Textile value added sector demands restoration of sales tax zero-rate regime

KARACHI: Exporters of textile value added sector have demanded restoration of zero-rated sales tax regime as despite assurance of 72-hour payment of refunds huge liquidity was stuck up with the tax authority.

The Value Added Textile Exports Associations demand the government for immediate restoration of Zero Rating – No Payment No Refund System, release payments pending refund claims of sales tax, tariffs of gas needs to be reduced, tariff of power recently enhanced without any justification and FAC imposed retrospectively be withdrawn with immediate effect, industrial water tariff in Karachi must be rationalized and its supply must be made assured, weekly holiday of gas must be done away with and utilities be supplied on 365 days basis.

The exporters agitated against imposition of 17 percent sales tax on export oriented sectors, however, the government one-sidedly imposed the sales tax despite of strong disagreement of the export sector.

The Advisor to Prime Minister on Finance promised that the refunds will not get stuck up whereby he and his team have made a commitment that after passing of budget, his team will hold meetings with exporters and devise an automated system like in Bangladesh or China.

Through the automated system, exporters will get a major amount from bank or the State Bank and would not be dependent on the FBR.

Advisor Finance promised that if the new refund system will not work, the govt. will re-assess in 3-6 month period.

Since more than 7 months have been passed and the FBR FASTER system has failed for speedy refunds, therefore, the Govt. should honour their commitment and restore zero rating – No Payment No Refund Regime for the export sectors.

Exporters feared that their precious liquidity taken away by the government in shape of sales tax worth billion of rupees shall be completely stuck up and refunds shall be excessively delayed because the FBR has also failed to achieve its revenue collection target.

It is an alarming situation that Chairman FBR at the time of budget has left due to his acute illness while, as learned, Member IR (Operations) is also not available at FBR Islamabad.

If the government will not realize the gravity of situation and exporters refunds are not released on war footing basis, the textile exports will completely collapse leading to enormous flight of capital and massive lay-offs and uncontrolled unemployment.

The government rescinded SRO 1125 and discontinued zero rating status from export oriented sectors including textile and imposed 17 percent sales tax with a plan target in Budget 2019-20 to collect Rs185 billion from the local market for the whole fiscal year.

The government claimed that local textile sales is around Rs1200 billion per annum. However Govt. collected only Rs23.6 billion in the first five months (Jul-Nov 2019) through domestic front and Rs32.3 billion at import stage (as these imports are mostly by exporters hence it is refunded).

For mere Rs50 billion the entire sector has been put into deep cash flow crisis.

One fails to understand the rational behind this as there figures presented at the time of budget have been proven incorrect at that time also we tried to correct them that local sales are only 20 percent and 80 percent is the exports and by imposing the sales tax, the export sector would be severely hit and that has proven to be right today and exports are suffering heavily in the scenario of cash flow crunch coupled with very high interest rate.

This was voiced by the Chairmen of the Value Added Textile Exports Associations at Karachi Press Club today in a joint press conference followed by peaceful protest against the issues of withheld refund payments, high tariffs of Gas, Electricity, Water and load shedding of gas.

Zubair Motiwala, Chairman, Council of All Pakistan Textile Mills Associations; Jawed Bilwani, Chairman, Pakistan Apparel Forum; Amanullah Kassim, Central Chairman, All Pakistan Textile Mills Association, Asif Inam, Chairman (SZ), All Pakistan Textile Mills Association, Yasin Sadik, Former Chairman, All Pakistan Textile Mills Association; Aslam Karsaz, Chairman, Pakistan Hosiery Manufacturers & Exporters Association, Shaikh Shafiq, Central Chairman, Pakistan Readymade Garment Manufacturers & Exporter Association; Kamran Chandna, Chairman, Pakistan Knitwear and Sweater Exporters Association; Haroon Shamsi, Chairman, Towel Manufacturers Association of Pakistan; Khawaja M. Usman, Chairman, Pakistan Cotton Fashion Apparels Manufacturers & Exporters Association Abdus Samad, Former Chairman, Pakistan Cloth Merchants Association, Shaheen Merchant, Chairman, Pakistan Denim Manufacturers & Exporters Association; Amjad Jalil, Chairman, All Pakistan Textile Processing Mills Association; Amin Allana, Chairman, All Pakistan Bedsheets & Upholstery Manufacturers Association participated in the Joint Press Conference and peaceful protest supporting by a large number of textile exporters.

The Value Added Textile Export Sector was of the view that the Govt. has failed to refund sales tax claims under FASTER System of textile exporters as per commitment, to refund claim amount in 72 hours, contrarily the government has not paid exporters’ claims for the last seven months.

Approx. Rs100 billion of textile exporters liquidity held up under FASTER Refund System in last 7 months and total Rs210 billion are withheld with the government payment timeline for payment of Customs Rebate claims which previously was reduced to 7 months has again been prolong to a period of 13 months.

However, the government also committed that Customs Rebate, DLTL claims will also be paid electronically along with export proceeds.

