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Value-added, apparel sectors: government not ready to abolish ST, revive zero-rated regime

The meeting between Finance Minister Ishaq Dar and value-added as well as apparel sectors remained inconclusive as government is not ready to abolish 2 to 5 percent sales tax and revive zero-rated regime on five leading export oriented sectors in coming budget (2015-16).

On the conclusion of the meeting at the FBR House here on Saturday, Ijaz Khokhar Chairman Pakistan Readymade Garments Manufacturers & Exporters Association (PRGMEA) told Business Recorder that initially FBR proposed to increase existing reduced rate on industrial input from of 2 percent and 3 percent to 5 percent under SRO.1125. However after due deliberation, tax authorities showed some relaxation with the modified proposal that 2 percent sales tax be increased to 3 percent and other rates of 3 percent and 5 percent to be kept unchanged.

The value added and apparel sectors at the other end stuck to their principled stance to revive zero rating facility on entire supply chain of five export oriented sectors in upcoming budget. They agitated that industries recently been burdened by gas development surcharge having an impact of around 3.5 percent on the businesses. They argued that continuation of 2 percent to-5 percent sales tax under SRO.1125 would have serious implications for industry as a whole. Even if the FBR continues with the existing sales tax rates under SRO.1125, it is difficult for the industry to carryout businesses following 3.5 percent impact of the GIDC on garments. The textile exports are already facing crunch in international markets and any negative taxation measure would hurt the export growth of Pakistani products in international markets.

However, value added and apparel sectors insisted for zero-rating regime in budget. The industry is facing impact of 3.5 percent on businesses due to the introduction of the new GIDC Act whereas continuation of 2-5 percent sales tax under SRO.1125 or enhanced rates would have serious implications over the industry. Even if the FBR continues with the existing sales tax rates under SRO.1125, it is difficult for the industry to carryout businesses following 3.5 percent impact of the GIDC on garments. The cost of doing business would considerably increase following GIDC impact and proposed enhanced rates of sales tax.

Responding to the GIDC Act, he referred to the Finance Minister as saying that the GIDC Act has been duly passed by the National Assembly and now it is a law. The major concern of the value added and apparel sectors remained inconclusive as government is not introducing any measures to enhance exports of five leading sectors, ie, textile, leather, carpets, surgical and sports goods. The government has the option to either not collect GIDC or introduce no payment-no refund' scheme under zero-rated regime. Otherwise, exporters would not be in a position to bear additional burden of GIDC as well as enhanced rates of sales tax under SRO.1125. However, top government officials were of the view that complete zero-rating would not be possible under the government policy.

He said that the first and only proposal of the value added and apparel sector is to introduce 'no payment on refund' regime for the export oriented sectors. The exporters are facing serious liquidity crunch due to the blockage of their sales tax refunds to the tune of billions since inception of sales tax rates Under SRO.1125 hence they demanded immediate revival of zero-rating regime for export sectors.

They further demanded of the Finance ministry to ensure clearance of all pending sales tax refund payments of exports sectors till June 30, 2015. According to industry's estimates, sales tax refunds of over Rs 100 billion are pending and on the contrary tax department contends the unpaid refunds stood about Rs 20-25 billion. The value added and apparel industry has shown their total disagreement to the figures of the FBR.

They further informed the ministry that DTRE regime is not extended to medium and small sized exports industry by the Customs authorities on the ground that this facility is only available to persons having composite unit. The exporters are drawn attention towards this anomaly and ask FBR to clarify the position and allow facility to all sorts of exporters.

The FBR shown its willingness to keep continue sales tax zero-rating facility on electricity and natural gas consumption provided the industry agrees with the revised sales tax rates under SRO.1125. He added that the proposed mechanism for the sectors in the budget would not enhance exports. At present the country's exports have declined by 1.53 percent during current fiscal (July-February) and no measure for increase of export seems to be proposed in upcoming budget.

Arshad Shehzad the Karachi based advisor extending his opinion on the revision of 1125(i)/2011 has supported the idea for revival of zero rating facility. He informed that all the major trade bodies, chambers and Federation of Chamber of Commerce and Industry on this issue has unanimously oppose increase of sales tax rate for export oriented sectors as well as propose immediate revival of sales tax zero rating on five export oriented sectors, he informed that zero rating on supply chain of five export oriented sectors were first introduced in 2005 and kept continue for next 6 years till 2011. Then reduced rate for supplies to unregistered person within the supply chain was introduced and scheme was further continued to next 2 years. The existing version of the regime was introduced in Mar 2013 just before arrival of an elected government.

He therefore suggested that levy of sales tax on this sector without having scientific studies and calculating its impact could not bore fruits. He further suggested that government needs to understand the role of each sector on a broader national interest. The export oriented sectors are not only fetching precious foreign exchange but it's one of the major drivers of employment in the country with its share of over 45 percent. He therefore suggest that rather focusing on revenue element alone the government and tax authorities should sit with stakeholders and professionals to find out alternate ways and means to keep these export oriented sectors away from the hassle of the refunds by reviving zero rating regime at one end and placing proper module to collect sales tax from domestic consumption at the other end. He also expressed his inability to understand why tax proposal resulting in increasing element of refunds are always appeals tax authorities.

The case of value added and apparel sectors were pleaded by Pakistan Apparel Forum's (PAF), All Pakistan Power Loom Association; Pakistan Hosiery Manufactures Association; Pakistan Knitwear & Sweater Exporters Association (PAKSEA) and Pakistan Cotton Fashion Apparel Manufactures and Exporters Association.

Copyright Business Recorder, 2015