Most textile sector units either exempted or enjoy concessionary rates of taxes: experts

The textile sector is enjoying a number of tax concessions including sales tax zero-rating facility and exemption of customs duty and sales tax on machinery and equipment imported by textile industrial units. Tax experts told Business Recorder here on Friday that most of the textile sector units are either exempted from federal taxes and either exempted from or a concessionary rate is applicable on the industry.
The analysis of tax laws and notifications shows that textile units are availing zero-rating facility, except on packing material which is subject to sales tax. In case of packing material, units are claiming refund of the sales tax paid on consumption of such material. And textile units are availing exemptions and zero-rating facility at the import as well as local stages. It is a totally erroneous impression that the textile sector is heavily burdened with taxes, as is evident from existing taxation structure of the FBR.
When contacted, a representative of textile sector argued that the textile sector has to pay different kinds of provincial taxes and levies including property tax, withholding tax on cash withdrawal from banks, stamp duty, tax on commercial/industrial consumption of electricity, employees old age benefit (EOB), social security, export development surcharge and other local taxes.
Tax experts said that under SRO 809(I)/2009, the Federal Board of Revenue (FBR) has exempted machinery and equipment, if imported by textile industrial units registered with Ministry of Textile Industry. The Board had granted exemption of customs duty on import of a wide range of textile machinery and equipment including machines for extruding, drawing, texturing or cutting manmade textile materials and textile winding (including weft-winding) or reeling machines.
On the direct taxes side, analyst said that certain textile units are declaring net losses for payment of one percent turnover tax. The companies making losses are liable to pay one percent turnover tax for discharging their tax liability. Secondly, exporters are paying one percent of the export proceeds under the presumptive tax regime (PTR). In this way, loss making units are merely paying one percent turnover tax and no indirect tax. The units paying one percent turnover tax are not liable to operate under the normal tax regime. The question arises as to how many units are actually declaring units on annual basis.
The duty drawback facility is also available to the textile sector as concessionary rate of repayment of customs duty on the import of raw materials/items consumed in the export goods is applicable on the textile sector. Through standard duty drawback notification, the FBR has extended the rebate facility to the textile units. Moreover, the government has not imposed federal excise duty (FED) on the textile sector. Similarly, there is no export duty on textiles exports.
Sources said that the entire chain of textile sector is zero-rated for sales tax purposes, including electricity and natural gas consumption. The Initial Depreciation Allowance (IDA) is available at the rate of 50 percent of machinery and equipments. Similarly, further tax concession is also available if 50 percent of the total production is exported.
Analysts maintain that textile industry has to pay one percent withholding tax on export of raw cotton, 0.25 percent export development surcharge (non-FBR tax) and 2-3 percent stamp duty(non-FBR tax). Similarly, concessionary rate of customs duty on chips, fibres, yarns, fabrics of manmade yarns, blended yarns etc are applicable. A low rate of withholding tax of one percent is applicable on raw material and 2 percent on the import of machinery.
Explaining the tax concessions on the textile sector, experts pointed out that the textile sector has been one of the major export oriented sectors and refund claimant. Therefore in order to boost exports, control refunds and improve cash flow of taxpayers, as a first step, the ginned cotton was made zero-rated from sales tax during for 2004-05, followed by zero-rating the entire chain of textile sector during 2005-06.
Similarly, concessionary customs duty on chips fibres, yarns, fabrics of manmade yarns, blended yarns etc are applicable. Moreover, there is no FED levied on the textile sector. Similarly, there is no export duty on textiles exports. Regional comparison of tax/tariff structure for textile sector revealed that in Pakistan textile sector is almost at par with the regional countries, where incentives are concerned.
Tax experts observed that in case of income tax, the sector is treated according to normal income tax law. In contrast, the entire chain of the textile sector is zero-rated from GST and concessionary customs tariff rates are subjected to various types of inputs both raw material and machinery imported for the sector. Similarly, this sector is entirely exempted from the FED.
Analysts pointed out that the share of income tax paid by the sector has been comparatively low over the years. There are two basic problems which are attached with the low contribution of income tax by the sector. One is the lack of audit: such cases where revenue level reaches a certain stage should be subjected to intensive audit, as done in the developed nations.
The concept of effective audit is non-existent. Therefore, the taxpayer takes liberties to declare income of his/her choice. Secondly, there is a problem in income tax reporting system as well. The Monthly Performance Reports (MPRs) are generated by the income tax offices containing the macro picture of withholding taxes, collection of demand and voluntary payment.
Sector-wise collection is not regularly generated and reported. Therefore, the true picture of sectoral contribution is missing. The lack of audit and punitive action leads to gross misuse of the USAS facilities provided to the taxpayers under the tax reform program, where substantial expenditure is being incurred.
About the sales tax zero-rating regime, tax experts stated that textile sector is zero-rated both at import and supply stages. The primary factor behind the zero rating of textiles, and other major export-oriented sector like carpets, leather goods and sports and surgical equipment was the large refund claims associated with these activities that were difficult for the FBR to substantiate. Zero-rating of these activities and inputs used are a way of removing some troublesome taxpayers' from the sales tax net. The very purpose of zero-rating the textile sector has not been achieved; the refund generation is still quite large.
Experts argue that the zero-rating was a stop gap arrangement till the system of STARR/STREAM (sales tax computer systems) was overhauled to ensure transparency in refund claims and disposal. It is apprehended that if zero-rating is done away with, the system will revert to the position of 2004-05 and 2005-06 when gin cotton and textile sector were zero rated respectively, on the plea that the FBR was unable to check fake invoicing, over invoicing and delayed disposal of refunds etc.
According to experts, the purpose of zero-rating the entire chain of textile sector was to address the issue of delay in refunds payments of sales tax and also to resolve the rampant use of fake and flying invoices by unscrupulous agents to claim illegitimate refunds. The situation as claimed had become a source of anxiety both for the taxpayers and the tax administration. This initiative has broken the VAT chain and eroded the tax base, but it has been accepted that streamlining the STARR/STREAMs is required to ensure that it operates as per best international practices. Unfortunately, the decision of zero-rating seems to be ineffective.
Textile sector has termed the 'reformed general sales tax' (RGST) as a hurdle to textile production as the textile sector comprises of 10 stages and at every stage 15 percent sales tax would be imposed but getting back its amount in shape of refund pertaining to every stage will take a long time. The textile sector zero-rating was the conscious decision of the government. Textile sector is maintaining all kinds of documentation under the zero-rated regime. If the purpose of the new system is to collect tax and then refund the whole amount under the RGST, there would be no need to go through the cumbersome process of collecting GST for refunding the same amount, textile industry added.