No option but to withdraw zero rating, textile sector told

ISLAMABAD: The government has decided to withdraw zero rating for export industry (textile, leather, carpet, surgical, and sports) arguing that it has committed with the IMF to reverse this facility.

The economic team has told textile industry representatives in plain words that under IMF commitment and to achieve the target of Rs5.5 trillion, it is not possible to extended the zero rating to the export industry. However, Adviser to PM on Commerce, Textile, Industries and Production and Investment Razak Dawood kept on advocating for the industry arguing withdrawal of zero rating SRO does not make the sense. Razak Dawood also suggested that the government should make a statement in the upcoming budget that SRO 1125 would be modified to ensure that there is no tax evasion but certainly not state that zero rating would be withdrawn.

The government wants to collect Rs600 billion, a representative of the industry responded, from the textile industry in the head of sales tax to show case before IMF the improved revenue outlook on way to achieving the target of Rs5.5 trillion, but this step will choke the export industry. The 70 percent export industry that is in Punjab will die down as it is already facing the huge liquidity issue as the FBR has already failed to pay back the huge refunds to the industry and under the new decision.

This was crux of the day-long marathon meetings of high-level delegation of All Pakistan Textile Association (APTMA) with government economic team in the Finance Ministry held on May 28, 2019. The morning session continued for two hours till May 11.30 and the two hours long second session held from 4.3- to 6.30 pm.

According to the minutes of the May 28 meetings exclusively available with The News, a govt team member informed the meeting saying that the government has decided to withdraw the zero rating SRO 1125 as it has been committed with the IMF. He went on to elaborate that despite domestic sales of textiles of over Rs2 trillion only Rs10 billion was collected as sales tax and that this situation could not continue.

A minister backed the member’s stance, saying that the pulling out of zero rating would also help FBR meet the IMF set target of additional collection of Rs1.5 trillion in the upcoming financial year.

However, Razak Dawood acknowledged, the copy of the minutes says, the extraordinary progress in quantity terms logged by the textile sector and stated that he was not in favour of withdrawing zero rating as that such a move would have disastrous consequences. He stated that collection and then refund of over Rs600 billion for the sake of recovering just Rs30 to Rs40 billion of sales tax on domestic sales while incurring additional costs of over Rs150 billion just did not make sense.

The industry representatives explained to the meeting that the total production value of these sectors is $18 billion out of which 70 percent or $13 billion equivalent is exported. Domestic sales are worth only $5 billion on which total tax for 2019/ 2020 at an exchange rate of Rs150 would be Rs37 billion for which enforcement is needed at the retail stage. “FBR should not withdraw zero rating and make export sector deposit Rs600 billion just because FBR cannot implement and monitor sales tax on domestic sales of Rs37 billion at the retail stage. Last year the total sales tax collection from retail was Rs10 billion at exchange rate of Rs110/ dollar whereas the liability of $5 billion domestic equivalent was Rs27 billion.”

He clearly said that industry simply did not have liquidity of Rs600 billion to pay the sales tax and then await payment of refunds. The refund cycle with best of intents would take 6-8 months.

The textile representative argued saying that the track record of the government whether Finance, FBR or State Bank was extremely negative as far as refunds are concerned which have been delayed by many months and even years in certain cases.

He clearly warned the government saying under the current circumstances industry would collapse if further liquidity is mopped up by the government.

The story does not stop here as the cost of doing business would increase by Rs150 billion per annum for the textile sector destroying Pakistan’s hard won competitiveness through rational energy pricing. Industry further elaborated that even at present the obtaining of sales tax refunds from FBR entailed an additional 4 percent unjustified expense.

“The current upward trend of production would be lost and that exports would decrease by more than $3 billion in the coming 9 months should the government persists on withdrawing of zero rated regime. So much so the investment of $5 billion currently in the pipeline would vanish.”

With the decision to withdraw the zero rating SRO, he told the government that more than 2 million jobs of directly employed workers would be at risk saying that it would result the extremely negative consequences for the country’s Balance of Payments.