LAHORE: The scrap steel trade deprives the public treasury of a staggering 72 billion rupees per year by completely controlling the informal sector. Globally, steel products are made from iron ore, but after the closure of Pakistan Steel Mills, the industry uses scrap steel instead.

Even when PSM was operating, its effective production capacity was one million tons per year, while steel consumption in Pakistan ranges from 6.5 to 7 million tons. Half of this scrap (3-3.5 million tonnes) is locally available and an equivalent amount is imported.

Imported scrap is subject to a sales tax of 17 percent and an withholding income tax of 1.5 percent. Steel mills do not get sales tax adjustment on local scrap purchases and are forced to pay government taxes instead of the informal sector.

The current rate of local steel scrap is 130,000 rupees per tonne. Informal suppliers save Rs 22,100 per tonne on avoided sales tax and Rs 2,000 withholding on income tax. Thus, on one tonne, the informal sector saves 22.10 million Rs in sales tax and 2 million Rs in withholding tax on income.

On sales of 3 million tonnes discarded, the informal sector saves Rs 66 billion in sales tax and Rs 6 billion in withholding income tax. The state should devise a plan to bring these informal and wealthy suppliers into the tax net.

Almost 70 percent of the steel scrap is used to produce steel bars of various sizes for the construction industry. A great miller, Mian Rehan Aziz Chan, said the steel industry is operating under immense pressure due to various factors.

He understands the disruption of the steel sector supply chain due to the dominance of the local informal sector in its value chain. Second, it is at a disadvantage due to the steel mills established in FATA and PATA which are exempt from all government taxes and their products are inundated in the Islamabad and Lahore market. The third factor is the entry of sugar factories into the production of steel rebar.

Steel rolling mills are subject to sales tax and income tax based on their energy consumption. All the mills consume electricity from the grid.

The Federal Board of Revenue (FBR) has calculated that one million tons of billets (secondary raw material for steel rebar) consumes 700 units of electricity and for rebars the consumption is 811 units. The millers have no objection to this arrangement.

However, the industry is affected when FATA and PATA factories supply their products untaxed to markets where other factories are taxed.

This gives them an 18.5% advantage over factories that pay taxes. The concession granted to the FATA and PATA factories may be legal, but it denies a level playing field to factories that pay all government taxes.

The case of sugar mills requires the attention of the tax administration. All the sugar factories generate their own electricity from the waste of sugar cane after extraction of sugar and ethanol.

They are not connected to the national electricity grid. Some 10 to 15 sugar factories have replaced their inefficient low pressure boilers with high pressure boilers which have greatly improved their power generation capacities.

These steelworks commissioned steelworks based on the excess power available to them. Since these factories are not connected to the national electricity grid, the FBR has no way of judging their steel production.

It must be based on the production declared by the sugar factories. Steel mills are worried because it is customary in Pakistan for companies to dump their production if left to them and there are no controls.

The RBF should fix this problem. One possible solution is to tax them on the capacity of the plant (taking into account the average capacity utilization, November 15 to March 15 being lean periods, otherwise all factories are operating at full capacity).

Getting them into the proper tax net would be a daunting task, as sugar mills have a powerful influence in power lanes. Gradually, all the sugar factories would modernize their boilers and consume excess electricity in other companies put into service inside their premises.

It is essential that a fair solution be found before things get out of hand. In India, some sugar factories produce up to 100 MW by installing high-tech pressure boilers.

Bulk steel scrap is imported (mainly from Europe). It is packaged in a container. After Covid-19, the cost of containers nearly tripled from $ 200 to $ 550.

The landed cost of imported steel scrap amounts to approximately Rs 160,000 per tonne. The re-rolled bars are retailed at Rs195,000-205,000 per ton. Millers prefer imported steel scrap because the local scrap contains impurities like sulfur and other chemicals.

Steel production in Pakistan is one of the lowest in the world at 48 kg per capita against an average global consumption of 228 kg per capita. Pakistan is the world’s fifth largest importer of steel.

Yet Pakistanis use less steel in construction than global standards. For every ton of steel, 4 to 5 tons of cement are consumed. In Pakistan, 13 times more cement was used than steel consumed. Pakistan imports about $ 1.5 billion worth of steel scrap per year.