Textile industry contribution of taxes may reach Rs 23.5 billion

The textile industry's overall contribution of taxes in 2011-12 is expected to reach Rs 23.5 billion, including payments of withholding taxes and applicability of lower rate of sales tax of 4-6 percent on local supplies. Industry sources told Business Recorder here on Monday that textile exports stood at $12.5 billion from July 2010 to May 2011. During the current fiscal year, the tax department collected Rs 10.5 billion as one percent withholding tax.
Similarly, textile industry contributed Rs 2.5 billion at the rate of 0.25 percent as Export Development Fund (EDF). Break-up shows that the applicability of lower rate of 4-6 percent sales tax on local supplies would contribute an additional amount of Rs 11 billion, annually, to the national exchequer. Moreover, the collection of withholding tax amounted to Rs 10.5 billion during ongoing fiscal year, sources added.
According to FBR estimates, the five zero-rated sectors including textile industry can contribute around Rs 20-22 billion from lower rate of 4-6 percent sales tax on local supplies of five zero-rated sectors as compared to original projection of Rs 30 billion based on imposition of 17 percent sales tax at domestic stage.
Sources said that the FBR had worked out collection of Rs 30 billion from withdrawal of sales tax zero-rating facility on local stage of five export sectors including textile, leather, surgical, carpets and sports goods. These estimates were based on the imposition of standard rate of 17 percent sales tax on local stage of textile sector. After revision of the relevant SRO for reduction of sales tax to 6 and 4 percent on domestic zero-rating, it has been worked out that the FBR may be able to collect Rs 20-22 billion during the fiscal year.
The FBR has only worked out the estimates from zero-rated sectors at 17 percent. Later, the estimates have been revised downward keeping in view the consensus developed between the FBR and associations on 4 and 6 percent of reduced rate on the local supplies involving un-registered persons. Now, if a combined rate of sales tax of 5 percent is imposed on textile sector, instead of 4-6 percent, on the local supplies, there would be revision in the tax projections from the zero-rated sectors. The FBR wanted to merge 4-6 percent rate of sales tax applicable on the local supplies of zero-rated sectors into a single rate of 5 percent whereas the textile industry has proposed a combined rate of 4 percent from July 1, 2011. However, the situation would become clear after the issuance of notifications from July 1, 2011 about the applicability of combined rate of 4 or 5 percent instead of existing two rates of 4-6 percent on local supplies of textile sector.
The FBR has also withdrawn exemption of sales tax on the import of plant, machinery and equipment in March 2011. However, full tax adjustment facility has been allowed on the import of such machinery. Contrary to this, the textile sector is pressing the government to restore sales tax exemption on the import of plant, machinery and equipment.
At present, the FBR is charging reduced rate of one percent withholding tax on local sales supplies and services provided or rendered to the existing registered taxpayers of five zero-rated sectors including textile, carpets, leather, footwear, surgical and sports goods. The withholding tax would not be deducted from sales, supplies and services made by traders of yarn to registered taxpayers of five zero-rated sectors including textile, carpets, leather, footwear, surgical and sports goods. The yarn traders would pay minimum tax @ 0.1 percent on their annual turnover on monthly basis.
A leading textile exporter said that the Ministry of Textile had issued three notifications to facilitate the industry in the past. Textile manufacturers will receive three percent drawback on garments--two percent on home textile and one percent on fabrics. However, all these facilities were initially announced in the textile policy for three years. The government has yet to issue any notification in the extension for these facilities and it is likely that these facilities would also be withdrawn from July 1, 2011.
Apart from provision of zero rating facilities under the sales tax, customs duty was abolished textile items causing revenue loss of around Rs 2 billion. Through SRO 809(I)/2009, the FBR had abolished duty on the import of textile machinery and equipment falling under various headings of Pakistan Customs Tariff (PCT). Moreover, there is no federal excise duty (FED) levied on the textile sector. Similarly, there is no export duty on textiles exports. The textile sector is partially exempted from taxes and partially subjected to taxes. Like in the case of income tax, the sector is treated according to normal tax law. In contrast, the exports of entire chain of the textile sector is zero-rated from GST and exemption/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 federal excise duty (FED). However, local supplies of textile sector are now subjected to 4-6 percent at local stage.
Analysts say that the textile industry has remained the core source of foreign exchange earnings. Keeping in view the growing size of the sector with huge investment, the tax revenue collection is negligible. Notwithstanding positive collection (though meagre amount) on account of income tax and customs duty, the overall collection turned negative, mainly because of huge refund payments.
FBR had proposed setting up of a Textiles Industry Group including taxpayers and representatives of government. The group would identify the main problems (non-compliance from the standpoint of government, but also burden of compliance from the standpoint of taxpayer) and solutions that aim at prevention of tax evasion, etc. They would also have to look at end-markets, and determine what the impact on demand would be with changes to tax administration. The arrangement may also help in creating business-friendly environment and harmony between industry and tax administration.