PTI govt withdraws zero-rated status for major exporters

Govt imposes 17% sales tax on textile, leather, carpet, sports goods and surgical instrument sectors

Usman Hanif June 12, 2019

KARACHI: Despite the hue and cry by the five major zero-rated export sectors of the country, the Pakistan Tehreek-e-Insaf (PTI) government has withdrawn the zero-rated facility, saying that the move will streamline revenue flow and prevent leakages.

While announcing the federal budget for fiscal year 2019-20, the government withdrew the Statutory Regulatory Order (SRO) 1125(I)/2011, which offered zero-rated sales tax on inputs and products of five major export-oriented sectors ie textile, leather, carpets, sports goods and surgical instruments.

“The objective behind the move is to resolve the problem of delay in refund payments. The zero-rating created a loophole and the benefit was being availed by unintended beneficiaries and non-exporters,” said Minister of State for Revenue Hammad Azhar while presenting the budget for 2019-20. “The reduced rates for finished goods are also harming revenues.”

In order to streamline revenue flow and prevent leakages, he proposed some measures including scrapping the SRO 1125, thus restoring sales tax at the standard 17% on the five zero-rated sectors.

He also said the rate of sales tax on local supplies of finished articles of textile, leather and finished fabrics may be raised to 17%. However, the retailers opting for real-time reporting would be given a relaxation and will be charged 15% tax, he added.

He stressed that zero-rating of utilities would be withdrawn and the refund of sales tax to these sectors would be automated, thus ensuring that the tax paid on inputs was immediately refunded.“Refund Payment Orders (RPOs) will be immediately sent to the State Bank for payment,” he said.

He proposed a reduced tax rate of 10% on ginned cotton, which is presently exempted.

“This decision is against the textile policy which the PTI government presented before general elections,” said Pakistan Hosiery Manufacturers and Exporters Association (PHMA) Chairman Jawed Bilwani while criticising the budget. “Exporters reject the government’s decision on withdrawing the SRO 1125.”

Stating figures, he lamented that the withdrawal of zero-rated facility for the five export sectors would push down exports by 30%.

He was of the view that the discontinuation of the zero-rated status would deal a blow to the export industries, lead to flight of capital, mass unemployment and huge foreign exchange losses.

He expressed concern that after implementation of the decision, the exporters’ liquidity would get stuck with the government as it did not have efficient system to refund exporters’ money on time.

“Exporters ship their products thrice a year because it takes four months from the production of garments to shipment,” Bilwani said. “If the government is going to charge 17% tax, 54% of their money will get stuck with the government in these three cycles, which will cause liquidity crunch for the exporters.”

“This is how the discontinuation will cause plethora of problems for the export industry,” he said. He pointed out that this could also result in capital flight to foreign countries, which could trigger a spike in unemployment in the country.

“The government is taking these steps to meet IMF conditions,” the PHMA chairman said. “Pakistan is a sovereign country and the government should take decisions in its own interest and not give in to external pressure.”

The government already owed the exporters billions of rupees, how would it be able to pay new refunds, Bilwani asked.

An amount of Rs200 billion of exporters in tax refunds, customs duty rebate, withholding tax refund, Duty Drawback of Local Taxes and Levies and Duty Drawback of Taxes are stuck with the government.

“The withdrawal of zero-rating will definitely lead to the shutdown of small and medium export industries,” he said.

Published in The Express Tribune, June 12th, 2019.

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