Sources told Business Recorder that the EDB has forwarded the 'tax incentive package for Export Houses' to the Federal Board of Revenue (FBR) for comments. The EDB has proposed that the government may appreciate the concept of 'Export Houses' and announce a special scheme for promotion of this activity. The proposed scheme for Export Houses may have the following features:
First, the 'Export Houses' may be officially recognised for promotion of exports by the Trade Development Authority of Pakistan.
Second, the "Export Houses" in the engineering industry may be registered by the Trade Development Authority of Pakistan on the recommendations of the Engineering Development Board.
Third, the State Bank of Pakistan may recognise and treat "Export Houses" at par with manufacturer-cum-exporter and extend benefits of all financial and banking products and facilities like Export Refinance on equal basis.
Fourth, the DTRE procedures as contained in Customs Rules, 2001 may be suitably amended to treat registered "Export Houses" at par with manufacturer-cum-exporter.
Fifth, the withholding income tax rate for suppliers of goods and services to registered "Export Houses" may be reduced to come at par with tax rate applicable to exporters, so that manufacturers of exported goods through "Export Houses" are also treated as exporters.
Sixth, the supplies by manufacturers to registered "Export Houses" may be treated as sales tax zero rated and exempt from special excise duty under the sales tax and federal excise laws to avoid blockage of funds in the shape of unpaid refunds.
Seventh, the "Export Houses" may submit insurance policies to the government at the time of registration to securitise the government revenue.
The recognition of "Export Houses" through a special scheme in this regard has to be jointly managed by the Trade Development Authority of Pakistan, Engineering Development Board and the FBR.
Sources said that the Trade Development Authority would notify the scheme for Export Houses in consultation with the Engineering Development Board and FBR.
The State Bank of Pakistan would notify that registered "Export Houses" would be treated at par with other manufacturers-cum-exporters.
The Customs Wing of the FBR to suitably amend Customs Rules, 2001 to accept insurance policies instead of bank guarantees in case of registered "Export Houses".
The Direct Taxes Wing of the Federal Board of Revenue to suitably amend the withholding Income Tax rates so that suppliers to registered "Export Houses" are treated at par with exporters as far as withholding income tax is concerned.
Indirect Tax Wing of FBR to suitably amend zero rating of Sales Tax laws and rules as well as Special Excise Duty laws and rules to treat supplies to registered "Export Houses" as exports, and therefore treated as such for charging of tax purposes.
According to the EDB, the governmental laws, rules and procedures are designed in a manner which discourages such activity. Up till now, the concept of Export Houses has been recognised as indirect exporters only within the scope of DTRE scheme.
The facilitation regime offered by the government is biased in favour of manufacturer-cum-exporter and does not treat trading houses equally.
The "Duty and Tax Remission for Exports" scheme as contained in Customs Rules, 2001 requires trading houses to submit bank guarantee, whereas other securities are acceptable in case of manufacturer-cum-exporter. Obtaining bank guarantees from the banking system is only possible after deposit of 100 percent cash margin. This involves financial costs and burdens competitiveness of trading export business.
On procurement from the small manufacturing concerns, the trading export businesses are required to deduct withholding income tax at the rate of 3.5 percent of the value of supply. They are also required to deduct withholding income tax at the rate of 6 percent if services in shape of contract manufacturing or jobbing are obtained. Although a concessionary rate of 1 percent has been provided to indirect exporters registered under DTRE scheme, it is not always possible to work under this scheme due to capacity constraints of micro and small level manufacturers. It means that supplies of products and services rendered by small scale operations are considered local business and outside the export chain. Finally, on export by trading export businesses another withholding income tax at the rate of 1 percent is deducted out of foreign exchange payments through the banking channel. This creates a clear-cut anti-export bias if exports are made by trading export businesses as withholding income tax on supply chain of the exported products is deducted at a higher rate and that too more than one time.
The special excise duty at the rate of 1 percent and sales tax at the rate of 16 percent is paid by trading export business at the time of procuring goods for exports. These taxes are technically supposed to be refunded by the government as exports are zero rated. However, existing rules and procedures for refund of this amount are such that it almost becomes impossible to obtain refund within any reasonable time. Such refunds are blocked for months and years, and the working capital of trading export businesses finally dries up.
There is no denying the fact that the export potential of small-scale manufacturers needs to be realised. There is also no denying the fact that this potential can only be realised through bridging the gap by trading export business. It is high time that the government realises the usefulness of this arrangement, sources said.
The EDB said that a large part of engineering industry, especially in sub-sectors of auto parts, cutlery/hollowware, farm machinery & equipment, surgical instruments, pumps and fans is small in size. The medium sized and large units in these sub-sectors are currently exporting, whereas export potential of small sized units remains unutilised. Although their manufactured products can be exported to less technology demanding and price conscious markets in Asia and Africa, they have been failing to do so.
There are multiple reasons for non realisation of their potential, including little or no knowledge of export potential and business; little or no knowledge of export related laws and procedures. Other factors for non-realisation of their potential is that there is no brand development of products, no standardisation of products, very little financial strength to support export activity, no capacity to raise finances from the banking system and very little managerial capability to handle export business and logistics required, the EDB said.
If efforts are made to develop the needed capacity within the small-scale manufacturers, the waiting time would be very long. In the meantime, the existing opportunity in Asia and Africa can be lost to other exporting countries. Therefore, there is a need to create a channel through which this capacity gap can be bridged immediately. One such bridge can be export through professionally managed trading houses specialising in export business. In fact, even currently, there are a few trading houses in private sector vying to bridge the gap. They have been trying to upgrade their supply chain so that suitable products can be procured for exports, the EDB added.