TAX COMPLIANCE OF TEXTILE SECTOR  

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
July 13 - 19, 2009

Federal board of revenue that has slipped its revenue target for the last financial year has recently released a quarter review highlighting its efforts in resource mobilization from different economic sectors. In this review, it has thoroughly underscored overviews and tax generation and compliance performances of major economic sectors. The most surprising was the textile sector that was under broadside in this report. FBR has not only dubbed textile sector low tax compliant but also said that negative collection was recorded from the sector for many years.

Textile sector of Pakistan is receiving tax incentives, which are modelled to those of regional countries, noted quarterly review Jan-Mar 2009. It highlighted the importance of control in refunds and improvement in cash flows from taxpayers to expand the tax base. In 2004-05, only 961 taxpayers from textile sector filed their returns. Although the situation, it said, has improved for the next two years, but one third are still out of tax net for the past few years. FBR recommended punitive actions against tax evaders, however, it clarified that tax incentives be provided to textile sector.

Textile sector contribution in GDP is 8.5 percent, highest in the manufacturing sector, while its share in tax revenue is negative for the last many years. FBR is paying to the sector in form of rebate and refunds much more than it is receiving from it in tax revenue. Therefore, FBR deplored a negative collection from the textile sector. FBR observed that zero rating of textile sector instituted to expedite refunds payments of sales tax had proved ineffective as this had broken the VAT chain and shortened the tax base.

The views and figures presented in the report pose flipside of textile sector, but they were widely contested by Council of All Pakistan Textile Associations (CAPTA). First, the council contended that zero rating of textile sector has not broken the chain of value added tax. FBR made zero rating responsible for cutback in taxes while the council retorted that textile sector was zero-rated and not exempted. Further, the council in a defending statement also pointed out irregularities in sales tax refund mechanism that originally caused negative collection in last financial year. It said government had neglected textile industry totally throughout the last financial year and it provided no supports to the industry amid internal and external pressures that brought down textile exports by whipping 17 percent.

In addition, it termed the review an image-tarnishing attempt by the federal board of revenue. Capta brushes aside the claim of FBR that audit is non-existent in the textile sector, contending that non-documentation of sales tax refunds is not practically possible as, it maintains, every transaction was attached with proper tax invoices and had been crosschecked meticulously, by whom, it however did not disclose in a press release. According to textile exporters, zero rating of textile sector is a motivating measure for them as it has reduced cash flow problems and also facilitated government to get rid of fabricated tax invoices. This can be true for opinion holders who find faults in refund mechanism, but for FBR refund mechanism is far better and efficient revenue manager than zero rated regime.

The FBR has termed textile sector as one of the hard to tax areas in the review. Global economic slowdown and contraction in buying power has greatly affected textile sector of Pakistan, although many strongly believe that internal shocks to textile industry are far more severe than those external vicissitudes. They loath high production cost that render Pakistani products uncompetitive in the midst of nominal priced products of regional counterparts in international market. Regional competitors enter in foreign market with adequate price structure, which Pakistani exporters can not afford. Due to government's myopia for the textile sector and its ignorance of far-reaching impact of the incentives to the industry on scaling up exports, the value added textile sector has not made a distinctive mark of Pakistani brands in exporting market.

Government has announced Rs40 billion export investment support fund for the textile industry for this financial year. This fund is a replacement of research and development fund, which was phased out last year, and it is aimed at to encourage value addition in the industry. Manufacturing sector has been hit harder during last financial year, witnessing deceleration of significant percentage. It is unlikely to catch again positive trajectory in this quarter given the high input costs that despite lower inflation would continue upward. Macroeconomic stability such as exchange rate appreciation, increasing foreign exchange reserves, reduced discount rate, and balanced twin accounts may indirectly pave way for the progress. There is however, an urgent need of stimulus to revive industrial growth, which again will augur well for exports and net revenue collection. Rs40 billion would spur revival of endangered textile industry. Since textile and clothing constitutes major foreign exchange spinner, there is a hope that it would receive large share in value addition support. According to Dr. Mirza Ikhtiar Baig, Federal Adviser on Textile, the sector will have 67 percent of value addition funds. Many businesspersons and trade associations have been demanding incentives for textile sector conditioned with value addition for long. Adequate utilization of the fund would enhance textile exports from the country and generate revenue for FBR from such hard to tax area.