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May 9, 2021

Brave moves

LAHORE: The notion that withdrawal of zero-rating regime is counterproductive has been proven wrong as the exports that remained stagnant under the facility started improving after it was called off.

Former chairman Federal Board of Revenue Shabbar Zaidi took this bold step and refused to budge despite full opposition from the exporters and the Advisor to the Prime Minister on Commerce and Trade.

Through an increase in the collection of sales tax on local sales (particularly textiles) he proved that zero-rating facility was misused by sectors that evaded sales tax on local sales as well. He resolved the complaints of delays in exporters’ refunds by streamlining the system. The system started working after initial teething problems. The small exporters still face delays that require further fine-tuning to be addressed. The improvements in the system slowed down after Zaidi quitted the job.

The larger exporters get refunds without hassle and are in no position to complain though many of them have been deprived of the sales tax pilferages they used to make on local sales. It is time to address the refund delays faced by small exporters. It may be noted the pilferage in sales tax during zero-rating periods came from larger exporters local market operations. The small size exporters have no local sales. They mostly export value-added textiles. Most of them supply goods to well-known brands. The strict audit by the brands ensures that not a single piece goes into the local market.

These small exporters claim refunds for the inputs bought from sales tax registered suppliers. The receipts should be enough to prove that the refund claim is genuine. The amount of input consumed in the exported goods is already calculated by the FBR.

If the claim is according to the use of inputs the refunds should be no issue.

The form on which refunds are made automatically is a bit cumbersome for small exporters. The sales tax officials should make it simpler and transparent to ensure that their automatic refunds are not refused for technical reasons.

When the refunds are refused through automation the exporters are directed to contact the concerned sales tax staff. The automation was done to avoid the contact of refund seekers with the sales tax staff.

The exporters claimed they have to get refunds after paying speed money to get refunds through the sales tax officials. That also was the main cause of opposing zero-rating. The problem has been partially resolved but refunds haunt all those exporters that fail to complete the automated refund form. The majority that has been denied automated refunds are those that have zero local sales.

The planners should find out why these delays of refunds to small exporters are increasing. There were fewer complaints earlier when the small exporters also got automated refunds. What has changed now? Is there a deliberate attempt on part of bureaucracy to fail the system? After all it has deprived many of a regular income when refunds requests were processed manually.

The success of withdrawal of zero rating-regime has proved that problems could be resolved and corrupt practices reduced from the system through technology. The same system has been prevalent in Bangladesh and India for decades. India’s domestic textile market is larger than its exports and is a source of substantial revenue for the Indian government. We should also follow other best international and global practices to eliminate corruption.

This government has been trying in vain to implement its directive of documentation of computerised national identity cards on any purchase over Rs100,000. Initially the limit was Rs50,000 that was enhanced after protest by traders and surprisingly by the industry as well. The matter has been dragged too long by this government, which encouraged the protestors as they were convinced that the state could be pressurised.

We should look at what is happening in developed economies and in this region. We have the largest undocumented economy in the region. India proposed imposing sales tax on retails eight years back and it has now been implemented across the country. We proposed sales tax on retail sales in 1987 and we are at the same level even after 34 years.

Now we are facing resistance not at the grocery retailers but on gadgets valuing Rs100,000 or more. These gadgets are bought by affluent classes that ought to declare their incomes transparently. The nexus between tax evaders and corrupt officials could only be broken through available technology as has been done while withdrawing zero-rating on exports. It has added Rs150-200 billion in sales tax receipts annually.