FBR advised to revisit sales tax zero-rating for textile exporters

KARACHI: Tax managers advised the Federal Board of Revenue (FBR) to revisit the sales tax zero-rating facility for the five exporting sectors, including the key textile, as the scheme is stymieing the revenue collection, officials said on Saturday.

Zero-rating, reintroduced in the budget 2016/17, brought the revenue collection from textile sector, which accounts for more than half of total exports, almost to standstill, said Large Taxpayers Unit (LTU), Karachi – the largest revenue collecting unit – in various meetings with the Federal Board of Revenue (FBR).

In July, the FBR reintroduced the sales tax zero-rating regime for five export-oriented sectors: textile, leather, carpets, surgical and sports goods, under which five percent sales tax is chargeable on supplies of locally-made finished article to retailers.

Officials were unable to calculate the revenue loss quantum due to the zero rating. They said revenue collection growth is declining and zero-rating was one of the main factors.

Officials said there is no hope of an increase in revenue from the textile sector due to a large number of unregistered retailers.

Previously, different sales tax rates were implemented on the various stages of purchases of raw materials by textile sector. 

Government introduced ‘no payment-no refund’ as sales tax refunds were piling up, causing liquidity shortage for the registered taxpayers. Subsequently, the entire supply chain was granted zero percent tax rate, while only 17 percent sales tax is applicable on the sale of finished products or at retail stage.

Since registered retailers are nominal major revenue has already been lost.

A tax official, making a comparison, said previously around five percent sales tax was imposed on sale of fabric (raw material) to the unregistered segment. “At present, this five percent has also been abolished,” the official added.

The FBR was also proposed of increasing vigilance on the unregistered persons. The official said it was not possible for the tax authorities to bring textile retailers into the net.

Officials said refunds were moving up despite the zero-rating regime as inputs for manufactured products couldn’t be adjusted with output or sales to end consumers in the local market.

Besides, the revival of sales tax input adjustments with the provincial revenue authorities also resulted in refunds.