CASE STUDY # 3 -

MEHRAN SUGAR MILLS (Pvt.) Limited

INTRODUCTION:
Mehran Sugar Mills is a private limited company, managed by an experienced business group
and is run as a Seth Company. It is engaged in the business of buying sugar cane from
agriculturists, agents, and wholesalers for its in-house manufacturing of sugar. The sugarcane
(an agricultural produce) is received from the agricultural fields of the adjoining areas of Tando
Allahyar, Tando Jam, Tando Adam transported through ordinary trucks and trolleys. This raw
produce is washed with water and crushed to yield Sugar Cane Juice and Bagass. The juice
produced in this process is used to produce two main products after chemical treatment,
namely, Molasses and Crystalline Sugar (C12H22O11). In addition to the manufacturing of these
products, residue is produced during filtration, which can also be used as a fertilizer. Sugar is
usually sold in the open market for consumption in Pakistan. Molasses is a low value product,
which can be used as a raw material for manufacture of Alcohols [(Methyl/Ethyl (liquor)].
However, socio-political environment in Pakistan does not permit industrial production and sale
of liquor. It is, therefore, exported in bulk by specialized exporters viz: Molasses Export
Corporation. Molasses produced in the sugar production is transported in vessels/tankers to
the Bulk Cargo Terminals at Karachi Ports and Port Muhammad Bin Qasim, for temporary
storage in huge tanks. It is later exported in the bulk cargo vessels.

Disclaimer: The case studies developed use hypothetical names and data and are meant for practice and learning only.
These case studies are intellectual property of Abdul Majid Yousfani. These can be freely used for teaching and research, provided the
source thereof is duly acknowledged. Should you need to use it for any purpose other than teaching or research you need to seek express
written permission of the author.

The supply of Sugar and Molasses is chargeable to sales tax under sub-section(1) of section 3
of the Sales Tax Act, 1999. However, the tax charged on the supply can be reclaimed by a
registered taxpayer other than a retailer or an enrolled person. The tax charged on supply of
Molasses is claimed by the exporters as refund.
PROBLEM AREAS:
The sugar industry faces pressures from associations of agriculturists, Government and
international competition. Local growers urge the sugar industry and Government for fair price
of their agricultural yield through political pressure and occasionally resort to agitation.
Government has usually attempted to regulate the industry through provincial legislation and
fixation of support price for sugarcane. However, the industry resents and sometimes denied to
buy the farmers produce creating pressures on the price of the commodity. International price
of crystalline sugar and Molasses have reflected a declining trend over the last decade. The
abundant production of sugarcane and gains in productivity has further elevated pressure on
the price of the commodity. The agriculturists and their associations have organized against
the industrialist creating political pressure and urged the Government for increase of control
and regulations on the industry.
IRRITANTS OF TAXATION:
The sugar industry uses Bagass produced during crushing of sugarcane is being utilized for inhouse consumption with a view to save on the energy demand and cost of the manufacturing
process. Bagass is charged to sales tax under sub-section (1) of section 3 of the Sales Tax
Act, 1990 read with sub-clause (a) of clause (33) of section 2 ibid and no exemption is
available under section 13 read with Sixth Schedule thereof. The industry had not been paying
sales tax on in-house consumption of Bagass for quite sometime as against the interpretation
and contention of the sales tax administration and Central Board of Revenue. Cases were
made out against the industry by the tax administration for recovery of sales tax on in-house
consumption of the product. Realizing the nature of supply, CBR has also fixed out the value of
supply of Bagass for determining the tax liability of the registered persons in the country [see
SRO 178(I)/2002, dated 11th February 2002].
SCENARIO:
M/s. Mehran Sugar Mills filed a tax return on 16th January 2003, in respect of the purchases
and supplies made by them during the month of December 2002, reflecting the following
details:
S#
1
2
3
4
5
6

DESCRIPTION
Exempt Purchases
Taxable Purchases
Taxable Supplies
Exempt Supplies
Tax Due
Tax Paid

VALUE
24,835,711
1,000,000
10,000,000
100,000
150,000
150,000

Disclaimer: The case studies developed use hypothetical names and data and are meant for practice and learning only.
These case studies are intellectual property of Abdul Majid Yousfani. These can be freely used for teaching and research, provided the
source thereof is duly acknowledged. Should you need to use it for any purpose other than teaching or research you need to seek express
written permission of the author.

Computer selectivity criteria of the exception reports for Sales Tax Administration generated
the name of M/s. Mehran Sugar Mills, including other taxpayers, who failed to discharge full tax
liability in respect of the tax period under consideration. Accordingly, a show cause notice was
issued to M/s. Mehran Sugar Mills under section 11 of the Sales Tax Act, 1990 calling upon
the taxpayer to explain to produce the details of the purchases and supplies made during the
month of December 2002 and as to why a penalty should not be imposed upon them for late
filing of the tax return without prejudice to the demand of additional tax under the relevant
provisions of the law. On production of the requisite documents, it transpired that the
registered taxpayer consumed 1,000,000 Kg of Bagass during the tax period without payment
of sales tax thereon. The exempt supplies were made those of Residue produced during the
last crushing season and were purchased by a local orchard for treatment of land having PH
value in excess of the normal.
The assessing officer is also considering recommendations to be placed before the Collector
of Sales Tax having jurisdiction in the case of the registered taxpayer for thorough audit for the
period January 2000 to December 2002.
SUGGESTED QUESTION:
1.

Compute the tax liability of the registered person in this case. Compare it with the figures
reflected in the tax period December 2002.

2.

Point out the contraventions of the provisions of the Sales Tax Law in force in Pakistan?

3.

What are the possible consequences of the contraventions highlighted in the above
question?

4.

What are the options available to the taxpayer? Were you a Defence Counsel for the
taxpayer what will be your stand.

5.

What will you suggest to the taxpayer for removing the irritants relating to the tax matters
with the aim to minimize the litigation costs?

6.

What records need to be prepared for the expected audit?

7.

What are your recommendations of the strategy with regard to the proposal for audit of the
taxpayer being the consultant of M/s. Mehran Sugar Mills?

Disclaimer: The case studies developed use hypothetical names and data and are meant for practice and learning only.
These case studies are intellectual property of Abdul Majid Yousfani. These can be freely used for teaching and research, provided the
source thereof is duly acknowledged. Should you need to use it for any purpose other than teaching or research you need to seek express
written permission of the author.