Significance of steel sector
and proposal for improvement
Steel sector plays a significant role in economic growth and development of a country. Empirical results provide evidence of a long association between steel production and economic growth. Per-capita consumption of steel is an important index for measuring economic development and standard of living of the people of a country.
Similar to other economies, steel sector is of vital importance for industrial progression, infrastructural developments and construction-related projects in that of Pakistan. An empirical study finds long-run causality between steel production and economic growth in Pakistan.
Steel sector in Pakistan is largely fragmented and has historically lagged behind the desired progression and self-sufficiency. Top 20 companies have about 80 percent share in the total market, and entities listed on the Pakistan Stock Exchange (PSX) do not have a significant contribution to the local steel-production capacity despite generating PKR 150 billion revenue in 2020.
Pakistan’s annual steel consumption is around 7.1 million metric tons (MTs) with per-capita consumption of 33 kg per annum, which is considerably low as compared to global average of 214 kg per annum.
Low per-capita consumption of steel indicates that there exists immense potential of growth in steel sector for Pakistan. As taxation policies have an impact on exploring potential in steel sector, the tax authorities have introduced various tax policies under the Sales Tax Act, 1990, (STA) to facilitate taxpayers operating in the steel sector. This article is structured to discuss tax policies under the STA for taxing steel sector in Pakistan and the challenges being faced in implementation of such policies.
The Steel Sector Manufacturing Processes
The steel-melting units, steel re-rolling units and composite units engaged in steel melting and re-rolling are the manufacturing units in the steel sector of Pakistan. The sector derives energy from electricity or through self-generation from other sources, including use of bagasse, coal, natural gas, furnace oil, etc. for producing steel products including ingots, billets, slabs and profiles. The electricity being a major input to steel sector is supplied by public power utility companies. However, electricity can also be produced by using LPG, coal, etc. A specific plant is required for the purpose of generation of electricity from coal.
Major raw materials used in steel production are iron ore, coal and steel scrap. Re-meltable scrap of various types is the basic raw material for steel melting, in addition to electricity to run furnaces for melting purposes; whereas ingot, billet and ship plate are the primary raw materials for re-rolling mills. Besides these inputs, some chemicals such as silicon manganese, ferro manganese, etc., along with bricks for furnace as consumable items/inputs, are used during the manufacturing of steel ingot and billet. Steel scrap or ingot/billet are procured locally or imported for domestic consumption by steel-melters and re-rollers, and the ship plates are also available locally from ship-breakers.
Pakistan’s steel sector largely depends on imported raw material as about 80 percent of total raw material consumed in the steel industry is imported and remaining 20 percent is locally purchased.
Steel products are primarily produced using either blast furnace or electric arc furnace/induction furnace. A blast furnace is used to make steel from liquid iron whereas an electric arc furnace is used to make steel from scrap material. Electric arc furnaces use two different types of electrical currents to create heat. Blast furnaces force air into the bottom of the furnace into a heated stove area.
Pakistan’s ship-breaking industry is world’s third largest, consisting of 132 ship-breaking yards, located across a 10- kilometre beachfront of Gadani, Balochistan. In the 1980s, Gadani was the largest ship-breaking industry of the world, with more than 30,000 direct employees. Now competition from newer facilities in India and Bangladesh has resulted in a significant reduction in output. Gadani, today, is producing less than 1/5th of the scrap it produced in the 1980s. Gadani now has around 6,000 workers and an annual capacity of breaking up to 125 ships of all sizes including supertanker with combined weight of 1,000,000 LDT (Light Displacement Tonnage). It is a major source of raw material. More than 80 percent of raw material used in steel sector is imported.
For the purposes of melting of steel iron scrap, induction furnaces of various sizes or various electricity frequencies are used; these are operated with electricity as the sole melting source. Induction furnace consumes less units of electricity when compared with an older technology called arc furnace as far as efficiency with regard to production is concerned. Arc furnaces are not used in the private sector in Pakistan now. It is worth mentioning here that steel melting and casting requires a temperature ranging between 1450ºC and 1650ºC. The furnaces produce ingots or billets. When molten steel is passed through a continuous casting plant, the product is called billet. A product having relatively even density with finished polished sides and corners results in lesser wastage when re-rolled. “Ingot” is a product when molten steel is poured in flat dies. Ingots can have a varying density with chances of air bubbles on a side and have rough sides with varying corners.
For re-rolling of the ingot/billet, two different steps namely re-heating and re-rolling are required. For the purposes of re-heating, ingots/billets are placed in a long room – almost 65ft in length – moving towards other end on a moving conveyor belt. Re-heating room is commonly operated with Sui gas or other burning sources, i.e. coal, coal gasification plants producing gas from coal, furnace oil. When ingot/billet reaches a certain temperature at which it can pass through the rolling mill and change shape, individual ingot/billet is pulled out of the heating room and run into a rolling mill. Re-rolling mill runs on electricity. As there is huge electric load variation at small intervals; maximum load when the ingot/billet passes through the roller and minimum when the rollers are running idle; rolling mills can only run on electricity and generator sets are not feasible. However, very small re-rolling mills making thin wire using re-rollable scrap may be operated by diesel engines for re-rolling which creates a possibility of loss of government revenue.
Suggestions for improvement
Serious policy interventions are needed to make the taxation regime equitable for small-scale manufacturers and large-scale manufacturers, production formula may be revised to make it competitive for small- and medium-scale manufacturers who are running re-rolling units only.
Strict vigilance and employment of information technology tools is inevitable to root out menace of fake and flying invoices.
It has been observed that the steel sector is a high-risk sector and it is not documented. In order to improve tax collection, it is necessary to introduce strict measures to ensure recording of financial transactions. Strict penal action should be introduced on violation of Section 73 of the Sales Tax Act, 1990. Special measures should be introduced to register the whole supply chain.
The powers of monitoring/inspection of sales tax record at the premises of the registered person lies with the commissioner under Section 38 of the STA which requires prior approval of the Commissioner Inland Revenue. Special legal provisions should be introduced to make spot-checking and routine verifications without employing Section 38 of the STA.
Posting of adequate number of enforcement staff and logistics is also very important to improve the monitoring of the manufacturers in relevant enforcements/IR Units holding jurisdiction of steel sector.
Electronic monitoring under Section 40C of the Sales Tax Act, 1990, to be imposed for tracking of production, sales, clearances, stocks for the registered unit of steel sector operating by sugar mills or other persons using self-generated electricity and the units not paying sales tax on minimum production and minimum value.
The melters and re-rollers employing self-generated power shall install a tamper-proof meter for measuring their consumption. Such meter shall be duly locked in room with keys in the custody of a nominee of the Commissioner Inland Revenue having jurisdiction. The officers of Inland Revenue having jurisdiction shall have full access to such a meter.
The minimum production of industrial units employing both distributed power and self-generated power shall be determined on the basis of total electricity consumption.
The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at firstname.lastname@example.org
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