As part of the move to collect agriculture turnover tax revenue of an estimated Rs15bn per year, the Federal Board of Revenue intends to tighten the noose around wheat flour mills that are allegedly misusing a concession available only to the agriculture sector.

The flour mills are required to withhold 6.5pc tax from non-filers of income tax returns on the procurement of wheat from grain merchants including intermediaries. The rate is 4.5pc if the seller is a filer of income tax return.

As per constitutional provision, farmers are exempted from the levy of withholding taxes. Therefore, the sale receipts of agriculture produce are exempted from withholding taxes.

The 6.5pc WHT rate was too high for commission agents and intermediaries, one option being to lower the rates within the range of 2pc, say stakeholders

The issue of tax evasion came to the surface a few months earlier when the Large Taxpayer Unit (LTU) Islamabad sent show cause notices to two flour mills for non-deduction of withholding taxes. This created ripples among the millers who said that they would increase the flour price by Rs5 per kilogramme.

Since then, the issue has been on the back burner for two reasons: the fear that tax on turnover will push up prices of the staple, and that millers will have to improve their documentation process in order to avoid tax problems in the future. No change in documentation has been observed so far.

Former Chairman Flour Mills Association of Pakistan Shaikh Shabir told Dawn that his association members are deducting a10pc withholding tax (WHT) from commission agents on the purchase of wheat.

According to Mr Shabir the tax is deductible only on the commission amount of the agent and not on the total sales of proceeds. This, he said, needs clarification from the FBR.

Contrary to this, if the wheat is purchased indirectly from growers through intermediaries, flour mills are not required to deduct taxes. However, in that case, mills have to produce a certificate proving that the wheat was procured from growers. Almost all mills are claiming that they are directly or indirectly procuring wheat from growers to avoid the 6.5pc withholding taxes.

According to a tax official, the miller’s documents are not sufficient to prove that this is the case. It has been observed that in most cases, the intermediaries buy the commodity from growers at less than the official support price and sell it at a later stage at higher market rates. This practice has deprived growers from getting the right price for their commodity.

According to data, there are over 915 registered flour mills. The average annual turnover of each mill is estimated at Rs300m. On average, they are jointly procuring roughly Rs275bn worth of wheat annually.

Tax officials say that if the FBR enforces the law in its true spirit, millers would definitely retaliate. They say that the large flour mills in the Islamabad and Rawalpindi regions alone are believed to be avoiding roughly Rs3bn taxes annually.

According to some stakeholders, the 6.5pc WHT rate was too high for commission agents and intermediaries. They said one option was to lower the rates within the range of 2pc. However, for that, the government will have to issue a Presidential Ordinance, as the FBR has no powers to change tax rates through Statutory Regulatory Orders (SROs).

The FBR has excluded harvest and post-harvest months when farmers are normally selling wheat. Within three months, growers sell the wheat and the grain then moves into the investors’ hands — who sell it to the millers. Therefore, the investors must be subjected to a withholding tax, say FBR officials.

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. 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.

The commission agent is neither a farmer nor an investor; but can be used by all sides — even by investors to avoid taxes by going through him. The agent is a service provider: locates wheat and its owners, helps to decide rates between the millers and sellers and, finally, transports the commodity to where it is required for milling. The government needs to clarify or re-cast the role of the middle men before going any further.

Similarly, the FBR should also see who will bear the final shock of this turnover tax. It will inevitably be consumers since, if forced to deduct taxes without necessary steps and clarification, the millers will simply pass it on to the consumers.

The timing of this WHT will create additional layers of problems. 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 are the sellers.

With the market inching towards the drier side and wheat prices starting to go up, the WHT will become operational — adding to the cost, or at least providing the industry, with an excuse to hike flour price.

This also brings in the bigger question of wheat trade. The government exempted trade from WHT for twin purposes: exempting farmers and keeping the price of flour low. Once the WHT 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 the taxation regime smoothly.

Published in Dawn, Business & Finance weekly, September 12th, 2016