This salami-slice strategy won’t work

WEB DESK: A very crucial demand of exporters was finally met on 12th February, 2016, when Prime Minister, Nawaz Sharif announced his government’s acceptance to a zero-rated tax regime for the export sector to help it overcome liquidity crunch and eliminate corruption in payment of refund claims.

But zero-rating only relates to sales tax. What about other taxes paid by exporters on their inputs? Those, tax on diesel used, too need to be refunded to them as well. What about Export Development Fund of 0.125%? Cash flow difficulties of the federal government are the root cause of non-refund or delays in refund of taxes which should not have been accounted for in the revenue stream, in the first place, and duty drawbacks on various categories such as yarn, fabrics and made-ups are already decided.

The decision to zero-rate sales tax was taken during a meeting with leading businesspeople to discuss the issue of pending tax refunds to exporters and the new regime will take effect from 1st July, 2016. The businesspeople in the meeting also gave detailed reasons behind the continuous decline in country’s exports and suggested various measures to reverse the trend. High input cost, exchange rate, refunds withheld by the FBR and several other factors were cited as the reasons behind the fall in exports.

Business community also wanted reforms in the FBR in the backdrop of tax authorities’ coercive and exploitative measures against the business community. It may be mentioned that FBR had introduced zero-rated tax regime for five sectors viz textiles, sports goods, leather, carpets and surgical sectors a few years ago but the decision was later reversed on grounds that exporters were also selling products in the domestic market that needed to be taxed. Currently, the FBR charges taxes on both imported and locally manufactured raw materials but it is supposed to refund all these taxes after exports have been made. However, while the FBR is legally bound to refund taxes, it raises various kinds of objections and takes a long time to issue refunds which causes liquidity problems for exporters.

Apart from experiencing liquidity shortage, exporters have to waste a lot of time in running after the officials of the FBR and often have to pay a percentage of the refund amount as bribe to get their refund. As the reports indicate, the Prime Minister was also told that at present refunds/rebates of exporters amounting to Rs 200 billion were stuck with the FBR and the total impact of zero-rating on the export sector could be in the range of a mere Rs 6 billion to Rs 10 billion.

This estimate was made after taking into account cases where some exporters, especially in the textile sector, sold their products, which were originally meant for exports, in the domestic market. According to some participants in the meeting, it was also decided that small refunds will be released immediately while government bonds, which can be discounted, will be issued for large claims. However, the whole issue would be discussed with the stakeholders within a week to reach a workable solution.

We feel that the Prime Minister needs to implement the textile policy in totality. Salami tactics of incremental help would not suffice. For instance, the prime minister reduced the electricity charges by Rs 3 for the industry; however, this reduction has been accounted for in fuel adjustment surcharge and the tariff for electricity remains largely unchanged. Similarly, the natural gas tariff is on the higher side and exporters want all kinds of energy inputs on competitive rates.

It may be mentioned that our exports are currently facing various challenges like loss of competitiveness in the international market, a slowdown in world trade, an energy deficit in the country and a fall in commodity prices abroad. As a consequence, exports have suffered a fall in double digits in the first seven months of the current fiscal (14.4% in seven months) which is alarming and some major decisions need to be taken to reverse this trend. Seen closely, the present refund system does not suit any stakeholder but only promotes corruption in the system and wastes a lot of time and effort of the FBR in settling the due claims besides creating liquidity shortage, compelling the exporters to run after the taxmen.

The liquidity foregone and time wasted by the exporters could have been used to enhance the level of exports and benefit the country in a more productive manner. Besides, the withholding of refunds did not serve any useful purpose for mobilising additional revenues for the government except delaying due payments for a certain period of time which in any case had to be repaid by the treasury. However, while the decision of the Prime Minister would remove one of the major constraints to export expansion, overall exports of the country would only be maximised if several other measures like competitive exchange rate of the rupee and adequate supply of energy are also guaranteed.

Unfortunately, the Prime Minister or the Finance Minister does not seem to be in a mood to consider the case of rupee depreciation favourably despite various justifications advanced by analysts, including the IMF. It may also be emphasised that the clearance of refund claims in one go would reduce the government revenues and would also lead to a reduction in the share of taxes to the provinces under the divisible pool. However, such a reduction would be gradually offset with the passage of time when refund of claims will be a thing of the past. So the Prime Minister needs to have a clear dialogue with exporters and ensure to them uninterrupted supply of natural gas at competitive tariff prevalent in the region. Pakistan’s failure to fully exploit its GSP Plus status provided by the European Union (EU) is a stark reality that needs to be checked immediately. The market share once lost is extremely difficult to recoup.

We have wasted more than three years and exports have substantially decreased, so let us do away with the incremental approach without any further loss of time. Oil prices would not remain subdued forever and dependence on home remittances needs to be reduced. Exports are the answer to the widening gap in the merchandise account.

Source: Business Recorder