Wednesday, January 8, 2014

Treasury loses Rs1B month or more from the frauds in Alcohol Excise

I have been following the massive smuggling of Ethanol, that has recently come to light, but which has been happening for a while. On further study, it is quite apparent that the 5 largest alcohol producing companies that pay the bulk of the taxes to the Inland Revenue and Customs and Excise are NOT involved, especially as they have a lot to lose if they get caught and fined, and their factories sealed.

So it the second tier legal alcohol producing companies like ACME and those owned ostensibly by Johnston Fernando interests that are the likely beneficiaries of this fraud. The investigations are continuing and I am told that the Customs have only cottoned on to this fraud recently, and hence the intensity of raids, and as a first step, transferred their officers around with effect from January 1st. Those who are too familiar and on the take will be out of their comfort zone and others can pick up on the fraud. 

The Govt. loses revenue twice, first on not receiving the appropriate duty on the import of the ethanol, the basic ingredient for most alcoholic products, and secondly when the bottles are sold the tax charged is not paid, as these bottles do not get recorded. Any intelligent person will tell you that the way the inspectors check if something is wrong, is that they extrapolate how much a company must produce in bottles depending on the Ethanol used. Legitimate ethanol has been subject to the duty, and so one can calculate the duty payable. When smuggled ethanol is used in production, the bottles produced can leak through the system without getting caught.

The excise inspectors at the distilleries must therefore resort to different techniques to discover this. It has now become a cat and mouse game where the mouse the illegitimate crook is winning, and the Govt. cat is chasing around trying to find the mouse, but cannot even find him. It is too sophisticated for the bootleg industry to import ethanol, and so it is definitely the small distiller who is involved in the massive scam. One who has vertical integration into owning the proverbial “wine stores” is even better able to conceal their work, raking in billions for themselves.

The Govt. is short of funds, some excise taxes have fallen, even after rates have gone up and production and consumption are up too, so everything depends on the ability to have incorruptible excise staff, using their brains to discover the bandits, and have them prosecuted and fined, effectively to make them bankrupt  

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