ISLAMABAD: Prime Minister Nawaz Sharif on Friday announced zero-rated tax regime for the export sector to help it overcome liquidity crunch, and eliminate corruption in payment of refund claims.

The regime will take effect from July 1, 2016.

The premier took the decision during a meeting with leading businessmen to discuss the issue of pending tax refunds to exporters. Chief Minister Punjab Shahbaz Sharif, Finance Minister Ishaq Dar and Planning Minister Ahsan Iqbal were also present.

A few years ago, the Federal Board of Revenue (FBR) introduced the zero-rated regime for five export sectors, namely textile, sports, leather, carpet and surgical sectors. However, the scheme was reversed on a plea that exporters were also selling products in the domestic market which needed to be taxed.

Currently, the FBR charges tax on both imported and locally manufactured raw materials. As per law, the authority is supposed to refund all these taxes after export proceeds have been made.

But in practice, the tax department normally delays issuing refunds which causes liquidity problem for exporters — the premier was informed that Rs200 billion refunds/rebates of exporters were stuck with the FBR.

The country’s exports fell in double digits in the first seven months (July-January) of this fiscal year.

An FBR source told Dawn the tax department estimated that the total impact of zero-rating on the export sector would be around Rs6bn to Rs10bn.

The estimation also considered cases where some exporters, especially the textile sector, sell their products in the domestic market, which are originally meant for exports.

“We have classified exporters in three categories,” the source said, adding that the one category included those who mostly sell their export products in the domestic market.

According to a businessman who attended the meeting, the prime minister was also informed about the past arrears of the refunds/rebates. Three options were discussed for the clearance of pending refunds.

It was decided that small refunds should be released immediately while banking bonds would be issued for large ones. However, the issue would be discussed with stakeholders within a week to reach a workable solution, he added.

The prime minister was also informed that clearance of Rs200bn in one go would also lead to reduction in share of taxes to provinces under the divisible pool.

The zero-rating regime was proposed to the premier by the business delegation led by the Punjab chief minister, who is said to have played a critical role in the scheme’s approval.

During the meeting, the premier said the government placed massive cuts on its non-development expenditures to create space for development spending. The energy sector was put on priority to generate 10,000 megawatts of affordable electricity until 2018, which would help end load-shedding and reduce the cost of electricity.

The participants briefed him about existing business environment and proposed measures to achieve rapid economic growth, including encouraging youth by establishing start-ups which are a growing phenomenon these days.

They particularly referred to reforms in the FBR against the backdrop of coercive and exploitative measures against businessmen in the past.

The prime minister constituted a committee to evaluate the proposals and come up with recommendations within the next 10 days to reach a final decision.

Published in Dawn, February 13th, 2016