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During my tenure as Chairman, Federal Board of Revenue (FBR) one major change which was brought in was the abolition of zero rating of sales tax for five export-oriented sectors. This is generally called the SRO 1125 regime. When we make a list of legislations that legalized state sponsored corruption then SRO 1125 will appear at the top of the list of such measures that include the Protection of Economic Reform Act, 1992, the Foreign Currency Accounts (Protection) Ordinance, 2001, the Presumptive Taxation and Section 111(4) of the Income Tax Ordinance, 2001.

There was a very big hue and cry against my action and it was publicly and privately stated by the exporters operating in these five sectors that this action is regressive and will adversely affect country’s exports. I will dilate other aspects separately, however, nobody can deny the fact that exports from 2013 to 2018 when the PML-N was in government, never exceeded USD 20 billion mark despite the fact that zero rating for export-oriented sectors was fully applicable. These sectors were completely relieved from the possibility of delayed refund of sales tax paid on export inputs. The amount of exports has increased after the abolition of the sector wise zero-rating of sales tax. These facts are more than enough to demonstrate that what was being said earlier and what is being said now is far away from the ground reality and there is some vested interest in promoting zero- rating for export-oriented sectors instead of zero-rating of sales tax for exports. The Ministry of Commerce is requested to review the views in the textile policy. It is my view that any professional who supports zero-rating of export-oriented sectors versus zero-rating for export either does not know the sales tax law or is not interested in the levy of tax on local sale of products by such sectors. If it is so then he will be saying that there should be sales tax on sugar and other consumables but no sales tax on say textiles. This logic will not prevail because if this is the objective then discrimination of other sectors should be abolished. There is a valid ground for a petition alleging discrimination under the Constitution of Pakistan.

Let us first understand the difference between the zero-rating of export-oriented sector and zero-rating for exports. Under the regime of zero-rating for export-oriented sectors there is no sales tax on any transaction of production and sale of all the items and material used in that sector. For example, if textile sector is zero-rated then starting from cotton ginning to the sale of cloth there will be no sales tax on products or material related to that sector. For example, zero-rating for export-oriented sector on textile means that there will be no sales tax on any product of textile sector at any stage in Pakistan. There is no distinction between the product used in Pakistan or exported. As against that zero-rating for export means that whenever a product is exported the whole amount of sales tax paid in the manufacture of product exported is refunded.

There is no country in the world where there is sales tax or value added tax and there is zero-rating for the sector. Pakistan is unique in this innovative approach to the detriment of the exchequer. I will be pleased to zero-rate the textile sector if we agree that the entire production in that sector is exported and we all roam around naked or wear smuggled or (imported) old clothing. This system was introduced as a ‘stop gap arrangement’ when sales tax law was in its infancy; however, that honeymoon cannot continue for over 30 years. Anybody having even the slightest knowledge of value-added tax will laugh at what we had been doing. The PTI government corrected this aberration and time has proved that his action was right. Facts cannot be denied.

Now we have to analyze why certain quarters promote zero- rating for the sector instead of zero rating for exports. Their first argument is that they face liquidity problems from the time when goods are purchased to the date when they are exported and the amount of sales tax paid on input is refunded. This concern is genuine and there is no basis to challenge that valid argument. The second argument which is also valid is that on account of rampant corruption there is delay and malpractice in the release of refunds. This complaint is also genuine. Measures will have to be taken to improve that system. I introduced FASTER system which is better than the past; however, a lot is still required to be done. There should be complete automation and complete non discretion in the release of refunds. We can even provide some kind of support to counter the liquidity issue. Both the complaints or grievances are genuine. There can be improvement in DTRE regime. This means no tax on quantity required for exports.

However, there is no justification, basis or logic for reviving zero-rating for export-oriented sectors. It is my view that in the economic sense abolition of zero-rating for the export oriented sectors promotes exports. This is simple economics. When exports are made zero-rated against local sales being subject to sales tax at the rate of 17 percent there is definitely more incentive to export as against local sales. This is simple arithmetic. With the abolition of zero rating for export sector the margin from exports as against local sales has increased by 17% percent. If anybody denies this then there is no answer for such innocence and it means that the intentions of the people seeking revival are not entirely kosher. This is a reality that there is huge evasion of sales tax in the local textile sector and the export issue is intentionally placed in between to misguide and scare the policymakers in making the right decisions. They are told that exports will come down if zero-rating for export sector is not revived. This logic has completely been proved wrong. I in my personal capacity as an accountant, tax adviser and former Chairman FBR am highly disappointed by the recommendation in the textile policy that zero-rating for the export-oriented sectors be revived. I cannot believe that. I firstly thought that this is misprinted. This is a time to call a spade a spade. I may agree on a special rate of 5 to 10 percent on local sales of export-oriented sectors, however if we go on reviving the zero rating for export oriented sectors then there cannot be any substantial sustainable improvement in tax collection in this country and in addition to other losses Pakistan will be further indebted to the World Bank by USD 480 million being provided for tax reforms.

Copyright Business Recorder, 2021


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