Government yet to remove sales tax from stationery and dairy

FBR has not reversed decision despite being ordered by ministry.

ISLAMABAD:

The federal government seems to be backtracking from its commitment that Finance Minister Ishaq Dar gave at the floor of the National Assembly for restoring zero rating facility on the raw material of stationery and dairy products.

On June 12, the Federal Board of Revenue (FBR) had taken away the zero-rating facility from the writing instruments manufacturing industry and dairy products while bringing these sectors to ‘exempted sectors’. The withdrawal of zero rating facility has immediately resulted in a 17% levy on import of raw materials, which are mainly chemicals for the instruments industry.

After hue and cry made by the parliamentarians and the manufacturers and consumers of these products, Finance Minister Ishaq Dar had announced to restore the zero rating facility for these sectors in his budget wind-up speech.

To give effect to the announcement made by the Finance Minister, the FBR was required to rescind the notifications that it issued on June 12. However, despite a lapse of more than 20 days and the fact the start of the new fiscal year, the FBR has not recalled its orders, as also confirmed by the FBR officials.

Before June 12, under the zero-rating facility, the industry used to pay sales tax on imports but could later claimed refunds on its output. Since the industry has been granted ‘exempted status’, it will no longer be entitled to claim refunds.

A senior official of the FBR claimed that the tax authorities have sent a fresh summary for the approval of Finance Minister Ishaq Dar, to restore the zero rating facility. Chairman FBR Tariq Bajwa was not available to confirm the development but  some fresh demands made by Lahore based dairy producers is delaying the decision.

The manufacturers who are paying 17% sales tax on imports are not clear whether they should seek refunds in sales tax returns due to indecisiveness of the government. They are now planning to increase the prices of their products, which will increase by at least 20%.

Since inputs make up about 80% of the cost of production, while the rest of the 20% is incurred on labour and other expenses, prices are expected to go up by at least 14%, on average, immediately.

This will make the local industry, which currently has a turnover of billions of rupees, unviable; as the price structure for imported finished products has remained the same, industry officials said.

The price of an HB pencil is currently Rs5 per piece, which may go up to Rs6 after the levy – an increase of 20%. Similarly, the cost of a dozen colour pencils will increase from Rs70 to Rs80, an increase of 14.3%. The prices of a dozen crayons, on the other hand, will increase to Rs90 from Rs80, up by 12.5%.

A sharpener that was available for Rs5 will now cost Rs6, after a 20% increase in prices. A six-inch ruler’s price will also increase by 20% to Rs6, while a ballpoint pen will now cost 16.7% higher.

Pakistan is home to some good brands in this sector, like Gold Fish, Piano and Dollar, but these have been threatened in the past by an influx of competing imports. The government’s decision to tax the sector will increase the import bill and make the industry’s exports uncompetitive, industry insiders complained.

Local manufacturers also claim that importers of writing instruments easily evade taxes through under-invoicing and undervaluation of products, which they say is done in connivance with corrupt FBR officials. This latest development will now place them at an even more advantageous position.

Published in The Express Tribune, July 14^th, 2013.

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Correction: In an earlier version of the article, the word "stationery" was misspelled as "stationary". The error has been rectified.