ISLAMABAD (January 30 2006): The Central Board of Revenue (CBR) has started audit of leading beverage manufacturers to ascertain their actual sales tax liability and authenticity of declarations, production and sales in the country.
The CBR has issued instructions to all collectors of sales tax to start desk-audit of all the beverage manufacturers keeping in view the production and previous revenue collection as per data collected from the international head offices of these companies.
The Large Taxpayer Unit (LTU), Audit, Lahore has approached the head offices of beverage manufacturers abroad and collected the relevant information. It has been decided to carry out nap audit of inputs used by the registered manufacturers of beverages to determine the genuineness of 'input tax adjustment' as well as correct declaration of production/sales. Large Taxpayers Unit, Lahore has initiated audit of two registered manufacturers focusing on the quantum, value and consumption of inputs.
All the collectors of sales tax would conduct audit on the pattern of LTU, Lahore. The facts and figures provided by the LTU would be used as a baseline for carrying out audit in the field formation.
The CBR has empowered the concerned additional collectors to supervise the audit of units located within the jurisdiction of their respective collectorates.
The CBR has directed the regional collectors that the quantitative analysis of sales should also be made as per formula of conversion of concentrate into aerated drinks. The supply of concentrate made by two leading beverage companies to registered manufacturers of beverages operating within the jurisdiction of other Collectorates has been analysed.
The Large Taxpayer Unit analysis revealed that beverages are soft drinks made from water (to a specific standard of purity), flavouring concentrate, carbon dioxide (for aeration), sugar, calcium sulphate (for preservation/stabilisation), salt and other minor ingredients. In addition to the ingredients for the beverages, purchases are made of packing cartons, bottles, (glass and plastic), trays, crown corks etc. These raw materials are purchased locally as well as imported. Beverages are subject to excise duty at the rate of 12.5 percent and sales tax at the rate of 15 percent on the retail price.
The manufacturing of aerated beverages involves four main steps including water treatment, ie purification, syrup mixing, blending of syrup with concentrated flavouring and filling into bottles.
The Large Taxpayers Unit, Lahore has obtained comparative data of supply of concentrate from two leading companies made to registered manufactures of beverages all over Pakistan for the period July-October (2004) and July-October (2005). M/s Coca Cola Export Corporation has made supplies to seven registered manufacturers and M/s Pepsi Cola International has made supplies to eight registered manufacturers. Two bottlers namely Riaz Bottlers and Coca Cola Beverage are registered with LTU, Lahore. The analysis of data of concentrate indicates that supply of concentrate to 13 manufacturers of aerated drinks has increased significantly in July-October 2005 as compared to corresponding period of last financial year. The supply of concentrate by M/s Coca Cola Export Corp to Coca Cola Beverages Lahore has registered growth of 52 percent in this period while the supply of concentrate by Pepsi Cola Int. to M/s Riaz Bottlers Lahore has risen by 64.16 percent. However, commensurately the sales tax payments by 13 registered persons do not exhibit the same trend. The turnover and tax payments during the period July-October (2005) of seven Coca Cola beverage units have averaged +34.32 percent and +7.25 percent respectively while in case of eight Pepsi Cola bottlers, it has increased by 35.62 percent and 10.37 percent respectively. It is worth mentioning that tax payments of five manufacturers of beverages have registered negative growth. It is pointed out that sales tax payment by the sector up to November 2005 has increased by 24.4 percent vis-a-vis last year.
According to the analysis, the apparent reason for low tax payment is 'adjustment of input tax credit' from output tax. Coca Cola Beverages and Riaz Bottlers have on average credited input tax from out put tax to the tune of 25.25 percent and 27.7 percent respectively. The reason given by Coca Cola Beverages and Riaz Bottlers for huge input tax credit is increase in the price of major inputs such as sugar, concentrate, crown corks and PET bottles. To ascertain the factual status, the LTU Lahore also obtained comparative data of prices of inputs such as sugar and concentrate from M/s Coca Cola Export Corporation, M/s Pepsi Cola International, Pakistan Sugar Mills Association and M/s Coca Cola Beverages. The analysis of data provided by beverage concentrate suppliers reveals that per unit average price of concentrate supplied by Coca Cola Export Corp has increased nominally by 0.26 percent and decreased by 4.80 percent in case of Pepsi Cola International during the period July-October (2004) vis-a-vis July-October (2005). The price of sugar has risen by 34.82 percent as per data provided by PSMA. The average price of crown corks and plastic closure caps has increased by 26.57 percent and 17.98 percent respectively while per unit average price of PET and C02 has decreased by 1.575 and 15 percent respectively.
LTU, Lahore maintained that in order to determine the quantum of production of aerated drinks by registered manufacturers, formula provided by beverage concentrate suppliers for converting units of concentrate into aerated bottles of 250ml, has been employed. With this formula the projected production of Lahore based M/s Coca Cola Beverage works out to 4,689,295 crates of 250 ml bottles and that of Riaz Bottlers 6,733,890 crates of 250 ml. M/s Riaz Bottlers has given same input/output ratio of concentrate for its different brands to obtain duty and tax remission for export (DTRE) approval.
However, assessment of production levels of 13 manufacturers of beverages critically hinges on availability of data of actual production of each registered person. LTU, Lahore procured actual figures of production from M/s Riaz Bottlers and M/s Coca Cola Beverages to cross verify their production visa-a-vis the projected production of aerated drinks as per their formulae.
These figures indicate that production actually done by M/s Riaz Bottlers in July-October 2005 is more than the projected production.
This implies that the unit has also produced goods from the opening stock. This analysis encompasses both period of July-October (2004) and that of July-October (2005). The production of this unit as per formula should be 6,733,890 crates of bottles of 250 ml whereas actual production has been 7,157,723 crates of bottles of 250 ml. However, the production of M/s Coca Cola Beverages lags behind the projected production, the production of M/s Coca Cola Beverages should be 4,689,295 crates of bottles of 250 ml whereas Coca Cola has produced 4,577,083 crates of bottles of 250 ml.
The data of payment of excise duty of M/s Riaz Bottlers and M/s Coca Cola Beverages has also been analysed. The payment of excise duty by M/s Riaz Bottlers during the period July-October (2005) has increased by 0.095 percent and the increase in the sales tax payment has been to the tune of 0.0945 percent. Similarly, M/s Coca Cola beverages has shown increase of 0.057 percent in payment of excise duty, however, payment of sales tax has decreased marginally.
The conclusion of the analysis revealed that the supply of concentrate flavour, main ingredient of beverage, has risen sharply during the period July-October (2005) vis-a-vis the corresponding period last fiscal. Turnover and tax payments of registered manufacturers of beverages all over Pakistan have not proportionally increased, but decreased in case of five registered persons due to increased cost of inputs as contended by beverage manufacturers.
The analysis of inputs of M/s Coca Cola Beverages show that average price increase of six inputs in 2005-2006 has been 68.30 percent. On the other hand, the production analysis conducted on the basis of per unit of concentrate production of aerated drinks of the same registered person indicates under production of aerated drinks. It can be surmised that, albeit, costs of inputs have risen, however, the same have been offset against suppressed sales, leading to low tax payments.
The CBR has asked the collectors to conduct audit on the basis of the said analysis and submit the audit findings by March 2006.