By: Zulfiqar Ali, Shujaat Mir, Shahzeb Afzal (Kashmir Investigation Team)
MUZAFFARABAD (Kashmir English): Seven oil and ghee manufacturing companies based in the Azad Kashmir’s southern district of Mirpur allegedly exploited tax exemptions to import crude oil worth nearly Rs. 110 billion.
The documents from the AJK government available with Kashmir Digital suggest that the majority of this crude oil did not reach Azad Kashmir and was illegally sold in Pakistan’s open markets.
Information gathered from official sources showed that one company imported crude oil worth over Rs. 27 billion during the 2022-2023 period, while another company imported edible oil worth over Rs. 20 billion during the 2021-2022 period.
Furthermore, a third company imported crude edible oil worth Rs. 20 billion, while another company imported crude oil worth over Rs. 3 billion during 2021-2022 and more than Rs. 7 billion during 2022-2023.
Additionally, another company imported crude oil worth over Rs. 4 billion, and another imported edible oil totaling over Rs. 11 billion between 2017 and 2022. However, records for another oil and fat company remain unavailable.
Some of these companies were registered in Azad Kashmir between 2014 and 2016, while most of them were established in 2018 or later.
Which Tax Exemptions Granted?
Under Section D-65 of the Income Tax Ordinance 2001, manufacturing companies in Azad Kashmir were initially allowed a 100% income tax credit for the first five years, which companies could claim themselves. In 2021, the AJK government ended this income tax credit.
However, under Section 65-D, the Government of Pakistan allowed manufacturing companies established before June 30, 2022, to claim the income tax credit, which also applied in Azad Kashmir.
Additionally, according to a 1995 notification from the AJK government, any manufacturing company registered in Azad Kashmir is granted an 18% sales tax exemption during the first five years.
Sales Tax Exemption
Sales tax exemption is granted to manufacturing companies when raw materials are processed, packaged, and then sold in the market. For example, if a company imports crude oil worth Rs. 100,000 and, after processing and packaging, sells it for Rs. 150,000, sales tax is levied on the added value, i.e., Rs. 50,000. However, during the first five years in Azad Kashmir, this sales tax is exempt.
However, the question arises, whether these companies registered in Azad Kashmir were eligible for tax exemptions.
After examining official documents, it became apparent that most of these companies did not have the required production capacity, nor was there any record of transporting such large quantities of oil and fat through excise toll posts. Even if some companies did have machinery and staff, it was insufficient.
According to the documents, these companies registered as manufacturers to avail themselves of tax exemptions designated for manufacturing companies.
However, the documents also show that most of these companies did not manufacture or only did so minimally in Azad Kashmir and sold the majority of the crude oil in various cities of Pakistan’s open markets.
The documents suggest that some of these companies were commercial importers but posed as manufacturing companies to exploit tax exemptions and avoid taxes applicable to commercial importers. According to the documents, a 3.5% income tax should have been applied at the import stage, not the 2% that is applicable to manufacturing companies eligible for the tax credit.
Do Companies Receive Tax Exemptions During Import Stage?
Officials claimed that although there is no sales tax exemption at the import stage, there are indications that these companies may have received sales tax exemptions during the importation process. There is no record of this with the Inland Revenue Department.
The Pakistan Customs Department operates a web-based Customs System (WeBOC), a locally developed computerized clearance system that facilitates automated clearance of import and export goods. The Commissioner of Inland Revenue stationed in Mirpur, Azad Kashmir, is issued an ID through which they can log in.
Some officials believe there is a possibility that Inland Revenue officers issued online tax exemption certificates for imports to companies registered in Azad Kashmir. However, such records do not exist at the Mirpur Inland Revenue Office.
When a commissioner changes, a new ID is issued, and the new commissioner has no knowledge of whether their predecessor has issued tax exemption certificates to any company. Since June 2018, six commissioners for Inland Revenue, Indirect Taxes, or Commissioner Inland Revenue South Zone have changed.
According to documents, recently one commissioner wrote letters to the in-charge of toll posts requesting details regarding the transportation of oil and ghee, and also wrote to Pakistan Customs authorities asking for information on the total quantity imported by these companies. However, they did not receive a response before their transfer.
Formation of Fact-Finding Committee
To address the issue, the AJK government formed a Fact-Finding Committee on January 15. The committee chairman, Commissioner Inland Revenue North Zone, Ishtiaq Ahmed, was appointed, with Additional Secretary Law Fida Mukhtar, Deputy Commissioner Tanveer Khalid, and Audit Officer Sabir Hussain Baloch serving as committee secretaries.
The committee was assigned the responsibility of investigating seventeen key points. One of its main tasks was to verify whether the companies in question were properly registered as manufacturers with the Inland Revenue Department. Additionally, the committee was required to obtain detailed records from Pakistan Customs regarding crude oil and ghee imports, including goods declarations, to track the extent of these transactions.
The committee was also tasked with inquiring with the Customs Collector to determine if the Inland Revenue Commissioner had issued any tax exemption certificates to these companies. A thorough inspection of business premises and machinery was another crucial part of the investigation, aimed at verifying whether the companies had the required facilities for processing and packaging.
To further investigate the situation, the committee was to review records at toll posts to confirm if crude oil had been brought to Mirpur for manufacturing purposes and whether processed products had been subsequently moved. The committee was also instructed to check the distribution chain, identifying wholesalers, distributors, and retailers who received these processed products.
Another key objective was to verify whether each company was legally eligible for income tax and sales tax exemptions, ensuring that the companies followed the prescribed guidelines. The committee was also asked to analyze the tax revenue losses resulting from any misuse of exemptions, such as illegal claims. Finally, if it was found that the companies were ineligible for exemptions or had illegally received them, the committee was mandated to take action against the responsible officials.
However, before the committee could begin its work, one of the companies obtained a stay order from the High Court, which suspended the committee.
Companies Deny Allegations
The companies denied the allegations, claiming that they pay the 18% sales tax at the import stage and assert that they are manufacturing companies.
While these companies maintain their position, analysts argue that the stay order should be viewed more as a strategy to delay or halt the fact-finding process, possibly to prevent information from being uncovered that could later be used against them.
The Two Primary Goals of Tax Exemptions in Azad Kashmir include
Promoting Investment:
The purpose of tax exemptions was to encourage more investors to establish businesses in Azad Kashmir, which would lead to economic growth and increased investment in the region. This, in turn, was meant to benefit the economy.
Providing Employment Opportunities:
The second goal was to create job opportunities for the local population through the promotion of businesses, thereby improving the local economy.
However, in practice, this initiative did not succeed. The primary reason for this was that when companies registered in Azad Kashmir to avail themselves of tax exemptions, most of them had only a nominal presence in the region.
Authorities and analysts argue that these companies registered merely to obtain tax benefits, but their operations or production in Azad Kashmir were minimal or nonexistent. As a result, there was no significant increase in investment, nor did it create substantial employment opportunities for locals.
Impact on Pakistan and Azad Kashmir:
Overall, while the tax exemptions aimed to foster investment and create employment opportunities in Azad Kashmir, these companies exploited the benefits they gained from registering in the region, without offering significant benefits to the local economy. Furthermore, Pakistan faced considerable tax revenue losses as a result.
