Conflict over removal of zero-rated facility persists

PM aide supports stance of business community on maintaining status quo

Shahbaz Rana May 31, 2019
Representational image. PHOTO: REUTERS

ISLAMABAD: The deadlock between the government and business chambers persisted on Thursday over the key budget proposal of abolishing the sales tax exemption for five export-oriented sectors, increasing prospects of a further increase in the standard sales tax to 18%.

A meeting between Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh and representatives of various chambers of commerce and industry ended inconclusively. The business community leadership aggressively defended their position, leaving little room for any dialogue.

Presidents and representatives of Lahore, Faisalabad, Sialkot, Karachi and Federation of Pakistan Chambers of Commerce and Industry held the meeting with the finance adviser.

A representative of car assemblers also warned the government of an increase in prices of locally produced vehicles, if it imposed federal excise duty on the vehicles. Slapping of the excise duty on locally made cars is also part of the government’s budget proposals.

End of zero-rated facility to raise business cost

Adviser to Prime Minister on Commerce and Industry Abdul Razak Dawood once again supported the stance of the business community over the issue of maintaining the status quo.

“My position on the issue of withdrawal of zero-rating facility from the five export-oriented sectors remains unchanged,” said Dawood, while talking to The Express Tribune after the meeting.

The commerce adviser said he was against the finance ministry’s proposal of withdrawing the facility from the export-oriented sectors.

Dawood on Sunday also opposed the finance ministry’s proposal but Federal Board of Revenue (FBR) Chairman Shabbar Zaidi was hopeful that the commerce adviser would change his position in light of new statistics shared with him by the FBR.

Dawood was of the view that the withdrawal of the zero-rating facility would create serious liquidity problems for the exporters and he would not be able to achieve export targets. He stated in the meeting that the decision would also go against the prime minister’s promise of creating 10 million jobs.

He asked the finance ministry to bring a proposal that did not create liquidity problems for the exporters and segregate exports from local proceeds. The budget proposal in its current form adversely affects both the exports and local sales.

“The government has also not budged from its stance of withdrawing the concessionary tax regime but we will try to find a middle ground,” said FBR Chairman Shabbar Zaidi. The FBR would accept any proposal that would stop the abuse of SRO 1,125, he said.

Zaidi revealed that tax authorities on Thursday also held a meeting with the Pakistan Banks Association where banks expressed their willingness to share details of accounts which were subject to withholding tax deduction. Zaidi said the banks would also write to their clients about the Benami accounts and get details for the FBR. The textile, leather, carpet, surgical and sports goods sectors are exempted from the value-addition tax. But from July 2019, the federal government wants to withdraw this facility, aimed at generating a minimum Rs86 billion in additional taxes.

Some say the Rs86-billion estimate is highly understated as the actual tax benefit from the withdrawal of zero-rating facility may go as high as Rs150 billion.

The government wants to impose 17% sales tax on all inputs of these five sectors, according to the budget proposal. It has offered the exporters to claim refund on the value of goods that they will export aimed at fully capturing local supplies of these sectors.

The government’s apprehensions are that the exporters are misrepresenting their domestic sales as exports in order to avoid taxes. It says these five export-oriented sectors have contributed only Rs16 billion in sales tax on their domestic sales and paid only Rs32 billion in income tax.

Tax benefits to these sectors have been ensured through the Statutory Regulatory Order 1125, which the FBR wants to withdraw from the next fiscal year 2019-20.

Finance Adviser Dr Abdul Hafeez Shaikh has announced a Rs5.550-trillion tax-collection target for the Federal Board of Revenue. To achieve this, the FBR requires at least 36% annual growth over this year’s revenue collection. The withdrawal of SRO 1125 was critical to its plan to impose additional taxes to meet a condition of the International Monetary Fund (IMF).

If the government remains unable to convince the industrialists to accept the new normal, it will have to increase the standard general sales tax to at least 18%, which will be highly inflationary and will hit every segment of society.

End of zero-rated facility may push down exports to $21b

Business community representatives were not willing to trust the government on the issue of sales tax refund payments. The government has already withheld over Rs240 billion in genuine sales tax refund of the industrialists aimed at artificially inflating its revenue collection.

Hafeez Shaikh offered personal guarantees to the industrialists that he would make sure that their refunds were cleared within six months. However, the business community leaders did not trust him.

“The budget proposal will go against the desire to transform the economy and the decision will increase the cost of doing business that will make the industries uncompetitive,” said Lahore Chamber of Commerce and Industry President Almas Hyder.

Hafeez Shaikh urged members of the business community to play their role in increasing the volume of exports, according to a statement of the Ministry of Finance. 

Published in The Express Tribune, May 31st, 2019.

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