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Home »Taxation » Pakistan » Five export-oriented sectors: sales tax zero-rating regime abolished
The government Tuesday abolished sales tax zero-rating regime for five export-oriented sectors i.e. textile, leather, carpets, sports goods and surgical goods and imposed 17 percent sales tax on items covered under SRO 1125(I)/2011.

Senior FBR officials said that the FBR will generate revenue Rs 80-90 billion from imposition of sales tax on textile, leather, carpets, sports goods and surgical goods during 2019-20. "We have accepted the biggest challenge for timely payment of refunds to the textile sector by abolishing sales tax zero-rating regime for five export-oriented sectors. The abolition of the SRO 1125(I)/2011 is the big challenge for the FBR," the FBR Member added.

According to the Finance Bill 2019, SRO 1125(I)/2011 provides for zero-rate of sales tax on inputs and products of five export-oriented sectors i.e. textile, leather, carpets, sports goods and surgical goods. The objective was to resolve delay in refund payments. However, zero- rating has created loophole and the benefit is being availed by unintended beneficiaries / non-exporters. Reduced rates for finished goods are also harming revenues. Huge misuse of SRO on import of fabric and processed fabrics has been reported, the FBR said.

To streamline and prevent revenue leakage, SRO 1125 is being rescinded. The SRO 1125 be rescinded, thus restoring standard rate of 17% on items covered under SRO.

Under the new regime, the rate of sales tax on local supplies of finished articles of textile and leather and finished fabric may be raised from current 6% for integrated businesses, and 9% for others, to 15% and 17%, respectively.

Secondly, zero-rating of utilities (gas, electricity and fuels) allowed to these export oriented sectors through various sales tax general orders be withdrawn.

The refund of sales tax to these sectors be automated, thus ensuring that the sales tax paid on inputs is immediately refunded. Refund Payment Orders and refund of sales tax to these sectors be automated, thus ensuring that the sales tax paid on inputs is immediately refunded. Refund Payment Orders (RPOs) shall be immediately sent to SBP for payment as soon as these are generated.

The ginned cotton which is presently exempt is proposed to be subjected to reduced rate of 10%. In addition, it is also proposed to rescind notification o. SRO. 769 (I)/2009, dated 4th September, 2009, which grants zero-rating on import and supply of polyethylene and polypropylene for manufacture of mono filament yarn and net cloth, being similar in nature to SRO 1125, and that granting zero-rating to local supplies is to be discouraged.

A tax expert said that on the pretext of misuse of the zero-rating facility on import of fabric /processed fabric s and other loopholes in the scheme government has decided to withdraw the zero-rated regime and by virtue of this withdrawal, the standard rate of 17% is made applicable. While commenting on this major change Arshad Shehzad, the prominent lawyer and sales tax expert has informed that the zero-rated scheme lasted for more than a decade. It was first introduced in 2005 where the sales tax refund on textile sectors outnumber the revenue collection which forced the government to work out the policy of no payment no refund scheme to eliminate corruption as well as to improve the cash flow of the export industrial sectors. Under this scheme essential industrial raw material like yarn, fabric, dyes, chemical, accessories, and utilities were declared zero-rated. The exporters are neither required to pay sales tax on purchases nor does any sales tax refund arise.

The textile sector has flourished over the period and local textile brands were also developed. The government starts worrying about the collection of sale tax on local consumption. According to their concern, due to the zero rate facility on the entire supply chain, they were not getting the potential amount of revenue from this sector. Eventually, the scheme is now coming to an end in this budget.

According to Arshad Shehzad, the question still arises whether the government can tackle huge sales tax refunds pertaining to the textile sector where it's export share is over the US $ 13 billion? According to him the refund payment cycle from the date of purchase to filing returns and getting a refund is not less than six months, in his opinion, this may lead to serious cash flow problem to export sector in this high-interest rate scenario, the sector, therefore, may face a drop in export performance.

The government steps to abolish the scheme, rather fine-tune the settled decade old zero-rating regime, removing anomalies, loopholes and ensure effective mode to improve sales tax collection on the local segment is quite surprising. Shehzad concluded.

Copyright Business Recorder, 2019

the author

Sohail Sarfraz is the Chief Reporter in Islamabad. He has been with the paper for over a decade and his contributions to reports on tax related matters as well as Securities and Exchange Commission of Pakistan are recognized and appreciated not only by his readers but also by his colleagues in other media outlets.