LAHORE: Textile exporters and the government appear inching closer to breaking the deadlock over a key budget proposal withdrawing sales tax exemptions to five industries under the zero-rated export regime from the next financial year as the former seems to have resigned to the new situation arising from Islamabad’s deal with the International Monetary Fund (IMF).

Several textile industry leaders from Punjab involved in negotiations with the government over the issue indicated that their majority realises the fact that the “inevitable” could neither be wished away nor delayed as Islamabad is under immense pressure from the IMF to remove tax exemptions to increase revenues.

Hence, the exporters now appear focused on clinching the best possible deal — including creation of an efficient mechanism for sales tax claims refund payment — from the government as a substitute for the facility. However, the industry stakeholders have different claims to make about the solutions being debated — or already agreed upon so far — with the government for bridging the gap on the proposal.

Talking to Dawn on Friday, a leader of the All Pakistan Textile Mills Association, for example, insisted that the government has agreed to continue energy subsidies for the exporters from Punjab during the next financial year to keep them globally competitive by maintaining the existing gas price at $6.5 per mmbtu and electricity rate at $0.075 a unit.

Withdrawal of sales tax exemptions to five industries under zero-rated export regime in next budget

According to him, the government’s economic team had also indicated its willingness to consider the implementation of a reduced sales tax rate of 7.5 per cent — instead of the standard rate of 17pc — across the textile value chain, starting from the spinning sector, following the abolition of the zero-rated status.

A value-added textile exporter from Faisalabad, who expects a final decision on the issue on Saturday (today), told Dawn that the government had assured them to apply a reduced sales tax rate on the exporters subject to approval from the IMF.

Further, he said, the issue of energy price subsidy would be settled at a later stage, adding that the exporters were demanding that the government ensured that the Federal Board of Revenue paid their sales tax claims in 60 days. “Nothing is final unless it is announced by the government.”

The Aptma leader says the government has promised to pay the refunds in 90 days and plans to use exporters’ money as part of its tax revenue collection effort (to keep down fiscal deficit under the limits set by the IMF loan deal).

Minister of State for Revenue Hammad Azhar also tweeted on Tuesday that “consultations with the exporters are ongoing on all issues including taxation, tariffs and gas/power pricing. Inputs are being solicited from all stakeholders and the final decision will be taken by the federal cabinet in the coming days”. That implies that nothing is final as yet.

When tried to contact him for his comments, the minister did not take calls.

The Fund wants the government to withdraw the facility in the forthcoming budget as part of the deal, which is yet to be approved by its executive board. Both the IMF and government are of the view that the facility has been “misused by the industry to steal sales tax on their domestic sales”. The Fund also wants the government to withdraw incentives to exporters and focus on boosting exports through market-driven exchange rate.

Another exporter said the industry could only propose what is best for increasing exports from the country. “The final decision has to be made by the government,” he sighed, adding that nothing was final yet except that the facility of ‘no tax, no refund’ is not going to be available from the next fiscal year. Still, he was hopeful that the government would work out and announce an effective and efficient mechanism for quick and smooth payment of their sales tax refund claims before withdrawing their zero-rated status.

Although the abolition of the zero-rating regime also affects four other industries —surgical instruments, sports goods, carpets and leather goods, the government has so far discussed the issue and solutions with the textile industry alone. A businessman, who claims to have represented the garments, surgical instruments, sports goods, and leather industries from Sialkot, told Dawn that the discontinuation of the zero-rating facility will ruin the small and medium sized exporters. He said he had apprised the prime minister in his meeting with exporters at his Banigala residence that the country’s exports could drop by $2-3 billion if the incentives under zero-rating were withdrawn. “It is a matter of our survival; we cannot let this happen,” he concluded.

Published in Dawn, June 8th, 2019