Mirpur: According to official documents from the Azad Jammu and Kashmir (AJK) government, seven oil and ghee manufacturing companies based in Mirpur, a southern district of AJK, allegedly imported crude oil worth approximately Rs. 110 billion under tax exemption schemes. However, a significant portion of this oil never reached AJK and was instead illegally sold in Pakistan’s open markets, causing massive losses to the national treasury.

Details of the Scandal

The documents reveal that one company imported crude oil worth over Rs. 27 billion between 2022 and 2023, while another imported edible oil worth more than Rs. 20 billion during 2021-2022. A third company imported crude edible oil worth Rs. 20 billion, and a fourth imported crude oil worth over Rs. 3 billion in 2021-2022 and Rs. 7 billion in 2022-2023. Another company imported oil worth over Rs. 4 billion, while a sixth imported edible oil worth more than Rs. 11 billion between 2017 and 2022. Records for a seventh company were unavailable.

Most of these companies were registered in AJK between 2014 and 2018, with the majority established in or after 2018.

Tax Exemptions and Legal Loopholes

Under Section D-65 of the Income Tax Ordinance 2001, manufacturing companies in AJK were eligible for a 100% income tax credit for the first five years of operation. This provision was abolished by the AJK government in 2021 but reinstated by the federal government for companies established before June 30, 2022.

Additionally, a 1995 AJK government notification allows manufacturing companies registered in AJK to claim an 18% sales tax exemption for the first five years. However, this exemption applies only if the crude oil is processed and packaged in AJK before being sold in the market.

Allegations of Misuse

Official documents suggest that most of these companies lack the required production capacity, and there is no record of large-scale oil and ghee transportation at excise checkpoints. Some companies reportedly registered as manufacturers solely to exploit tax exemptions, while their actual operations were minimal or nonexistent in AJK.

Instead of processing the oil in AJK, these companies allegedly sold the bulk of the imported crude oil in open markets across Pakistan, bypassing tax obligations. Documents also indicate that some companies misrepresented themselves as manufacturers to avoid higher taxes applicable to commercial importers.

Investigations and Legal Challenges

To address the issue, the AJK government formed a fact-finding committee on January 15, 2024, chaired by Commissioner Inland Revenue North Zone Ishtiaq Ahmed. The committee was tasked with investigating 17 key points, including verifying the companies’ manufacturing status, obtaining import details from Pakistan Customs, and inspecting production facilities.

However, before the committee could begin its work, one of the companies obtained a stay order from the High Court, effectively halting the investigation. Analysts suggest that the stay order may be a strategic move to delay or prevent the fact-finding process.

Economic Impact

The tax exemption scheme was designed to promote investment and create employment opportunities in AJK. However, officials and analysts argue that most companies registered in AJK only to exploit tax benefits without contributing to the local economy. As a result, neither investment nor employment opportunities materialized, while Pakistan and AJK suffered significant tax revenue losses.

This scandal highlights systemic flaws in tax exemption policies and their exploitation by businesses. The AJK government’s failure to enforce regulations has allowed companies to misuse tax benefits, causing billions in losses to the national treasury. The ongoing legal battle and stalled investigation further complicate efforts to hold those responsible accountable.