The authenticity of data is a major problem in determining the quantum of production in different sectors of economy and to make matters worse Federal Board of Revenue (FBR) is badly strapped for capacity or the will to bring to book those tax evaders, whose information is available with it, resulting in depressed revenue generation.
Textiles, for instance, is the largest industrial sector of Pakistan’s economy. No one has the exact information about the total production of yarn and fabric in the country. In fact, most of the fabric is produced in the informal sector by power looms.
All Pakistan Textile Mills Association (APTMA) evaluates total production of these items on the basis of cotton and polyester fiber consumed by its members. The data for mills that are not APTMA members is also not available. Then smuggled yarn is imported in substantial quantity that is not accounted for in Aptma or official statistics. Hundreds of tons of fabric, imported in stock lots, are also unaccounted for.
The textile commissioner office has even less data on textile production. This is the reason that there is a dispute between Aptma and the FBR on the quantity and percentage of textiles consumed in the domestic market.
The zero-rating on exports was withdrawn because the tax authority thinks that this facility was misused by exporters in order to avoid sales tax on domestic consumption of textiles.
The sales tax collected from the domestic sales of textiles in local market was nominal when compared with the assessment of both, the FBR and textile millers, about the consumption of textile products in the domestic market.
The Prime Minister has categorically told the chairman of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) that zero-rating facility would not be restored. The exporters are now asking the government to reduce the sales tax rate to 7.5 percent. There is no indication that even this demand would be accepted.
There is no doubt that there has been a mushroom growth of ladies’ clothing brands in the last one decade. It started initially at small scale by designers, who later started outsourcing the mass production their designs to small scale manufacturers. The success was instant and the price these designer lawn fabrics were fetching was several times higher than that of similar unbranded fabrics produced by larger mills.
About six years back media reports estimated that the total sales of these brands exceeded Rs500 billion. No one from textile sector disputed these reports. At that time the two larger brands were Breeze and Khaadi. It was during the last government when the largest textile groups started introducing their textile fabric brands for the ladies. They in fact were constrained to explore the domestic market as the exports were drying gradually. And further enhancement of textile exports in basic textiles looked bleak.
There are more than a dozen big textile players who have entered the domestic market with a bang as almost each is now operating with 100-150 outlets established around the country. They are expensive and other than fine cotton textile fabrics they also market their own brand of artificial jewelry and shoes.
They business is flourishing and the sales of these posh outlets are very high. In fact, without average sales of over Rs150,000 in fabric only these outlets could not survive commercially. In order to have their presence registered these brands have established shops in posh shopping plazas. They are doing this just for the sake of their prestige despite the fact that their sales at those high-end malls do not even match the cost.
By a very conservative estimate the 12 largest brands now command a market of around Rs200 billion. In the meantime, the sales of brands established earlier have increased by the same amount as they continued to innovate and add more customers in the past five years. The combined sales of the largest brands and over 150 smaller brands have reached Rs900 billion a year. Add to this around Rs300 billion worth of sales of other textile products like home textiles, men’s wear, and children’s wear, the total domestic textile market has increased to around Rs1.2 trillion even by most conservative estimates. This includes products made from smuggled and under-invoiced fabrics as well. The federal government has earlier imposed 5 percent sales tax on domestic textiles sales but this year it expects to end up with approximately Rs14 billion only from domestic sales. In reality the sales tax under this head should have been Rs60 billion at least.
The economic planners think that as most of the larger players are both in exports and domestic markets they took an undue advantage of zero-rating facility. They have to now pay sales tax first and then get a prompt refund after exports but sales tax from domestic sales would exceed Rs204 billion. This is Rs190 billion higher than the sales tax the state got this year.
The writer is a staff member