Reportedly, hundreds of exporters SMEs have stopped their production owing to liquidity problems who have not received their sales tax refund claims for last seven months and due to high rates of utilities shall be compelled for closure if their sales tax refunds are not released on immediate basis and tariffs are not rationalized to facilitate them to get new orders and resume production.

In next 2-3 months Approx. 8-10 percent textile exports may face decline, the Small and Medium Export Industries are in total dire straits and demand immediate attention of the Government for their survival.

FBR harsh policies will completely destroy value added textile export sector if the system is not withdrawn. Government should declare an emergency situation to control the downfall of GDP, rise of inflation and downfall of exports and take all necessary steps to release payments of all pending refund payments of exporters forthwith and restore zero rating of sales tax – no payment no refund regime and freeze the tariff at its previous position in the larger national interest.

Value Added Textile Export Sector further demanded to bring down tariffs of gas, power and water and supply utilities 365 days.

One crisis after another is seriously mauling the Value Added Textile Export Sector and the recent announcements of another increase in electricity and Gas charges would render this vital export sector to be become most uncompetitive in the international market.

It is an irony and most surprising that on one side the Government wants to reduce the cost of manufacturing of export oriented sectors due to stiff competition from regional countries and on other side increasing utility tariffs.

This proposed increase in electricity and gas tariff along with several other adverse factors would render the cost of doing business of the Value Added Textile Sector uncompetitive in the International Market against competitors such as Bangladesh, India, Srilanka, Vietnam, China, and other competing countries whose cost of doing business is much lower owing to several variance in input costs as compared to Pakistan.

Ministry of Energy (Petroleum Division) has moved Summary to the ECC of the Cabinet to raise gas tariff of zero-rated industry and their captive power to $6.5/MMBTU (Rs1,000/MMBTU) from the previous tariff of Rs786/MMBTU, apparently to give cross-subsidy to other sectors.

Relevant to mention that the Ministry of Commerce had assured the export industry that Rs600/MMBTU would last for a period of three years while, previously, raising the tariff from Rs488 to Rs600 including GIDC. However, after appreciation of dollar, the tariff of Rs786/MMBTU was imposed which is itself much higher than our main competitor Bangladesh and we can prove if cross subsidies are removed from gas tariff and we pay the actual WACOG (Weighted Average Cost of Gas) our price would be lower than Rs600/MMBTU.

It is astonishing that Govt. is charging subsidy to be given to other sectors from Export Oriented Sector and crippling the sector whereas it is the domain of Govt. to allocate the same from budget and If two more fertilizer plants of the size of Engro come into Pakistan then what would happened to our tariff. It would probably enhance with another 50 percent.

It is an irony that Textile Export Industries of Karachi which contribute 54 percent in the national’s textile exports is starving for the most essential Raw Material – indigenous gas due to weekly gas closures and low gas pressure which has brought negative effects on the export consignments.

The export production has crippled and industries remained without gas leading to exporters failure to meet their export commitments in time.

The textile export sector has been compelled to work only six-days a week while in regional countries and worldwide the competing export industries operative 24/7. Percentage wise impact of One day Gas Holiday every Sunday is equal to 14.28 percent (100/7) which means there is 14.28 percent production loss every week due to Gas Holiday on every Sunday and its impact will be 8 percent on total national exports.

To safeguard textile exports, it is crucial to supply continuous and uninterrupted Gas to the Export Oriented Industries of Sindh / Balochistan. New Industrial Gas Connections should be given to industries of Sindh / Balochistan (as per Article 158 of the Constitution) at prevailing rates on SOS basis, Moratorium on new connections must be done away with.

Previously Ministry of Energy, Power Division vide Notification SRO12(i)/2019 dated 1st January, 2019 whereby the Power Division has revised the tariff for export oriented sectors to net 7.5 cents / kwh including all charges to facilitate the exporters for enhancement of exports and earn precious foreign exchange for our beloved country but this was not implemented in Karachi for the reasons best known to Federal Govt.

Water tariff in Karachi is also most exorbitant and three times higher than the water tariff of other cities of Pakistan. Therefore, water tariff should be brought down at par with the other cities. The export orders to Pakistan has been curtailed owing to lack of CETPs conformance.

The Federal Govt. should take the ownership and construct the Five Combined Effluent Treatment Plants in the industrial areas of Karachi to protect and facilitate the 54 percent textile exporting industries of Karachi.

It is imperative that Tariff for Electricity and Gas should be fixed on yearly basis for the Export Oriented Sectors and Priority should be given only to these sector as the Export Sectors have to make commitments for 6 months in advance and such frequent increase all the year round in the electricity and gas tariffs jeopardizes their entire planning and they suffer huge losses to keep up commitments to their foreign buyers.

The associations appealed to the Prime Minister to intervene in the matter in the best interest of our exports and foreign exchange earnings and demands a fair Gas tariff which is the actual cost of Gas minus cross-subsides.

He further appealed that announced power tariff of 7.5 cents/kwh including all charges should be implemented in inclusive of all charges across Pakistan including Karachi.

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