Zero-rated regime: withdrawal may lead to 20-30 percent decline in exports

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VIATahir Amin
SOURCEBusiness Recorder
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The government decision to bring five zero rated sectors under standard sales tax rate of 17 percent from July 1, 2019 may lead to 20-30 percent decline in exports, informed sources in industry told Business Recorder.

The imposition of 17 percent sales tax on local sales would reduce domestic demand, given large scale smuggling across our porous borders, and consequently compel industry to reduce its output, export sectors pointed out.

The government has refused to entertain industry”s request for the continuation of zero-rated sales tax regime for the export sector- textile, leather, carpet, sport goods and surgical – as it maintains that the facility was not only being grossly misused by exporters but would also generate Rs 200 to Rs 250 billion tax revenue.

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”Finance Bill 2019” was passed from the National Assembly with removal of zero rated status to five export sectors whose implementation would begin from July 1 2019 (today). Exporters further state that the impact of withdrawal of zero rated status would be greater on small and medium enterprises (SME) relative to large scale manufacturing units.

“The government has accepted the International Monetary Fund (IMF) demand and not the industry”s request,” deplored convener of five zero rated sectors Javed Balwani a day after the budget was approved. Talking to Business Recorder, he said that the export sectors held a series of meetings with the Prime Minister and his economic team during the last few weeks to convince them to continue zero rated sales tax regime however clearly they remained fruitless.

Advisor on Commerce and Textile Razak Dawood acknowledged before the National Assembly Standing Committee on Commerce and Textile that the government has committed to the IMF that zero-rating regime granted to the five export-oriented sectors would be withdrawn before approval of bail out package by the Fund”s board meeting on July 3, 2019.

The five zero rated export sectors demand that zero rating for five export oriented “no payment no refund system” should continue and converted into an Act from existing SRO system. The representatives of exporters argued during meetings with the Prime Minister and his economic team that exporters are continuing to face a severe liquidity crunch with more than Rs 200 billion in refunds of sales tax, customs rebate, withholding tax, duty drawbacks on local taxes held up with the government.

Discontinuation of no payment no refund regime will jam up an additional 14 percent of the exporters” liquidity every 4 months (as one shipment takes 4 months for completion) which implies 42 percent liquidity will be stuck up in unpaid refunds in a year.

The government argument was that zero-rating scheme was being grossly misused by the exporters as the sales tax exempted raw material was being used by other sectors which were not covered under zero-rated sales tax regime. Additionally, the government stated that exporters are not paying taxes on their local sales and consequently causing considerable revenue loss to the country.

Advisor on Finance during a post budget briefing claimed that exporters are paying Rs 6-7 billion taxes on their local sales of Rs 1200 billion and insisted that they must contribute to taxes.

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Commerce division has supported the exporters” argument and maintained that withdrawal of zero-rating regime would create liquidity problems if FBR can not manage speedy payment of refunds leading to exporters being unable to sell their products aggressively in the international markets. And the high input costs, including energy, are making Pakistani products uncompetitive in the international market, the Ministry acknowledges.

The Commerce Division”s budget proposals included: (i) if facility of zero rating is done away with as revenue is needed for the country then FBR must develop a speedy mechanism for payment of refunds to mitigate the resulting liquidity problems; and (ii) all raw materials used by domestic industry may be exempted from all types of tariffs, irrespective of sector, as envisaged in the National Tariff Policy and FBR may chalk out an effective mechanism to avoid tax evasion and take strict action against tax evaders in the business community.

(This news/article originally appeared in Business Recorder on July 1st, 2019)

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