LAHORE: The deadlock between the government and textile exporters over a key budget proposal to abolish zero-rated status of five exporting industries from the next fiscal persisted on Saturday as the former rejected the business community’s demand for continuation of the facility on the grounds that it was being “misused to evade payment of taxes on their domestic sales”.

A three-hour meeting between the government’s economic management team, led by Prime Minister’s Adviser on Finance Dr Abdul Hafeez Sheikh, and the businesspeople from Punjab on the budget proposal, according to the participants, ended without any hope of closing the massive gap between the two sides. However, some participants Dawn spoke with said the adviser and his team had suggested to the textile exporters to formulate a practicable mechanism to facilitate quicker refund of the taxes (to be collected by the Federal Board of Revenue after the abolition of their zero-rating) as an effort to find middle ground.

The exporters from Punjab fear that the abolition of the zero-rating facility for the five industries — textiles, leather, surgical instruments, carpets and sports goods — would lead to accumulation of refunds with the FBR, causing liquidity problems for them, and entail withdrawal of subsidy given earlier this year on electricity and gas rates to make (zero-rated) exports from the province competitive in international markets.

Meeting between govt economic team and businesspeople from Punjab fails to break the deadlock over the facility

The government has fixed the gas price at $6.5 per mmbtu for the exporters from Punjab. Similarly, the electricity rate has been decreased to $0.075 per unit. The energy prices have been decreased to support the exports from the province to enable them to compete in international markets. The exporters say they just want continuation of the zero-rating status and reduced energy prices to boost exports.

Federal Revenue Minister Hammad Azhar was said to have claimed that the government could realise just Rs12 billion on domestic sales of the textile and clothing products worth Rs1.5 trillion (or almost $10bn) during the financial year 2017-18. The economic team also pointed out that the government could not increase its revenues by Rs1.5tr next fiscal without collecting full tax on local sales.

The textile industry leaders countered the minister by saying the industry’s domestic sales were just 30 per cent (or $5bn) of its total output worth $18.5bn as the remainder was exported. They suggested that the government find some other mechanism to collect full tax on domestic sales of export-oriented industries, instead of creating liquidity problems for exporters of these goods.

It was also pointed out by the industry representatives that the abolition of zero-rating would lead to postponement of investment plans for capacity expansion in value-added downstream industry, wipe out small and medium exporters and lead to factory closures.

The textile exports account for 58pc of the total exports from the country despite closure of 30pc of textile mills in Punjab.

Adviser to the PM on Trade and Industry Abdul Razzak Dawood supported the industry, saying the withdrawal of zero-rating facility would create serious liquidity crunch for the exporters and make it impossible to increase exports. The adviser was supported by the Punjab Governor Chaudhry Mohammad Sarwar and provincial Finance Minister Makhdum Hashim Jawan Bakht.

The adviser promised to clear part of stuck-up tax and other refunds of exporters amounting to Rs139bn this month. He also assured the industry that the current import tariffs on raw materials would not be increased despite a suggestion from the International Monetary Fund, but refused to remove or reduce additional customs duty or regulatory duty on their imports.

He urged the businessmen to take advantage of the government’s tax amnesty scheme, saying it was last chance for them to legalise their assets.

Published in Dawn, June 2nd, 2019