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January 12, 2018

Lessons from a doomed sector that once loomed large


January 12, 2018

LAHORE: For businessmen, there’s a great lesson to be learnt from the fate of Faisalabad power loom sector that almost vanished from the industrial-scape of ‘Pakistan’s Manchester’ because those wayward weavers never cottoned to the idea of coming under the tax net.

Before collapsing for good, they struggled and survived in the face of inefficiencies and extremely low margins for years; yet there was a time when these power looms were the major source of fabric for the value-added sector.

In fact for a long time power looms produced more fabric than the weaving mills of the country. They stayed off the tax grid till their closure. They used yarn bought from the famous yarn market of Faisalabad that paid no taxes at all.

These yarn merchants seldom operated bank accounts and dealt in cash only. When the governments started tightening screws the spinners came to their rescue and paid punitive additional tax on their behalf without disclosing their identity.

Now the game of tax avoidance is coming to an end. The sales of yarn merchants have nosedived. Imported yarn is making inroads in the country rapidly. Power looms closure has already deprived them of their main market. Still the yarn merchants are moneyed people and they have the option to invest elsewhere.

The power looms owners despite remaining outside the tax net have not accumulated wealth. Around a million powers loom operators competed fiercely with each other. Every penny they saved by evading tax went into competition. They also operated on thin margins compared to the purchasers, who had option to choose from numerous fabric producers.

They did not upgrade their machineries. In fact when the large weavers started introducing shuttle-less or air-jet looms, small investors purchased outdated machines and started small-scale setups at their residences. They paid higher power tariff and income tax on power bills, while the documented weavers were exempted from these taxes.

As the cost of doing business started rising for the inefficient spinners, the orders for custom-made fabrics started falling and with each decline they were forced to cut down their already thin margins even further.

They survived for a while because most of the labour was provided by the family; however they could not last for long. The now defunct power looms, once bought for a fortune, are now being disposed of as scrap. Ironically even junk dealers are refusing to buy these looms.

Had these looms been paying taxes, they would never have operated on extremely thin margins or bought redundant machines. We can say the documented upgraded weaving sector would have flourished and textile troubles eased if weavers had chosen to pay levies.

There are numerous production houses outside the textile sector that are not in the tax net. They compete with each other in the same way as the power looms did. They are not scaling up and are feeling the pinch of high nonrefundable sales tax and income tax on their power bills. Some may have resorted to power theft, which is even a more serious crime. But this would not last long.

Technology would soon unearth most of the tax evasion. After living a comparatively better life for years the undocumented manufacturing sector is actually laying the future livelihood of their families on the line.

The ‘doing’ will definitely become too tough for them to get going as the days of reckoning are drawing near.

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