ISLAMABAD: All major steel industry associations Thursday said that the proposed measure of withdrawal of 17 percent Federal Excise Duty (FED) on industrial units located in the tribal areas would be a total disaster for the documented industry, resulting in closure of units with negative revenue impact of Rs50 billion per annum.
Addressing a joint press conference, on Thursday, Abbas Akberali, Patron-in-Chief, Pakistan Association of Large Steel Producers (PALSP) along with Javed Iqbal, chairman, PALSP and Javed Mughal, senior vice chairman, PALSP collectively raised industry concerns and reservations on withdrawal of the FED for steel producers in the Fata/Pata area in the federal budget 2021-22.
The associations, which participated in the press briefing from Karachi, Lahore, Gujranwala included Pakistan Association of Large Steel Producers, Pakistan Steel Melters Association, Pakistan Ship Breakers Association, and Pakistan Steel Line Pipe Industry Association.
The industry was shocked that the government has taken such a major decision without consulting the documented steel sector or any other stakeholder.
It seems that the proposed measure of abolishing the FED on units located in the FATA/PATA has been taken in haste due to unspecified reasons.
When asked whether the FBR can ensure checking of movement of steel products from tribal areas to tariff areas of Pakistan, Abbas Akberali responded that the FBR's enforcement measures like submission of "consumption certificates" and sales tax measures have no relevance.
The finished products are openly sold in Karachi, Lahore, and all other cities at low cost due to exemption of duties and taxes in the tribal areas.
Chaudhry Muhammad Sarwar from Steel Melters Association categorically stated that following this amendment, it is impossible to compete with the units located in the tribal areas, which are now part of Pakistan.
It is a tax anomaly, which must be rectified without delay.
This would result in closure of the units in tariff areas of the country, he cautioned.
They stated that the steel industry is paying additional custom duty @ two percent at import stage; five percent regulatory duty at import stage; sales tax 17 percent at import stage, and later FED in GST mode @ 17 percent at finished stage on all value addition costs, and one percent withholding income tax at import stage.
This total incidence of taxes on our steel products comes to 25 percent.
Javed Iqbal stated that the federal government has proposed in the federal budget to withdraw 17 percent FED from steel units operating in the Fata/Pata areas.
This budget measure if approved, it will cause closure of many steel units who operate outside Fata/Pata areas, as this concession is so huge that no industry can compete with it.
Already, Fata/Pata steel units enjoy sales tax exemption at import stage on all their raw materials.
Now this proposed concession is unmatched in the history of the country.
Even the steel industry in other parts of Khyber-Pakhtunkhwa like Peshawar, Swat, and Hattar, will not be able to survive the competition.
"We urge the government to review its decision and maintain the balance as it was, prior to this budget," they stated.
They informed that the major issue is to reverse the decision of moving the steel industry from FED to GST regime as it will give a free hand to over 40 units located in the Fata to illegally sell tax-exempt goods in major markets across the country.
This will directly hit the tax paying and quality-compliant sector of the industry, causing de-industrialisation, closure of mills, price distortions, and most importantly, an estimated revenue loss of Rs50 billion to the government.
The steel industry covering manufactures of long steel products such as steel billet and steel bars are paying billions of rupees in taxes to the government.
Due to weak administrative controls, many rent seekers have moved their steel manufacturing facilities to the Fata areas, taken advantage of the tax incentives and abused the law by selling tax-free goods in settled areas that undercuts the tax paying industry.
Over the past few years, the steel capacity in the Fata has risen to approximately one million tons per annum and represents about 16 percent of the long steel output of the country.
Continuation of this practice will lead to closure of many steel units, particularly in Punjab, over the next year, they said.
The government has also rejected another proposal of the steel industry to reduce turnover tax on its downstream retailers to 0.25 percent.
Currently, most steel retailers are forced to work in an undocumented environment due to the huge incidence of turnover tax.
There is no reason for the retailers to join the tax net as the turnover tax wipes out their very small profit margins on selling the steel commodity.
By rejecting the proposal, the government does not want to create documentation in the steel supply chain, improve ease of doing business, and facilitate stakeholders towards compliance.
Furthermore, the PSMA has also lodged its complaints to the Ministry of Commerce for not rationalising the industry's tariffs as agreed upon.
The National Tariff Policy aims to reduce import tariffs on imported raw material that is not manufactured in Pakistan and abstain from revenue-centric tariff measures.
However, the government has not been able to walk the talk on its own National Tariff Policy and has kept tariffs on primary raw material for revenue reasons, which makes the domestic industry uncompetitive.
Currently, the industry's raw material is taxed at 7-10 percent on import.
The steel industry criticised the government for not having proper stakeholder consultation to create consensus.
If policy decisions are taken without consultation, it will be impossible for the regulators to implement the policy.
Moreover, since policy makers are not in touch with ground realities of the steel sector, consequences of many policies are not accurately considered and this hurts the industry and the country's prospects.
In the backdrop, the industry is struggling to keep pace with volatile and changing raw material prices and costs.
Steel scrap, industry's raw material, has risen from USD 300 at the beginning of the fiscal year to USD 535 currently, translating into a PKR cost increase of 37,000.
Further, duties and taxes on raw materials account for another PKR 5,500 per ton.
Electricity has increased by 37 percent this fiscal year, climbing from PKR 13.5 to PKR 18.5 and causing a cost escalation of over PKR 4,000.
As such, cumulative cost increases are above PKR 40,000 per ton, which is partly absorbed by the industry and balance has to be passed on by increasing prices.
Industry experts believe prices must rise again as recent electricity and raw material cost increases have not been passed on and manufacturers are working on razor-thin margins.
The PALSP appealed to the government to pay attention to the proposals submitted in order to avert a major crisis within the industry that will jeopardise various national objectives such as the PM's Naya Pakistan Housing Scheme, the PSDP projects, CPEC projects, and various other commercial and residential projects that are the cornerstone of a growing economy.
Copyright Business Recorder, 2021