MoF asked to abolish FED, SED on cement

The Cement manufacturer have asked the Ministry of Finance to immediately abolish the federal excise duty (FED) and the special excise duty (SED) on the cement to save the industry from crises due to heavy incidence of taxation and procedural problems in exports of the commodity.
Sources told Business Recorder here on Saturday that at present, Pakistani cement bears the highest incidence of indirect taxation in the world. This accounts for same 29% of the retail price per bag. The retail prices range from Rs 310 to Rs 325/. per bag and at a median price of Rs 300, almost Rs 90 are taken up by indirect taxation which includes Rs 700 per ton as Federal Excise Duty, Special Excise Duty @ 1%, General Sales Tax @ 17% and various provincial taxes including excise duty on limestone and marking fee.
All Pakistan Cement Manufacturer Association has further informed the Finance Ministry that there appears to be no justification to levy Federal Excise Duty and Special Excise Duty on this commodity which is a basic raw material for the construction industry and by no means can be construed to be a luxury item nor a product whose consumption is desirable to curtail like tobacco. It is strongly recommended that alongwith imposition of reformed GST later this fiscal, Federal Excise Duty be abolished forthwith on this item. This had been the avowed programme of the government as it was the general perception that Federal Excise Duties would be abolished on items other than whose consumption was to be discouraged as a broad-based consumption tax is levied.
The cement sector has worked out the revenue implications of withdrawal of Federal Excise Duty and Special Excise Duty. There will be minimal fiscal implications should the Federal Excise Duty on cement be withdrawn.
This would reduce the cost of construction, create level playing field for all players since it is feared that high incidence of taxation presently is leading to evasion of some 10% or more of the goods presently sold.
The association further said that the cement production capacity in Pakistan has touched 44.682 million tons per annum with an additional 2.50 million tons on the anvil. About 80% of the capacity is situated in the North and 20% in the South. During the year 2009-2010, domestic demand for cement was a mere 23.538 million tons and exports amounted to 10.657 million tons including Afghanistan leaving surplus unutilised capacity of 10.487 million tons.
In view of low demand, weak capacity utilisation, high input costs, excessive incidence of indirect taxation, most of the cement companies have registered huge losses. During last financial year, 14 cement units suffered loss before taxation aggregating to Rs 10.226 billion while only 3 cement units, of which 2 are located near Karachi in close proximity to the sea port, earned profit of Rs 4.840 billion. At the end of last fiscal, industry debts to financial institutions have risen to a massive Rs 125 billion and cement units located in the North are particularly challenged owing to low demand and are unable to service their debts. Cement prices continue to prevail at levels lower than cost of production.
With this overview, all efforts should be made to spur demand in the domestic markets and create incentives for export of this commodity.
The association said that the high incidence of taxation requires review to spur demand. There is no justification for levy of Federal Excise duty and Special Excise Duty. Only GST should be levied. The marking fee should be rationalised @ Rs 1 per ton instead of 0.15% of revenue being demanded. The supervised clearance system should be reinstated at cement units to avoid evasion and APCMA should be allowed to monitor dispatches.
Moreover, the export goods for Afghanistan are reportedly being sold in domestic markets from Chaman and Torkham posts. Fool proof system has to be devised to avoid duty free goods being sold in domestic markets. The minimum export price should be fixed for Afghanistan @$50 per metric ton. Goods are presently being dumped in this market.
Another demand is that the payment of Inland freight subsidy claims as announced by Trade Development Authority vide its public notice dated March 26, 2010 and reinstatement of this facility post 30th June 2010. The issues of duty drawback claims on export of cement to Afghanistan should be resolved by the FBR, sources added.
The association further said that the Pakistani cement sector is in crisis since derailment of the economy in mid 2007 resulting in continuing low GDP growth. After showing robust growth in consumption and capacity utilisation from 2002 to 2007, domestic consumption has remained static and became negative in 2008-2009.
In fiscal 2009-2010, the industry achieved capacity utilisation of 76.53%. Total cement sale was recorded at 34.195 million tons of which domestic sales accounted for 23.538 million tons. Had it not been for exports of some 10.657million tons to Afghanistan, India and Middle East, the cement industry would have been in an even greater crisis. However, against installed production capacity currently at 44.682 million tons, utilisation at 76.53% amounted to only 34.195 million tons. Additional capacity of approximately 3 million tons is to come on stream next year.
With a view to encouraging exports from the North where most of the surplus capacity is available, the Government had announced a freight subsidy for internal transportation vides Public Notice dated March 26, 2010. However, no payment against this notification has been effected to date nor has the facility been extended into the current financial year.
With a view to increasing consumption of cement which will create additional employment in the construction industry and also spur growth in 40 allied industries, it is proposed that taxation on cement be rationalised.
Lower cost of construction would also spur growth in the GDP which is of paramount importance after the recent devastating floods.
It would also be a popular gesture by the government and be welcomed by those who have to reconstruct their dwellings. There would also be a salutary effect on cost of infrastructure projects, association added.