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Budget 2005-06: Spurious refunds on exports to go

ISLAMABAD (June 07 2005): The Central Board of Revenue (CBR) has announced a new scheme for the textile industry by reducing sales tax to zero percent on the import and supply of all items/goods and services utilised in the entire manufacturing regime of textiles.

This will eliminate 60-65 percent of the overall quantum of accumulated sales tax refunds due to levy of GST. The CBR has also proposed to allow zero-rating scheme for carpet, leather, surgical goods and sports goods industries.

Under the WTO regime, the government is required to give maximum relief to outer integration of textile industry.

Textile provides over 60 percent of national exports with employment to a large chunk of skilled and unskilled labour. Major textile outputs like raw cotton, yarn, fabrics and made-ups are exported leaving a nominal quantity for domestic consumption.

In order to boost the mix of man-made fibre with cotton and reduce the cost of textile made-ups, the Finance Bill proposes to reduce the duty on raw materials used in the production of man-made fibres. However, the necessary SRO was not issued on Monday.

Considering that bulk of the textile production is exported directly or indirectly, it is imperative to fully emancipate this sector from complex fiscal documentation and unnecessary tax compliance hassles.

It is, therefore, proposed to introduce a scheme for zero-rated import and supply of all items/goods and services utilised in the entire manufacturing regime of textiles so that GST refund system in textile sector is done away with, its capital flow is improved, competitiveness of textile products in the international market is increased and textile industry achieves higher efficiency standards.

Besides textile industry, it is also proposed to apply the zero-rating scheme in respect of carpet industry, leather industry, surgical goods and sports goods.

All outputs and inputs relating to these industries, including utilities, shall be zero-rated.

In the last budget, capital goods were zero-rated on both import and supply stages. However, their parts remained taxable, resultantly, the local capital goods manufacturers had to seek sales tax refunds, causing cash flow problems and documentary hassles for them.

In order to give boost to local industry in terms of capital goods, it is proposed to extend zero-rate to parts of the capital goods.

It appears that the government has finally come to the conclusion that it was not only losing much more in export rebates and duty drawbacks on account of over-invoiced exports then collecting sales tax on local sales of five key industrial sectors; namely: textile, carpets, leather, surgical and sports goods.

The organized export sector specially textiles and leather have constantly been agitating to do away with sales tax and other import duties for nearly a decade. But due IMF conditionalities their pleas were ignored.

A detailed analysis of export data from PRAL showed that due to flying invoices from fictitious suppliers, the fly-by-night export firms have obtained billions in refunds with the help of facilitating revenue collections. The imposition of anti-dumping duty, on certain textile items, by the European Union, was the last straw that broke the camel's back.

Investigation into unusually high export of garments to Dubai and Saudi Arabia and other free ports also pointed to the growing menace. As a result, in the Finance Bill 2005, Government took the bold step to do away with GST and import duty on the entire chain i.e. raw materials to finished product at every stage in textiles, leather, carpets, surgical and sports goods sectors.

By doing this government will also be able to counter any charge of subsidy on exports from importing countries.

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