage of flour in the market, which ultimately results in price hike of the basic food items. The flourmills are rightly pleading that sufficient stock of wheat is available in the country and the ban on its movement is paving way for a price hike due to short supply of wheat and subsequently of flour in the market.