Zero-rated tax regime for Pak export sector

17 Feb '16

3 min read

In a big relief to Pakistan's textile industry, Prime Minister Nawaz Sharif has announced zero-rated tax regime for the export sector to help it overcome liquidity crunch, and eliminate corruption in payment of refund claims.

The regime will take effect from July 1, 2016, Pakistani newspapers reported.

The PM took the decision at a meeting with leading businessmen to discuss the issue of pending tax refunds to exporters. Chief Minister Punjab Shahbaz Sharif, Finance Minister Ishaq Dar and Planning Minister Ahsan Iqbal also attended the meeting.

The zero-rating regime was proposed to the PM by the business delegation led by the Punjab Chief Minister, who is said to have played a critical role in the scheme's approval.

A few years ago, the Federal Board of Revenue (FBR) introduced the zero-rated regime for five export sectors, namely textile, sports, leather, carpet and surgical sectors. However, the scheme was reversed on a plea that exporters were also selling products in the domestic market which needed to be taxed.

The FBR currently charges tax on both imported and locally manufactured raw materials. As per law, the authority is supposed to refund all these taxes after export proceeds have been made.

But in practice, the tax department normally delays issuing refunds which causes liquidity problem for exporters — the premier was informed that Rs 200 billion refunds/rebates of exporters were stuck with the FBR.

Pakistan's exports fell in double digits in the first seven months (July-January) of this fiscal year.

By some estimate, the total impact of zero-rating on the export sector would be around Rs 6 bn to Rs 10 bn.

The estimate also considered cases where some exporters, especially the textile sector, sell their products in the domestic market, which are originally meant for exports.

According to a businessman who attended the meeting, the prime minister was also informed about the past arrears of the refunds/rebates. Three options were discussed for the clearance of pending refunds.

It was decided that small refunds should be released immediately while banking bonds would be issued for large ones. However, the issue would be discussed with stakeholders to reach a workable solution, he added.

The prime minister was also informed that clearance of Rs 200 bn in one go would also lead to reduction in share of taxes to provinces under the divisible pool. (SH)

Fibre2Fashion News Desk – India

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