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Highlights of Sugar forensic report

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Following are the highlights of the Sugar Forensic Commission report, constituted to find out those behind the sugar shortage and price hike of the commodity in the country.

Living up to his word, Prime Minister Imran Khan Thursday made the forensic report on the sugar prices public. His close aide Jahangir Tareen and allied partner from PML-Q Moonis Elahi, Omar Sheharyar, Omni Group and Sharif Group have been blamed for committing corporate frauds.

The forensic report uncovers the gross misconduct by sugar industry in the form of under-reported sugar sales, sale of commodity to benamidar (unnamed) buyers, double booking, over-invoicing, under-invoiced sale of bagasse and molasses which resulted in cost inflation and many other corporate frauds have been detected in the transactions of sugar mills.

The commission constituted by the interior ministry to carry out forensic audit of sugar mills has audited the record of six sugar mills including Prime Minister Imran Khan’s close aide Jahangir Khan Tareen’s owned JDW sugar mills, PML-Q’s leader Moonis Elahi’s owned Alliance sugar mills and Salman Shahbaz owned Al Arabiya sugar mills.

The report has highlighted that all of them have been found involved in committing corporate frauds to the tune of billions of rupees.

Benami transactions

According to the report, the quantum of sales transactions booked/invoiced to unregistered person by six sugar mills under forensic audit amounts to Rs150,217,451,253, which is 72% of total sales value during the aforementioned period.

The forensic audit shows that mostly the benami sales transactions are recorded against unregistered persons. Out of total sales of JDW Company of around Rs100 billion, ‘sale of around Rs. 71.8 billion is suspected to be benami transactions’ during the period from October, 2017 to February, 2020.

“Out of total sales booked/Invoiced of Rs723,491,913,194 by all the sixty six (66) sugar mills in the country, the quantum of sale transactions/sales booked/invoiced to unregistered persons/buyers during the period from October, 2017 to February, 2020 comes to Rs.517,272,369,222 (71 % of total sales value), as per FBR’s data”, the report says.

The analysis of sales transactions for October, 2019 to February, 2020, as represented in the tables below, depicts that same pattern of booking sales transactions to unregistered buyers is continuing in the current period as well. The details are as shown below:

During this brief period of five months, suspected benami transaction of Rs.20.5 Billion have been detected in case of six Mills under forensic audit, these transactions are made in the name of persons who don’t have any tax record.

The entire sugar industry declared total sales of approximately Rs. 124 billion; out of this Rs43 billion were sold to the registered persons. If the sales made to Income Tax registered persons worth Rs14 billion is taken out, then the rest of Rs58 billion sales have been made to unregistered persons who are suspected benamidars.

Similarly, the report highlights that the less production has contributed very little in the price hikes of sugar. Other factors like market manipulation, hoarding and practice of “Satta” were also responsible for price hike. The difference between sugarcane produced and crushed is significant. Significant quantity of this gap can be attributed to the off-the-book purchase of sugarcane and resultant off-the-book production of sugar. This factor is amply supported by the evidence gathered during the forensic audit of most of the sugar mills under audit.

“Although, modus-operandi of sugar mills under audit is different which is discussed in detail in later part of the report, the quantity of sugar, which is produced and sold off-the-book, is neither counted towards the GDP nor any tax is paid on this quantity.

The cost of production of this unaccounted-for quantity is, however, counted towards the cost of sugar produced and shown on-the-books. Resultantly, the cost of sugar production and the ex-mill price of sugar is shown to be higher than the actual and, therefore, the profit is shown less than the actual. This exaggerated cost of production also lays down the basis for the exaggerated claims of subsidy for export”, the report says.

The report also highlights that the calculation of production cost of sugar is overstated as the reported cost includes expenses on activities that have not been incurred on the production of sugar and are based on principles contrary to the principles of the International Financial Reporting Standards (IFRS).

Cost of production

“Major discrepancies in the calculation of production cost results in substantial overstatement of costs to the tune of Rs.53.187 billion (only for 6 sugar manufacturing companies in sample), thereby, resulting in overstatement of margins and eventually the ex-mill prices. Furthermore, the current practice as adopted by the PSMA In calculating the ex-mill price initially loads the ‘sales tax’ to ‘cost of production’ followed by margins, resulting In allowing excess margins (over the sales tax value) embedded in the resultant ex-mill price.

Lower payments to farmers along with deductions on the weight of sugar cane results in “off the books” purchase of sugar cane which eventually results in “off the books” production and sale. The proceeds of the extra production remain un-taxed, as well as, the unaccounted for sugar production, alters the production cost”, the report says.

Market manipulation

About the market manipulation, the report says there is ample evidence of market manipulation for profiteering by certain sugar mills through forward contracting, non-lifting of sold sugar and facilitation to the selected brokers who indulge in “Satta”.

Although there are clear indicators that cartelization exists, the main regulators i.e. CCP has remained a silent spectator since its report on cartelization in 2009. The issues prevailing in the sugar industry have been contended since 2009 and are not an unfamiliar matter.

