Garment manufacturers: Heavy taxes hamper investment in sophisticated machinery

Big businessmen go overseas, small ones reluctant to pay high prices.


Kazim Alam February 10, 2012

KARACHI: Few people were surprised when the Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA) released a study last month, saying the volume of textile and apparel exports to the United States declined by 18% in 2011.

In fact, industry experts had foreseen the sharp decline in export volumes because of two reasons: one, the lack of investment in imported garments machinery from 2008 onwards; and two, the rising trend of shifting manufacturing operations from Pakistan to Bangladesh.

Al Murtaza Machinery Company Private Limited – which imports knitting, cutting, stitching, embroidery, finishing and quality testing machinery from Japan, China, Europe and the US – has lost more than 50% of its business since 2005, according to its Chairman Asif Ali Rashid.

“We’re heavily taxed. On every machine we import, we pay customs duty at 5%, sales tax at 19%, income tax at 5% and clearing, transportation and terminal charges at 3%,” Rashid said.

Pakistan’s oldest commercial importer of garments machinery, Rashid says Al Murtaza Machinery still holds market shares of 60% and 18% in terms of value and volume, respectively. Yet, the company’s sales force decreased by 40% between 2008 and 2011.

Highlighting the fallout of the sales tax, which is imposed on commercial importers only, PRGMEA Research Officer Ibrahim Mahmood told The Express Tribune that while big manufacturers had been shifting their operations to Bangladesh, small and medium-sized businessmen were reluctant to pay increased prices.

“Small buyers aren’t able to import machinery themselves. No wonder little investment is taking place in the garments industry today.”

Analysts believe that the process of value addition, which can be defined as the enhancement added to a product or service before it is offered to customers, is central to garments manufacturing, as the price of a value-added product can sometimes be 400% higher than that of a basic product.

“In some cases, the cost of a sophisticated machine that produces complicated garments can be 250% higher than that of a basic machine. But it is one-time investment,” Rashid said.

While a simple pair of jeans can be sold at $6, a fancy version of the same product, prepared with the help of a sophisticated machine, can fetch as much as $18 per piece, he added.

“There’ve been examples where output has increased by 100% because of bringing sophisticated machinery online. But who’ll make the investment when banks charge 18% interest rate and imported machinery is taxed so heavily?”

Speaking on condition of anonymity, another leading importer of apparel machinery, who has offices in Karachi and Lahore, said the profit margin in the industry had decreased drastically, especially after 2008. “We’ve operated on a margin of up to 15-20% in the past. Now it’s somewhere around 3%,” he said.

Expressing his hopelessness, Rashid said he had now stopped sending his yearly suggestions to the authorities concerned. “We don’t want a subsidy. All we demand is a level playing field. If you can’t support us, then at least don’t penalise us either.”

Published in The Express Tribune, February 10th, 2012.

COMMENTS (2)

khan | 12 years ago | Reply

This is life and death issue for our country which has such high rate of unemployment we must understand that being a agro based economy we have to convert our raw materials in value added products. ALLAH (SWT) has blessed us with greatest resource which is human resource now it our job how we utilize this. if the government has the right policies this human resource can really turn our agro economy in to value added economy like it has for China. For example we are cotton producing country now if we sell raw cotton of one dollar but same amount of cotton made in to yarn will sell for 3 dollars and now if this yarn in converted in to fabric it will sell for 6 dollars and if this fabric is converted in to garments it will sell for 18 to 24 dollars and on each stage providing employment to thousands of peoples now this principle works for every product not only cotton instead of selling steel Orr we should sell cars the government job is to make sure that the manufacturer has same level playing field like our competitors have in HONG KONG OR SOUTH KOREA. But by charging these tariffs on import of machinery results in higher capital cost which ultimately will reflect in the finish product price and we can not compete in international markets. The present policy is like killing the goose to get the golden egg. There should be zero % charges on the import any machinery which is not manufactured locally to improve the production and quality for any exportable product and to encourage the local and foreign investors to set up manufacturing plants in Pakistan to capitalize on our cheap labor and availability Raw materials.

Harry Stone | 12 years ago | Reply

Another business sector which will slowly die in PAK because of the failure of leadership.

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