The budget 2016-17 is already making waves and it isn’t even out yet. In the five value-added export sectors, these waves are threatening to turn into a tsunami. Bad analogies aside, the government might scale up the existing general sales tax on exports from three percent to five percent or more, much to the chagrin of the five export sectors: textile, carpet, surgical, sports goods and leather. Businesses are almost never happy with government policies but to be fair, this time they are not wrong. The government is playing a dangerous game.
In 2011, the then-PPP government committed to a continued zero duty regime to these export sectors so they could enjoy the benefit of low cost of doing business in the face of the energy crisis. Then, it was discovered that some exporters were selling these zero-duty products locally. In an attempt to resolve this fix, a 2 percent sales tax was imposed and it was promised that these taxes would be returned in the form of a refund when export receipts were received and verified. As if the FBR did not have enough on its plate, and true to cue, incompetence and bureaucracy caught up with this issue as well.
Billions of rupees are stuck in this cycle leaving producers in a bit of a pickle—a massive cash crush. Estimates provided by business associations suggest sales tax refunds, customs duty rebates and Draw-back for local taxes and levies (DLTL) claims to the tune of Rs350 billion.
In his budget announcement speech last June, Finance Minister Ishaq Dar said: “I would also like to announce that the refund due to the export oriented sectors relating to tax periods till 31st May, 2015 shall be issued by 31st August, 2015 periods till 31st May, 2015” and announced an increase of duty from 2 percent to 3 percent. That was then, but refunds have not been released yet.
The news of an increase in duty as opposed to “no payment no refund” that the export sectors were clinging on is like kicking a dog when it’s down. Exports have been falling—a 9 percent drop between 10MFY15 and 10MFY16 according to SBP data. Total textile exports have fallen by 6 percent driven by cotton and cotton yarn (ready made garment grew by 5 percent); carpet exports fell by 18 percent, sport goods by 8 percent, leather by 16 percent in this time period.
Prime Minister Nawaz Sharif announced in February of this year that he would reinstate zero rated regime for the five export sectors from July 2016 but it is anyone’s guess what happened. Promises, promises Prime Minister, you can’t have it both ways—or maybe this government can.