Negligence of CCP

“The CCP had ample prior instances that provided the queue for taking preemptive actions. The last action of the CCP in respect of sugar mills was in 2009. During the price hike of sugar in 2019, no intervention was made by the CCP to address the abuse of market dominance, and/or anti-competitive marketing practices despite extensive powers conferred under the Competition Act, 2010”, the report says

Impact of increase in tax on sugar prices

The report has also highlighted the impact of increase in tax on sugar prices. “The Increase in tax impact is Rs3.6 per kg due to the increase in rate of GST to 17%, after 14, July 2019. The real increase in the retail price occurred between December 2018 to June 2019 when it went up by about Rs16 per kg.

Similarly, the major increase in ex-mill price occurred between December 2018 to June 2019 when it increased by almost Rs. 12 per kg which is from Rs51.64 to Rs. 63.59 per kg. This period saw no increase in sales or other taxes and the price of sugarcane, the major input, was also stable.

The Increase in retail price between July 2019 to January 2020 is from Rs 71 per kg to Rs 74.64 per kg, the data, therefore, does not show any major effect of GST on retail price”.

Hoarding of sugar

According to the report, there is sufficient evidence of hoarding of sugar at the level of sugar mills in connivance with brokers/investors. The sugar mills facilitate keeping the sold stocks hoarded in their godowns, which leads to undue profiteering. Despite the availability of relevant laws (Registration of Godowns Acts in Punjab and Sindh), no data of stocking of the sugar, by the stockists or the sugar mills, is being maintained by the Provinces.

Sugar export to Afghanistan

“The data from FBR shows that Pakistan exported 2,355,613 metric tons of sugar to Afghanistan from January 2015 to to-date. In order to verify the export figures, the data was obtained from the Afghan Government.

According to their data, Pakistan exported 1,577,232 MT of sugar to Afghanistan in the said period, with a difference of 778,381 MT.

The commission, approached the Afghanistan authorities, via Foreign Office, for provision of sugar transit data from Pakistan to Central Asia through Afghanistan. The Afghanistan Government has provided the transit data, which shows that 697,455 MT of sugar from Pakistan has been exported to Central Asia through Afghanistan. This leaves an unreconciled figure of 80,926 MT between the export data figures of Pakistan and Afghanistan. The data table below explains the year-wise break-up of exports from Pakistan to Afghanistan”, the report says.

Subsidy Vs direct tax paid by sugar mills

“Another Interesting aspect of analysis on subsidy is that the sugar sector, with an average annual turnover of around Rs350 billion, received a subsidy of more than Rs. 29 billion from January 2015 to-date.

During the 2013-14 to 2018-19, they paid direct taxes of Rs. 22.37 billion; claiming a refund of Rs. 12.03 billion at the same time. Whereas the tax demand created by the FBR against the sugar industry is Rs13.58 billion. In other words, the sugar Industry’s contribution to the national exchequer is in the negative due to the subsidy availed”, the report says.

Negligence of SECP

According to the report, the record sought from the SECP revealed that the books of accounts and financial statements of the mills were not reviewed, checked, examined, inspected, or investigated by the SECP, which is a serious negligence on part of the Corporate Supervision Department and Corporatization & Compliance Department of SECP. Despite the fact, that the price hike of sugar has been a nationwide concern since 2019, the SECP did not initiate any regulatory and enforcement action that could have saved the general public from continuous profiteering by all the Sugar Mills (Private and Public).

Who are benamidars of sugar mills?

According to the report, for the period October 2017 to February 2020 total sales of sugar in Pakistan was more than Rs. 723 billion and 71% sales (Rs. 517 billion) of all Sugar Mills are benami sales transactions against CNICs of unregistered “benamidars” mostly truck drivers, loaders, employees of the mills or dummy fictitious persons, who are unaware of such transactions booked/invoiced in their names.

“Even after the introduction of the requirement of CNIC for unregistered sales, still the pattern of unregistered benami transactions continues. For the period October 2019 to February 2020, 06 sugar mills selected for forensic audit reported sales amounting to Rs. 20.5 Billion (57% of the total sales) are made to un-registered buyers which are suspected benami sales transactions.

Similarly, the entire sugar industry for the aforementioned period has made suspected benami transactions of Rs71.054 Billion during the same period.

Sales transaction used in “Satta” are benami transactions and, as discussed in TOR (g) on forward contract, these are used for market manipulation, Price hike and profiteering.

Benami sales are major obstacle to the documentation of Pakistan’s economy for government authorities like FBR to check the tax evasion and other malpractices of the industry. Benami sales transactions are facilitating the parking of undocumented/ illegitimate money in the regular documented business sectors”, the report says.

Meanwhile, the Federal Cabinet Thursday made public the 350-page forensic audit report. Prime Minister Imran Khan summoned a special cabinet meeting to deliberate on various aspects of the inquiry commission’s findings and recommendations.

