Export-focused industries: Govt mulls over 5% sales tax on power, gas bills

FBR working on plan to eliminate zero-rating from next fiscal year.


Shahbaz Rana April 16, 2015
FBR working on plan to eliminate zero-rating from next fiscal year. CREATIVE COMMONS

ISLAMABAD:


In a move that may make the country’s five major export-focused industries further uncompetitive, the government is considering slapping 5% sales tax on the electricity and gas consumed by textile, surgical, carpet, sports and leather sectors.


These sectors are bringing precisely two-thirds of total export earnings of the country and are already experiencing flat or negative growth because of an over-valued rupee and preference given by industrialists to export of raw or semi-finished goods instead of value addition.



This proposal is being considered by the Federal Board of Revenue (FBR) as part of its plan to eliminate zero-rating except for the stationary sector from financial year 2015-16, say sources. At present, the five sectors are enjoying the zero-rating facility.

The move highlights the FBR’s traditional approach of overburdening the existing taxpayers instead of venturing into areas where it has failed to collect taxes.

According to the proposal, the 5% sales tax will be adjustable, which the industrialists will not accept due to the FBR’s past record of delaying tax refunds in a bid to inflate its revenue figures.

According to the FBR’s documents, the tax authorities paid only Rs77.8 billion in refunds from July to March of the current fiscal year, which was Rs3.7 billion or 4.5% less than the refunds released in the corresponding period of previous year.

“The textile industry will not accept 5% sales tax on utilities, which will increase the cost of doing business,” said Anisul Haq, Secretary Punjab Region of the All Pakistan Textile Mills Association (Aptma).

He said textile spinning, weaving and processing units were highly energy-intensive and the cost of energy consumption would go up by 33% if they were forced to pay sales tax.

Aptma fears the delay in release of refunds, as experienced already over the years, will further swell the cost of doing business and make the industry uncompetitive in the global market.

Already reeling

Textile exporters say they are already feeling the repercussions of an over-valued rupee against the US dollar, making it difficult for them to compete internationally despite enjoying duty-free access to the European Union.

In the first eight months (July-February) of 2014-15, the five sectors exported $10.5 billion worth of goods, which was almost 66% of total receipts. In this, the textile sector had the lion’s share of $9.2 billion, followed by the leather industry that fetched $827 million, surgical goods earned $223 million, sports goods $207.3 million and carpets $84 million.

Except for textile that recorded a flat growth of 0.4% in exports, all other sectors posted a negative growth. Tax experts caution if the prime minister accepts the proposal, there will be severe economic consequences that the FBR is not realising.

However, for the FBR it is the most convenient way to collect taxes, particularly at a time when it is finding it difficult to achieve the revenue targets. In the first half of the current fiscal year, the FBR collected Rs24.4 billion in sales tax on electricity and gas bills that amounted to more than 10% of total domestic sales tax collection.

It is impossible to evade taxes in such cases as the tax is collected by banks and deposited in the national exchequer.

Tax on cotton

According to sources, the FBR is also considering imposing 5% sales tax on cotton, which the powerful textile industry will also not accept.

At present, the government does not charge sales tax on cotton and starts collecting 2% tax from the ginning stage.

Industry people say cotton-buying season runs for only two months and the 5% tax will block the needed capital. The other option for them is to borrow from banks at higher rates.

Published in The Express Tribune, April 17th, 2015.

 

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