KARACHI: Business community has proposed imposing one percent sales tax on every stage of supply chain of five export oriented sector without input adjustment.
Federation of Pakistan Chambers of Commerce and Industry (FPCCI) in its budget proposals for fiscal year 2020/2021 said that Finance Act, 2019 abolished zero rating regime extended to five major export sectors i.e. textile, leather, carpets, sport goods and surgical goods by rescinding SRO 1125(I)/2011.
Sudden removal of zero rating for export oriented sectors has proved fatal for already struggling export oriented sector as the same has resulted accumulation of huge refunds, which in turn has forced genuine taxpayers to knock the doors of tax officers for issuance of their RPOs, which has further promoted harassment and opened up a new window of bribery.
Withdrawal of zero rating has caused liquidity issues even for large exporters.
The removal of zero rating has made it almost impossible for exporters to stand anywhere near global competitors.
Moreover, in order to get maximum possible input tax adjustment, suppliers who are able to supply locally as well as in international markets are preferring local sales at the cost of exports to get maximum possible input tax adjustment.
This has resulted in visible decline in quantitative exports of these sectors, damaging foreign exchange reserves and worsening current account deficit.
The FPCCI proposed that Sales Tax at one percent on total value of supply may be charged at every stage in supply chain of these sectors without any input adjustment.
An example of finished garment chain is given as follows:
i. import or local purchase of fiber – 1 percent
ii. ginning – 1 percent
iii. spinning – 1 percent
iv. knitting/weaving – 1 percent
v. dying – 1 percent
vi. cloth – 1 percent
vii. garment stage – 1 percent
In this way, say in case of a finished garment product, exchequer will collect 7 percent sales tax.
All the raw materials including chemicals and dyes which were included in the erstwhile SRO 1125(I)/2011 dated 31-12-2011 be also subject to 1 percent Sales Tax without adjustment as it will incur no loss to the government exchequer.
The above sales tax in the value chain without input tax adjustment will provide the required revenue to exchequer on one hand, while on the other, the same will relieve the taxpayers of liquidity issues being faced by them in form of huge refunds.
This will also save administrative costs and time of the Board, enabling the force field force to focus on broadening tax base and real revenue collections.