FBR considers restoring zero-rated sales tax regime

KARACHI: The Federal Board of Revenue (FBR) is mulling restoration of zero-rated sales tax regime from the next fiscal year of 2020/21 as businesses press the authorities for ways to get them rid of liquidity constraints on stuck refunds, people familiar with the matter said on Tuesday.

Sources said FBR started considering the proposal of reviving zero-rated sales tax regime in the upcoming budget of 2020/21. FBR received budget proposals from business community and majority of the chambers and associations and textile manufacturers demanded restoration of sales tax zero-rating from July 1, 2020, according to the sources in Regional Tax Office (RTO– II) Karachi.

The government abolished the sales tax zero-rated facility in the last budget after identifying massive misuse. Therefore, the zero-rated sales tax was withdrawn from July 1, 2019 and normal rate of 17 percent was imposed.

However, the FBR introduced fully automated sales tax e-refund (FASTER) system, which was meant to release refunds within 72 hours, to facilitate export sector.

The FBR sources said initially the FASTER system had glitches, which resulted in delay of refunds. “But now the system was functioning smoothly,” an official at RTO-II Karachi said.

The official said a strong lobby of textile sector, especially finished products, was persuading the government to restore the zero-rated sales tax regime on the pretext that the refund system failed.

The official said most of senior tax officials were opposing the restoration of sales tax zero-rated facility.

All Pakistan Textile Mills Association (Aptma) said the facility must be restored for the sector.

“Given the record of FBR and the design of the sales tax system, sales tax is stuck for at least at least three months before it is refunded,” the Aptma said in a statement.

As the refund is only reclaimable after exports and since exports are slowing down, collection of sales tax would only hasten bankruptcies, and usher in a very serious depression, according to Aptma.

Exports of readymade garments dipped 2.43 percent year-on-year in value and sharply fell in quantity by 34.83 percent during March, while those of knitwear dipped 2.63 percent in value, but increased 7.14 percent in quantity. Bed wear exports fell 13.58 percent in value and 10.78 percent in quantity. Towel exports fell 5.72 percent in value and 26.23 percent in quantity, whereas those of cotton cloth fell 8.84 percent in value and 41.25 percent in quantity.

Pakistan Business Council (PBC) also supported revival of zero-rated facility for five export-oriented sectors.

The PBC said exporters have taken a strong negative hit from the two-edged sword: zero-rating regime was abolished, resulting in piling of sales tax refunds and there was cancellation of existing orders due to the Covid-19 pandemic.

Restoration of zero-rated facility will allow some relief on the liquidity front for the major export sectors, the PBC said in its budget proposals.