Aurora Magazine

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Fears and Uncertainties

Published in Sep-Oct 2019

Nasir Jamal examines the impact of the government's new tax measures on Pakistan's textile exports

Imran Mahmood, CEO, Aspen Textiles, exports textiles, mainly fabrics and made-ups, worth five to six million dollars a year. Based in Faisalabad, he is one of the several hundred small to medium sized manufacturers who fetch almost 60% of Pakistan’s total textiles and clothing (T&C) export revenues worth approximately $13-13.5 billion every year. However, the recent government decision to withdraw sales tax exemptions enjoyed by the exporting companies on the purchase of their inputs under the zero-rated regime has left a big question mark over the future of small exporters like him.

“Cash is the lifeline for any export-oriented business; more so for small firms. The imposition of 17% sales tax on our inputs, including electricity, will cause a substantially large dent in our liquidity,” insists Mahmood during a conversation with Aurora.

“It takes a manufacturer between 120 and 180 days to procure inputs and ship the final manufactured product out of the country. How can a small business survive if almost a fifth of their liquidity is blocked for four to six months?” he wonders, predicting a drastic dip in T&C exports in the next six to 12 months because of the cash flow problems likely to hit the exporting units following the abolition of the sales tax exemptions.

The textile industry, the largest employer of non-farm labour in the manufacturing sector, contributes 8.5% to the economy and constitutes 55 to 60% of the total exports from Pakistan. Years of inconsistent government policies, energy shortages, lack of investment in new, efficient technology and failure of manufacturers to diversify their product range and move into the value-added apparel sector means that Pakistan’s share in the $820 billion international T&C export market has stagnated in spite of the country being one of the five largest cotton manufactures in the world.

According to the World Trade Statistical Review 2019 by the World Trade Organization (WTO), the current value of world textiles and apparel exports totalled $315 billion and $505 billion respectively in 2018, up by 6.4% and 11.1% from a year earlier. With exports of around eight billion dollars, Pakistan occupies the ninth position among the 10 largest exporters of non-apparel textiles with China, the EU and India taking the top three places. Regrettably, Pakistan’s name is nowhere to be found on the list of the top 10 apparel exporters. Compared with Pakistan’s apparel exports of $5.5 billion, Bangladesh, with a market share of $32.5 billion and Vietnam with $31.5 billion, have made it to the third and fourth positions on the list of top 10 apparel exporting countries in the last 15 years.

The government has promised exporters it will refund the sales tax three days after they file their monthly sales tax returns along with the Goods Declaration forms (containing the details and value of their shipments) to ease their cash flow. However, few believe it because of their past experience of dealing with the Federal Board of Revenue (FBR) and the government’s tendency to delay export refund payments (in certain cases for years) to meet its annual tax revenue targets.

The textile industry fears that at least Rs 350 billion of the manufacturers-cum-exporters will get stuck in the government’s refund system in one year because of the revocation of the ‘no sales tax, no refund’ facility implemented in 2016 to ease liquidity for exporters who saw billions of rupees stuck for years. At present, the government already owes them Rs 155 billion in sales tax and other refunds.

“The new budget has put into words the worst fears of the textile industry, which is gasping for growth at the moment,” asserts Azizullah Goheer, Secretary-General, Pakistan Textiles Exporters Association (PTEA). “The cash flow crunch will squeeze the financial streams of the exporting companies, as the large portions of their liquidity will get stuck in the government’s refund regime at a time when their working capital requirements have spiralled due to the steep currency devaluation and rising input prices. Larger firms may survive this, but the small and medium sized ones will see their export volumes decline rapidly over the next few months.”

The government has withdrawn the sales tax exemptions to meet a condition for the six billion dollar loan from the International Monetary Fund (IMF). Also the facility was allegedly being misused by many firms to steal sales tax on their domestic sales. The decision is expected to increase the collection of sales tax on domestic sales of textiles and clothing up to Rs 100 billion a year from the present Rs 12 billion or less.

According to Goheer, before the withdrawal of the sales exemptions, the average input tax paid on items such as packaging, stitching materials, chemicals and store items used by apparel exporters was computed to be 1.75% of the total textile and clothing exports. Subsequent to the abolition of the zero-rating, this is estimated to account for 12.8% of the total exports.

The withdrawal of the sales tax exemptions is not the only measure introduced in the recent months that will adversely affect the international competitiveness of the T&C exports. The government has, from July this year, also substantially raised off-peak electricity prices by 32% and peak rates by 60% by increasing the tariffs through a quarterly adjustment of Rs 1.80 per unit, added different surcharges to the exporters’ monthly bills and is charging five percent advance income tax and 17% sales tax against the special tariff of $0.075 per unit for export-oriented units in order to cut the cost of doing business and increase the competitiveness of the country’s exports. Similarly, the government is not releasing the promised subsidy on gas for exporters.

“The electricity and gas bills of the export-oriented industry have effectively increased our energy costs by 40% and mills are left with no choice but to seek relief from the courts for implementation of the power tariff of $0.075 per unit and gas rate of $6.5 mmbtu as allowed last year,” says an All Pakistan textile Mills Association (APTMA) official. “Much of our time is spent on court cases or in dealing with utility companies and tax collectors for implementation of the policies, something that should be done automatically. How do you expect us to work on our exports in such conditions?”

Many exporters across the textile industry value chain insist that the “new tax measures implemented coupled with steep, abrupt currency depreciation and enhanced energy rates” have created an uncertain and tougher business environment for exporters.

The changes in the fiscal and monetary policies have significantly spiked the overall cost of doing business by increasing the working capital requirements of manufacturers and blocking fresh investments in capacity expansion and technology replacements. “If the government is interested in boosting exports, it must immediately pay back the unpaid tax and other refunds to ease liquidity within the sector, implement the special electricity and gas tariffs for export oriented units and provide subsidised long-term bank loans and export refinance for fresh investments in value-added textiles,” argues Goheer.

“There is a lot of opportunity for us to increase our share in the international textile and apparel market, which is growing at a compound annual rate of over five percent. But to take advantage of that opportunity, the government will have to rethink its strategy, remove the uncertainties gripping manufacturers and exporters and shift the focus away from revenue generation measures to exports,” he concludes.

Nasir Jamal is Chief Reporter, DAWN Lahore.