Tuesday December 06, 2022

Zero-rating mantra

November 25, 2022

LAHORE: The economic planners must investigate whether zero-rating suits the textile industry or the bureaucracy that has been deprived of its discretion to withhold sales tax refunds after its withdrawal.

It is an established fact that in almost all cases where citizens or businessmen come in contact with bureaucrats for resolution of their issues, they must grease their palms. Even a peon expects some gratification for letting a person enter the office of his boss even if his/her doors are officially open to everyone.

In tax matters, various efforts have been made in the past to minimise the contact of taxpayers with the tax collectors. E-filing of sales tax was introduced quite some time back. It is still in vogue.

E-filing does not impact those sales taxpayers that have no sales tax claims. But it does impact exporters that claim refunds after exports are executed.

Exporters have a point when they argue about the logic of deducting sales tax first on their inputs and then refunding it after exports are executed. But the matter is not as simple as they portray. Sales tax zero-rating the entire value chain of textiles must be granted to ensure zero-rating. But the same value chain also supplies goods and services to the textile sector that serves the domestic market.

When zero-rating is granted to the entire textile sector, the sales tax collection from domestically consumed textile products declines to a trickle. Domestic consumption of textiles is considerably high.

About seven years back, a leading English daily estimated the value of textile brands to be over Rs400 billion. The turnover of textile brands now must have exceeded over a trillion rupees.

Branded fabrics or lawn and apparel are consumed by elite and middle class segments of the society that are hardly 20 percent of the population. The majority buys non-branded textile products. Since these products are cheaper, it can be assumed that the turnover of textile products consumed by 80 percent of the remaining population would be Rs2 trillion per annum. The government must generate a sales tax of Rs10 billion from domestic textile consumption. Currently, it is not collecting even 1/3rd of this amount. When zero rating was in vogue four years back, the sales tax collection from domestic textiles sales was less than Rs50 billion.

Former chairman of the Federal Board of Revenue chairman, Shabbar Zaidi withdrew zero-rating facility from exporters and asked them to pay sales tax first, which would be automatically refunded within 72 hours after realisation of export proceeds. He worked hard to ensure development of a software that ensured prompt refunds, provided the documented evidence of sales tax paid was submitted by the exporter. The system operated smoothly for a year or two before complaints of delay in refunds started increasing. Perhaps someone tinkered with the original software.

Such delays forced exporters to seek the help of the sales tax staff. This in fact was a return to the past practice, when sales tax was released after the payment of a certain percentage as refund.

The government should launch an in-depth probe in this regard and restore the software introduced by Zaidi. Otherwise, the demand to restore zero-rating would gain momentum.

Planners must realise that the genuine sales tax refunds would have to be made, but if the system continues to malfunction some of this amount would go to the rent seeking bureaucracy. The government would also lose most of the sales tax it generates from the sales of domestic textiles.