VAT ON SHIP BREAKING CAN PLAY HAVOC WITH BALOCHISTAN'S BIGGEST INDUSTRY

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Mar
22 - 28, 2010

The imposition of Value Added Tax (VAT) on ship breaking industry may play havoc with the industry, which is already reeling under the increase in the average prices of ships in the international market.

The industry produced 462,900 tonnes of scrap from 61 small and medium size ships that anchored at the Gadani shipyard in Balochistan in the first eight months (July-February) of the current fiscal year 2009-10.

VAT can harm the steel producing industry, which is already paying tax in a special tax procedure. The recent increase in prices of ships and tax system by the government has already discouraged the industry players to predict higher scrap production by the end current fiscal year.

The country's steel re-rolling mills depend heavily on the ship-breaking industry for the supply of ship plates. Local ship breakers contend that the steel re-rolling industry is in deep crisis, as the re-rolling mills, because of not having sufficient raw material are running on as low as 40 percent production capacity against the normal 80-90 percent.

GADDANI SHIP BREAKING IS THE BIGGEST INDUSTRY OF BALOCHISTAN.

The cash-strapped province can get more financial resources if the government takes effective measures to boost ship-breaking industry, which employs over 5,000 people. The industry has been a victim of negligence from successive governments. Global economic recession has also affected this industry, as the international market has witnessed reduction in the rates of abandoned ships. In the 1980s, Gadani was one of the largest ship-breaking yards in the world, with more than 30,000 direct employees.

Ship-breaking industry in Pakistan is mostly concentrated at Gaddani where 90 per cent of country's ship breaking activity is carried out. Gaddani still lacks the essential facilities like health, potable water and gas. The industry has to use costly oxygen gas for cutting and scraping millions of tonnes of scrap. Besides, the massive smuggling of rollable scrap without paying any duty from Iran and Afghanistan is destroying the industry.

The workers at the ship breaking yard work in sheer danger. Onboard gasses cause fires and explosions. The incidents take place frequently due to fires and explosion, suffocation and inhaling CO2 and the steel plates and other material, which may hit the workers while falling off the ships. As a result of frequent accidents at the ship breaking yard, many workers lost their lives because of the absence of health facilities at Gaddani.

It is a fact that ship breaking activities at Gaddani are polluting the air, soil and sea. Ship breaking involves generation of hazardous waste and toxic substances, which cause environmental pollution. The pollution or contamination can have both acute and long-term effects on human health and environment. The primary victim of this contamination resulting from ship-breaking activities is the workforce at the Gaddani shipbreaking yard but the contamination also makes the larger communities in the vicinity vulnerable.

The major environmental concern vis--vis ship dismantling at Gaddani is lack of containment facilities to prevent pollutants from entering water, ground and air in addition to the direct exposure of workers. There is no proper waste management system at Gaddani yard. There are no rules and regulations, which are followed to avoid contamination of air, water and soil.

The local ship breakers allege that smuggling of banned items such as moon shaped pipes, girders, angles, channels, pipes, shafts, and used ship chains are finding their way into the local market through Quetta-Chamman border and from customs due to large-scale mis-declaration which is hurting the ship breaking activities at Gaddani

The smuggling of 'half Mooa-cut' pipes, the substandard material through the Taftan border has also harmed the ship breaking industry. According to one estimate, about one million tons of such material is smuggled annually and supplied to the re-rolling mills in Karachi and Lahore. The 'half Mooa-cut' pipes do not conform to the required standard for construction in terms of its elongation flexibility and strength. The local ship breakers allege that the sales tax charged on this material is not based on proper assessment thus incurring loss to the national exchequer. The local ship breakers demand 25 percent regulatory duty on the import of steel junk and illegal imports of substandard material and its easy access to Pakistan steel markets. They have asked the government to restrain the use of construction bars made from substandard material, which do not meet PSI standard.

The steel and other material available from the dismantled ships at Gaddani not only meet the PSI standard but have internationally been acknowledged as quality steel scraps for the steel and building sectors. The government should take steps to plug the smuggling of the substandard material for the revival of the industry. It must impose regularity duty on import of re-rollable scrap from the Taftan border. Officials now claim that scrap smuggling from Iran and Afghanistan has been stopped.

The ship breaking industry faced crisis due to wrong polices of pervious governments which resulted in unemployment and people involved in this business faced losses and they withdrew investment from this important sector. In the 70s, 100 to 150 ships used to come at Gaddani beach for breaking. However, owing to imposition of heavy taxes, the industry got paralyzed. Now the VAT would be severe blow to the industry.

The industry is a major contributor to the economy by meeting half of the steel requirement of the country. It is a significant source of supply of steel for Pakistan Steel Mills. Besides high quality steel, Gaddani dismantled ships also provide cheapest possible non-ferrous material such as copper, brass, aluminum, machinery, generators, boilers, wood and tools of international standard for country's ever growing sectors of industry and commerce.

The policy measures adopted by the former government, including reduction in duty on scrap for ship breaking from 15 per cent to 10 per cent, helped the industry to revive and progress. The local ship breakers had not sought any tax remedies in the budget 2007-08, but they had warned against any change in present duties and taxes structure, which could seriously disturb the momentum of the industry. It goes to the credit of the former government, the industry once again gained momentum and people, who were earlier fed up at the state of affairs, began reinvesting in this sector.