THE flour milling industry may be the next one to lock horns with the Federal Board of Revenue on the taxation issue.

The problem cropped up when the FBR started sending notices to millers immediately after the budget to deduct withholding tax at a rate of 6.5pc from all wheat sellers. The industry makes roughly Rs250bn wheat purchases from different sellers every year and is expected to generate Rs15bn revenue for the FBR.

The FBR has excluded the period and purchases from taxation for harvest and post-harvest months when normally farmers are selling wheat. It maintains that within three months, farmers sell the wheat and the grain then moves into investors’ hands — who sell it to the millers; therefore the investors must be subjected to a withholding tax.

The FBR should also see who will be bearing the final shock of the withholding tax. It will inevitably be consumers

On the face of it, the FBR strategy has some gray areas, which should be clarified at the earliest to run the industry as well as the tax regime smoothly. One of them is the role of the middle man. The wheat trade gives an all-encompassing role to the middle man and uses him for legal cover to the trade — his services are taxed at 10pc and, once paid, make the transaction tax compliance.

He is a service provider: locates wheat and its owners, helps decide rates between the millers and sellers and, finally, transports the commodity to where it is required for milling. During the harvest and post-harvest periods, he plays the same role for the farmers.

So, the entire purchase of the flour industry, without exception, goes through the middle man, or legally speaking the commission agents. They act, at least on paper, as persons providing a service (connecting the sellers with the millers) for a certain amount of commission that is taxed at the rate of 10pc.

He is neither a farmer nor an investor; but can be used by all sides (by investors to avoid taxes by going through him and millers to avoid trouble of documentation, proving the sale came from the farmers). The government needs to clarify or re-cast the role of the middle man before going any further.

Similarly, the FBR should also see who will bear the final shock of this tax. It would inevitably be consumers. If forced to deduct taxes without necessary steps and clarification, the millers would simply pass it on to the people, hiking the flour prices correspondingly and creating a political and social issue for the government.

The timing when this taxation would operate could cause additional layers of problem for consumers.

During harvesting and post-harvesting, the price of wheat is normally on the lower side due to a glut in the market.

During that period, this tax would also be dormant because farmers operate in the market. With the market inching towards drier side and wheat prices going up, this withholding tax will become operational — adding to the cost, or at least providing the industry with an excuse to hike the flour price.

This also brings in the bigger question of wheat trade. The government exempted trade from taxation for twin purposes: exempting farmers and keeping the price of flour low. Once the withholding tax is weaved into the system, without knowing exactly their cost and benefit to the trade, both these purposes could be compromised. That is why, the FBR needs to sit with the industry and hammer out the issue for running taxation regime smoothly.

Making the first part of the trade (during harvesting) tax exempt and then slapping a tax on the second, also creates confusion.

The flour milling industry is politically too powerful to easily bow down to a withholding tax. It took a successful stand against the federal and the Punjab government on two separate occasions in the recent past. Once when the sales tax was imposed on choker and then when the newly created Punjab Food Authority started raiding the mills premises for quality flour checking. On both occasions, the governments had to back down.

So, the industry can easily take care of itself against perceived threats. The FBR can also flex its muscles. Between them, the issue is of the ordinary consumer who can hardly afford any addition to the cost of flour. With a sizable population stuck below the poverty line and surviving on daily purchases of flour, any addition in prices could be lethal.

Published in Dawn, Business & Finance weekly, August 22nd, 2016