In need of a stitch

Textile sector has grown stagnant partly because of new taxes and tough conditions for trade

In need of a stitch

Textile sector, the backbone of Pakistan’s economy, is experiencing a slow down because of several reasons. These factors include shifting government policies, drastic variations in foreign exchange rates, dependence on export of basic commodities, lack of industrial research and value addition, failure to upgrade industrial machinery, repeated cotton crop failures and increasing costs of industrial inputs.

The sector comprises the export-oriented textile industry as well as the one which caters to the needs of the domestic market. After the announcement of this year’s budget, there has been a general disagreement between the business community and the government primarily over amendments in the tax regime and the incessant increase in the cost of industrial inputs including gas and electricity.

A large number of textile units in Faisalabad have been shut down by owners due to some newly-imposed conditions that they are calling exploitative and unrealistic. The most disturbed are the informal sectors such as the sizing industry (that applies starch to yarn), power looms and the dyeing industry. Part of the overall value chain, these sectors work on a small scale and produce raw materials for industrial consumption at different stages.

These sectors have announced agitation against the government’s decision to impose general sales tax at the rate of 17 per cent and the requirement for buyers of their products to provide their Computerised National Identity Cards (CNICs) at the time of purchase.

In a major shift in tax policy this year, the government has withdrawn zero-rated facility awarded to five export-oriented sectors -- textile, leather, carpets, sports goods and surgical instruments. According to the government the facility was being misused by non-exporting players in these sectors who evaded local taxes by misdeclaration of their local sales as exports. The genuine exporters under the new arrangement will be able to get their refunds on realisation of their exports and provision of documentary proof.

Anees-ul-Haq, the All Pakistan Textile Mills Association (APTMA) secretary, believes the decision to withdraw zero-rated facility will create problems for them as they (the exporters) will have to wait for long periods to get their refunds. This, he says, will cause a liquidity crunch for them and they will be unable to reinvest the amount for many months. "It would have been better if the government had focused on plugging the loopholes and excluded non-genuine players from this scheme rather than withdrawing this facility altogether," he adds.

However, the architects of new tax policies including Adviser on Finance Hafeez Pasha and Federal Board of Revenue Chairman Shabbar Zaidi the reform was unavoidable to stop tax evasion by textile lobby that declares the size of domestic textile sales too small and that of exports overwhelming. This way the pilferage will be checked and only genuine exporters will be able to claim funds, they claim. Others will have to pay a standard sales tax of 17 per cent at every stage.

In his post-budget press conference, Pasha claimed that local textiles sales are worth Rs1,200 billion but the taxes from this sector have remained between Rs6 billion to Rs8 billion a year. He said even at the old sales tax rate of 5 per cent the collection should have been at least Rs50 billion. The industry, on the other hand, claims in advertisements placed in national newspapers recently that the size of local textiles sale is Rs545 billion.

Baba Latif Ansari, chairman of the Labour Qaumi Movement (LQM), Faisalabad, tells TNS all the cottage and small scale industry supplying raw material for textiles sector are closed in Faisalabad. He says this has created immense difficulties for the labourers who are unable to feed their families. Besides, he says, "the disruption in supply chain has resulted in shortage of raw materials for consumption by large scale manufacturers."

He SAYS small units are afraid of the tax authorities. "These units do not want to be documented due to a general mistrust in the government and cannot a pay the sales tax at 17 per cent." He adds that the middlemen who buy raw material for onward sales to industrial consumers are not ready to provide their CNICs and have, therefore, stopped buying. This, he says, has led to building up of unsold stocks at these units and liquidity crunch for the owners.

Ansari says the Faisalabad industry has requested the government to impose a fixed tax on these units on the basis of the machinery they have installed and save it from high sales tax on sales. "They will not survive if they are forced to pay these taxes," he adds.

Economist Kaiser Bengali believes Pakistan’s economy does not have the capacity to bear the burden of more taxes. He says the only way to overcome the budget deficit is to reduce non-development expenditure that includes spending on defence and civil administration. "Nominal cuts or freeze at current levels will not work; slashing by at least 20 per cent will bring improvement," he adds.

Bengali says the manufacturing sector has always been neglected and non-performing sectors like real estate have been developed intentionally to make easy money. "Due to this anomaly, one can see owners closing down their textile factories in industrial zones like SITE in Karachi and developing housing societies there." He suggests that the government go for reduced taxes and offer incentives to industries rather than hasten their death by imposing more taxes.

Bengali says, "The government must realise that the economy is in recession and needs a bailout at the moment and not a crackdown. The profits in textile industry are less than the taxes imposed on it. If it is forced to pay these taxes, it will simply close down."

Haq points out that high interest rates charged by banks on loans and the unstable foreign currency exchange rate are also harming the industry. "The interest rate increases input costs whereas the unstable exchange rate stops them from importing machinery."

He fears that the imposition of high tax rate on local textile industry may lead to a rise in smuggling of finished goods. "It is difficult for tax authorities to catch retailers but easy to locate and collar industrial units," he says.

"There is no deadlock with any trade associations," the chairman of the Federal Board of Revenue, Shabbar Zaidi, told a press conference on Friday.

The talks between the FBR and trade and industry unions were mainly focused on two points: the CNIC requirement and zero rating, Zaidi said.

The FBR is facing a lot of resistance from traders for imposing the CNIC condition, which is aimed at broadening the tax net. "This law doesn’t affect the general public," Zaidi said.

The chairman said there was no deadlock with any group or association of traders or industrialists but there was resistance because people did not want to the tax net.

By the time this report went online, traders were adamant there would be nationwide shutter-down strike from July 13.

In need of a stitch