ISLAMABAD: In what appears to be a major scam, more than Rs80 billion excise duty has been evaded over the past seven years by the owners providing franchise services, but the country’s top tax machinery has put the matter on the back burner.

The amount is a tip of the iceberg because the Federal Board of Revenue (FBR) is not willing to investigate the scam for reasons known to them.

The federal excise duty introduced in 2006 at a rate of five per cent was increased to 10pc in June 2008, which remains only on paper because FBR documents show negligible collection of the levy.

The FED is leviable on royalty fee, technical fee and franchise fee annually, but the FBR’s inability to recover the amount from big franchise owners speaks volumes for malpractice.

At the same time, no FED was paid by Wapda and other similar organisations which are paying royalty on crude oil, natural gas and hydel power generation.

According to the FED Act 2005, franchise is an authority given by a franchiser to a franchisee which is contractually or otherwise granted a right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration, including royalty or technical fee.

Official data show that regional tax offices (RTOs) in Karachi and Lahore have collected income tax on franchise and technical fees, but no FED on them as required under the law.

During the 2006-08 period, the RTO Karachi collected Rs3.067bn as income tax on royalty and technical fee, but did not collect FED on them.

The Lahore RTO collected Rs718.008 million as income tax on the same account. However, it collected a laughable Rs30,000 on account of FED.

As per calculation, FED should have been one-third of the income tax, meaning that Rs1.261bn should have been collected.

Contrary to this, the RTO Islamabad collected Rs12.721 million FED on royalty and technical fee during the 2006-08 period.

Syed Mohammad Hassan, a Karachi-based chartered accountant, contested the FED collection figures and said that an amount of Rs21.05bn could have been collected only from five companies assessed in the large taxpayers unit (LTU), Islamabad, between 2006 and 2013.

The companies include OGDCL, Mari Gas, Pakistan Oilfields, PTCL and Pakistan Tobacco.

No FED has been collected on royalty on oil and gas, and hydel power generation, since 2006.

Budget documents suggest that under the NFC award, Wapda paid Rs263.861bn to the provincial governments as royalty on hydel power generation from 2006 to 2012.

According to Mr Hassan, the FBR should have collected Rs22.260bn excise duty.

The government also received Rs304.461bn as royalty on oil and gas from 2007 to 2013 and the FBR should have collected Rs28.745bn FED.

Similarly, the Pakistan Telecommunication Authority (PTA) collected Rs90bn in 2009 and Rs89bn in 2010 on account of licence fee, but the LTU Islamabad has yet to take up the issue of FED recovery with the PTA.

The issue was raised with the Federal Tax Ombudsman (FTO) in September 2010. Consequently, the FTO directed the chief commissioners of LTUs to get a third party audit conducted to have credible basis for ascertainment of the difference in figures and evasion of tax if any involved and submit a compliance report within 45 days.

The FBR has neither submitted the compliance report despite several reminders by the FTO not is it willing to probe the scam and curb tax evasion.

In January 2011, the FTO ruled on a review application that FED was properly charged, collected on franchise service as per law by all LTUs and RTOs. It also recommended that figures of franchise service receipts be declared in income tax returns by taxpayers as per law.

For implementation of the order, the FTO asked for compliance within 30 days, but the FBR has yet to take action.