Refund quagmire

Mercifully, the export figures for September have held up to six percent above those for September last year. It would be interesting to see which sectors grew and which lagged. My own forecast was that the setback to exports in August was purely temporary. For sure many factories in Karachi were very badly affected by the rains and flooding, many have succumbed to the coronavirus ravages. An enormous number of days in August were lost due to Eid and Ashura, and then came the torrential rains and flooding at the end of the month. There will be long-term effects of these calamities, especially for those firms who were marginal. Many of them have closed down. The fact that despite all that gains are being posted over last year’s exports, when the rest of the world is just trying to get back to pre-Covid levels, is very encouraging.

Two new factors have emerged to favour our textile exporting industry in the last two months. The big retail chains have suddenly realized that their supplies from India are in jeopardy, at least for the time being. So they are rushing to secure what they can from Pakistan. The Bangladeshis are too specialized in garments, a field we have been unable to develop. Turkey is too expensive, and China and Indonesia have also specialized their products’ ranges. So that leaves Pakistan as the only obvious economic source of many textile products.

Basically, the failure is in India. The Indians have failed to stem the virus and their industry seems to be in disarray. Their workforce was ordered to dissipate back to their villages in April, from where they had come, to work in the big cities and the big factories. They were forced to make the journey on foot, as public transport had been shut down. So they walked hundreds of kilometers with their families and baggage, spreading the virus to each other on the way. When they got back to their villages they spread the virus to their fellow villagers. Now India is heading for the top slot in the Corona Virus League.

As a consequence their export industry is in shambles. Large retail chains worldwide had shifted their supply lines from Pakistan to India over the last twenty years. They abhorred our policies and loved theirs. Their executives felt comfortable in India whereas in Pakistan they felt threatened and constricted. Now their businesses demand immediate replenishment of supply as their shelves are emptying. So there is no option but to resort to Pakistan. Lucky for us. Many exporters are receiving huge orders and are getting fully booked. This is a most unusual development and must be fully exploited. Hence the increased exports over last year’s performance. If we are wise and now reestablish our lost links and prove to the buyers that Pakistan is a good and reliable source of supply this will prove to be a God-sent gift to beleaguered exporters of Pakistan.

Let us just hope that we do not shoot ourselves in the foot or as we say in Urdu,

“apne paer pay khud hee kulhaari mar li”.

Signs of this are emerging for we are prone to such reactions.

My foremost fear is that the “anti-export bias” that thoroughly permeates our officialdom will reemerge and the FBR, under pressure from the Government, will hold back sales tax refunds again. Already there are statements from high officials, and politicians, extolling the largesse of this government in releasing stuck-up sales tax refunds. Figures of billions of rupees paid out to exporters, they say, demonstrate the largesse of this government. They seem to forget that this was money owed to the exporters and not a largesse of the government. In fact, the period which the government withheld those billions of rupees as sales tax collection was a free loan from the exporting industry to the government. Most countries finance, encourage and promote their exporters; they don’t borrow from them!

I have represented my industry through the labyrinth of the FBR pleading for timely refunds. I know the system, and have been through the travails of getting the powers that be to realize that if they will not refund to the exporters the sales tax paid by them, then exports will come to a grinding halt. This is what was happening in the winter of 2019/20. When they released the refunds the industry started booming and export performance was better than last year. In fact doing better than last year over the next three months should be no big deal considering how dismal the refunds were last autumn.

Knowing our officialdom and the feudal and bureaucratic mindset of our rulers it is a very dangerous situation in which sales tax refunds are left to the whims of the FBR. Every time the IMF will apply the screws, and FBR performance will be short of targets, sales tax refunds will be held back. When we go begging and pleading for our just rights of refund we will be told,

“Only till 31st December, then all will be fine.”

Once the 31st December is past a new IMF mission may come for evaluation so another comma will be inserted. It is too tempting to be left as it is. The minister of finance and all the big spenders who rely upon the budget for their salaries and perks on one side and the minister for commerce on the other side? There is no match.

We have, therefore, always suggested that sales tax refunds should not be discretionary and their repayments should be institutionalized, as has been done successfully in the past. It is easy to calculate the impact of sales tax on the items being exported. In fact, this is already being done on a case-to- case and month-to- month basis for thousands of exporters. The range will be from eight to twelve percent in the case of most textile exports. These rates should be calculated, discussed with industry representatives, circulated, and then made mandatory as export tax refunds. The refunds should be payable as soon as exports are effected. Their repayment should be the responsibility of some other body, perhaps the State Bank of Pakistan, for payments and not the FBR. This body should be judged solely by the efficacy of its handling of the refunds and not on its ability to collect taxes.

The problem with the FBR handling sales tax refunds is that it goes against the very grain of the institution’s psyche. The entire system of the FBR is geared for tax collection, and not tax refunds. It’s like parking a family of lambs in a lion’s den for safe keeping! They may co- habit for a few days but how long can the situation last? A day will come when the lioness has not found a prey, what do you think will happen to the lambs in her safe keeping? I fear the exporting industry shall be the sacrificial lamb!

A system of industry and product-wise refunds should be devised. We have done so in the past. Industry and product averages can be calculated and announced. So let us say that for an item ‘x’ the rebate worked out is an average of 10 %. In the case of that particular consignment it maybe 9 or perhaps 11%. The exporter will be happy to see his refund two to three months early and will forego the one percent lost due to the process. The certainty of getting his refund a week after export formalities are completed will be far more valuable than the uncertainty of the current refund mechanism. The proposed system is not new nor perfect, and has its own shortfalls, and if the newspaper’s editor allows I can outline a system in another article.

If we really want our exports to grow, we have to allow the exporters to prosper as well. Pragmatic solutions have to be found to streamline export procedures and allow the exporters to concentrate on their businesses rather than run helter skelter to get their refunds, or get gas or electricity. If we just allow our entrepreneurs to get along with their work, and not hobble them with hurdles, they can show far better results. After all they do this when they go abroad and prosper.

Copyright Business Recorder, 2020