Daily Times

The textile sector of Pakistan, which contributes over 50% to our exports, is undergoing such a nerve-racking period where only a person with a crystal ball can be expected to reasonably predict its trajectory. The four main sub-sectors of the textile economy i.e. cotton, spinning, processing and Apparel/Madeups are all directly and indirectly affected by the Government’s policies.

A textile package of Rs.180 billion was announced in January this year. Under the package, Rs.38 billion should have been allocated for exports while only a meagreRs.3.5 billion has been disbursed as of now.

The dilemma of textile manufacturers is to continue production, sometimeseven knowing they will make losses. This decision is often fomented by the government announcing certain incentives to enable the manufacturer to continue production. The manufacturer, on the other hand, often passes such incentives to the importer to remain in business, while hoping for better returns in the future.

All sub sectors of the textile industry are running under capacity and 25-35% of all projects have shut down. Only garments and made-ups sub-sectors have been able to sustain production. The textile sector was hoping that the Government would allocate the requisite amount for announced export incentives in the budget of 2017-18 but nothing has been allocated as yet, leaving this productive sector in the lurch.

I suggest that the Government should authorise commercial banks, under the supervision of the State Bank of Pakistan, to directly disburse incentives to exporters on receipt of export proceeds which can later be claimed from the State Bank.

The Government’s budget deficit is resulting in the non-payment of sales tax refunds estimated to be Rs.250 billion. The Finance Minister had promised to clear sales tax refunds by 15 August, 2017which is appreciable, but the devil is, in fact, in the details.

The Minister’s promise relates to the Refund Payment Orders (RPOs) issued by the Federal Board of Revenue (FBR) till 30th April, 2017. The issuance of RPOs (which FBR is legally required to issue in 45 days) is another story.

Government policies regarding refunds, payment of incentives, under-invoicing and smuggling are adversely affecting the textile sector. If the government solves these three issues — it will
give breathing space to this sector and that can go a long way to energising our industries

The entire system is virtually controlled by FBR’s auditors to the exclusion of every other officer. This naturally results in harassment of the assesses, delay in issue of RPOs, uncalled for rejections of input taxes, not giving in writing reasons for such rejections, and their resultant unaccounted shenanigans.

RPOs issued in July2016 have still not been cashed. This entire entangled system of refunds is playing havoc with the cash flow of the textile sector. Rs.250 billion is still stuck in refunds cost, and in interest amounting to Rs 22 billion—or 1.75% of total textile exports—to exporters.

This 1.75% cost added in the 1% withholding tax on textile exports results in exporters paying almost 2.75% tax on exports. So it is a misnomer to say that textile exports are tax free.  This 2.75% cost plus interest assumes that textile exporters are selling at about a 9% net profit which is far from reality.

The Government should issue some negotiable instrument to all refund claimants as of 30th June, 2017 which the exporters may then use as collateral for raising money from banks to meet their working capital and the cost of financing must be met by the State Bank out of its profits.

The third complaint of the sector is the Government’s lack of interest and indifference in eradicating the menace of underinvoicing and smuggling (including the Afghan TV Assist Trade – ATT) which is playing havoc with local industries.

Afghanistan imports raw materials under the ATT for industries that do not exist in Afghanistan and these raw materials end up in Pakistan without payment of import duties. These two factors have not only caused colossal losses to the national exchequer but have also resulted in the closure of industries which has led to unemployment.

The Pakistan Business Council proved that underinvoicing worth USD 5.4 billion occurred in 2015 from China, on which the evasion of import duties is equal to Rs.200 billion per year.

One wonders why the Government does not plug this loophole of revenue leakage especially when there is just one gate from where all the underinvoiced goods leave the port of Karachi.

There is no other existing sector of our economy which has the capacity to generate this amount of revenue, simply by assessing imports at their actual value.

It is highly recommended that the Government create a Special Directorate or Collectrate whose sole job should be to control underinvoicing.

The policies of the Government regarding refunds, payment of incentives, and underinvoicing and smuggling are adversely affecting the textile sector. If the Government solves these three issues, it will give breathing space to this sector which can go a long way in energising our industrialists.

The writer is a Chartered Accountant and can be reached at; maqsood@aruj.com

Published in Daily Times, July 19^th , 2017.