Return of the zero-rating regime?

EDITORIAL: It seems businessmen and exporters might get what they’ve wanted for over a year after all as the recommendations of the ministry of commerce for maximizing the country’s exports forcefully push reverting to the zero rated sales tax regime for the 5 leading export sectors and the government is reported to be seriously considering restoration of the zero-rating sales tax regime for five leading export sectors in the next budget. The Federal Board of Revenue (FBR) put forward a similar proposal before the last budget since it had been overwhelmed by requests from businessmen facing liquidity constraints. The government didn’t go for it then but the way the Board’s inability to provide timely sales tax refunds has led to severe working capital strains for producers since then, a lot of whom claim to have gone bankrupt may move the government to finally change its mind. This, to most may appear to be a sensible step because the export industry is clearly in no shape to withstand the double whammy of the corona-induced slowdown and 17 percent sales tax with refunds inordinately delayed. Granted that, of late, the refund process for current exports has been significantly streamlined but refund claims pertaining to previous period, according to exporters, remain stuck. However, it is not as simple as it may seem.

The last time the zero-rating regime was in the news was last month, when the finance minister recommended an audit of the impact of all the incentives given to the five special sectors over years. It would help a great deal if that audit is completed in time to help the government come to a decision before the budget, of course. Because the current account once again registered a deficit in December after five straight months of surplus and the window that opened for Pakistan because we emerged from the first wave of the coronavirus ahead of regional competitors might well close as the second wave intensifies. So the more the government knows about how well each sector responded to the help in the past, the better it will be able to lend support in the coming fiscal year.

The uptick in exports came at a very crucial time for Pakistan and, together with the equally welcome and unexpected bulge in remittances, helped the economy stay solvent during the worst of the recent corona-crisis. The textile sector is in a particular spot of bother. It is defying the dominant global slowdown and receiving a large number of export orders, yet it is unnecessarily held down by inflated input costs and cash-flow problems because of the ever-increasing energy cost and locking up of working capital in the refund cycle. Therefore, the government may consider taking a step back and giving businesses a little more breathing room. The prime minister’s recent interaction with businessmen in Sialkot, predominantly exporters, most probably did the trick. That explains why Minister for Industries and Production Hammad Azhar, along with FBR officials, met with them again and dropped enough hints about a possible return of the zero-rating regime to ease their minds.

However, while the government is doing this for exporters, it must go a step further and zero-rate their income tax as well, which the FBR collects at a rate of one percent of the total amount of export receipts. This would do away the presumptive taxation that is the mother of many ills in our tax system. Exporters must now position themselves to take advantage of this facility if, or when, it is reintroduced. Because with the rise in remittances likely to subside in a couple of years, and tax collection not looking like it is going to improve anytime soon, increasing exports is the government’s best bet in the medium term. And right now it is left with little choice but to go back to the zero-rating regime with the aim of sustaining recent upside movement in exports.

Copyright Business Recorder, 2021