The report revealed that major sugar mills’ groups under-reported sales and committed fraud using many tactics. Based on the mills record and other related information, ex-mill price of sugar per kg was shown Rs51 in 2017-2018, whereas it was actually Rs38, in 2018-19, it was recorded Rs52.05, whereas it was Rs40.06, and during 2019-20, it was shown Rs62, whereas actually it was Rs46.04 per kg. Likewise, they would buy less sugarcane and show in record more to manipulate prices.

It was found out that all these violations, irregularities, and manipulations were done with the collusion of the government departments. The meeting was briefed by Director General FIA Wajid Zia about the findings.

Briefing journalists after the cabinet meeting chaired by Prime Minister Imran Khan, Minister for Information and Broadcasting Shibli Faraz said the government was firmly committed to accountability and ensuring transparency in governance.

Shibli was flanked by Special Assistant to the Prime Minister on Accountability Shahzad Akbar and SAPM Shahbaz Gill. During the meeting, the prime minister directed the advisors and special assistants to share details of their assets, the information minister said.

Shibli noted that in the past in case of sugar and flour crisis, only lip service was paid and no practical measures were taken to address the problem and trace and fix the culprits. He said the prime minister ordered the inquiry, as the common man was the main victim of this loot and plunder.

Speaking on the occasion, Shahzad Akbar said the constitution of a forensic inquiry commission was very important in the history of Pakistan, as no government ever made such commissions in the past.

He said the commission was established to ascertain reasons for increase in sugar prices in the last couple of years. He said they were heading in the right direction and it was just a beginning to rid the system of such elements.

Shahzad pointed out that the commission also found irregularities in the form of giving advance payments to farmers in the form of cash or commodity, which is akin to unregulated banking and they earned up to 35 per cent profit.

He said a subsidy of Rs29 billion was given to the sugar industry in the last five years, while it was found that the total income tax of around 88 sugar mills was just Rs10 billion, after getting tax refund. He said six big groups of Pakistan had 51 percent share of sugar industry and forensic audit of these mills was done by the commission.

The report also traced a broker, who was paid Rs6 billion and the mill could not respond to the inquiry, as to why this massive amount was paid to him. Likewise, the mill under-reported sugar sales for several years and sold sugar to unnamed buyers and among other violations, the report mentioned violations of the Pakistan Penal Code.

He said it was the first time that an “independent inquiry” had been conducted into the cost of production. He said in 2017-18, the sugar mills determinedthe cost of production at Rs51 per kilo whereas as per calculations of the commission, it was estimated at Rs38 instead. Similarly, in 2018-19, sugar mills gave cost price of one kg at Rs52.60, while the report gave an estimated cost of Rs40.

The SAPM said the report also pointed out that the sucrose content as shown by the Pakistani mills owners (9.5pc to 10.5pc) was less than the international standard. He said on the one hand, inflated cost of production and market manipulation were being done, on the other hand accounting fraud was also being committed by the sugar mill owners.

Shahzad Akbar said the report of the commission had also shown that mill owners were maintaining two account books – one for the government and the other for selves. There is an under-reporting on sugar procurement up to 25-30pc, which was a scandal, as no tax was evaded because of this factor.

Akbar said the report revealed that the Omni Group in Sindh had specifically benefited from the subsidies given by Sindh Chief Minister Murad Ali Shah. The Group was already getting subsidies from the federal government, but the Sindh government gave it additional subsidy.

Shahzad Akbar said the commission had recommended strengthening of the regulatory framework and pushing the regulators to perform their assigned duties. The commission said the failure of regulators right from the role of Sugarcane Commissioner up to the policy making level was quite obvious.

The commission recommended rectifying the gaps and shortcomings in this regard. Any fraud in sales tax by a sugar mill was impossible without the connivance of Federal Board of Revenue (FBR) representative deployed at each sugar mill, he said. The delivery, sales, purchase mechanism of sugar mills should be regulated, as there was no authentic record of sale, export, purchase or even production of a sugar mill was nonexistent.

He said the federal cabinet had decided to arrange the recovery of the looted money from the sugar mills. Recommendation in this regard would be finalized after Eidul Fitr and the task has been assigned to him by the prime minister.

On the direction of prime minister, timelines would be given to various investigating bodies, including NAB, FIA, and anti-corruption. He said the commission had determined the price of sugar by giving sugar mill owners 15 percent margin of profit, whereas the mills were looting the farmers by showing 15 to 30 percent less weight and not giving them proper receipts of purchases.

He added over Rs100 billion was earned this year by sugar mafia as windfall profit by market manipulations. Most of the sales were Benami including in the names of truck drivers and servants and others devouring taxes. Most of the mills commit fraud in paying sale tax.

He said the crushing capacity had been enhanced by various mills without getting approval from the relevant authorities. He explained that the weightlifting capacity of a truck was 15 to 20 tons, whereas the sugar mills invoices showed each truck carried 70 tons to 80 tons sugar to Afghanistan. Shahzad Akbar said none was recommended for placement of name (s) in the ECL, but the government would consider, if and when the probing agency so requested. 

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