Federal Budget 2020-2021 is the most unrealistic document based on pure assumptions, without any calculation or working which can be authenticated or legitimized. It seems as it was necessary to present the budget every year, so they did it. Not taking into account the extreme uncertainty caused globally by the ongoing Covid-19 crisis.
In the last year’s budget they had revise revenue receipt target downwards from Rs 5.5 trillion to Rs 4.8 trillion after consulting with IMF and today it has been declared in the budget, due to closedown of businesses and industry the FBR collection target has gone down by Rs 899 billion, that means from Rs 5.5 trillion the actual revenue of last year stands at Rs 3.9 trillion and still the figures of June 2020 are purely on the basis of assumption only.
Businesses fail to understand that in the environment where uncertainty continues as it is and nobody knows when things would settle down and normalcy in business would be restored, the financial managers have targeted revenue of Rs4.917 trillion, for FBR to collect. Which is one trillion more than the last year, it would be interesting to note that in the budget the only pride government exhibited was Rs500 billion more collections in non-tax revenue from Rs1.1 trillion to Rs1.6 trillion, whereas it is common knowledge that non-tax revenues are altogether different ball-game and are usually not affected by the market forces.
As we are aware that covid-19 crisis has also wreaked havoc on the economies of our biggest exporting destinations, namely the United States of America and the European Union. Where economists and pundits warn that their import capacity could be reduced by roughly 40%. This would therefore intensify our competition with our regional competitors mainly, Bangladesh and India. In order to compete effectively, we need to decrease the cost of manufacturing sectors by revising energy tariffs to a level which are available to our competitors and all government related expenditures and levies should also be brought at par, similarly all the incentives and support available in competing countries be offered to the exporters of Pakistan.
We would like to elaborate on the negative impact on textile sector which is the single largest manufacturing sector responsible for 42% of urban employment, 8% of GDP and 60% of the total exports of Pakistan. As explained above, we apprehend very difficult times ahead in terms of competition in domestic and international markets. Unfortunately, budget document is totally silent on the subject of textile and God forbid, if textile crashes down it would prove to be disastrous for the whole economy of Pakistan. Apprehending all this we sent proposals which could possibly take care of the problematic unprecedented circumstances which are being apprehended, but nothing was considered. We are presenting below the most essential steps to save the industry from a total collapse with legitimate reasons.
1) Turnover Tax
Presently, turnover tax is levied at the rate of 1.5% on the basis of whichever is higher that means even in case of loss the industry has to pay 1.5% on its turnover. Basically, as payment of income tax, it is so surprising that when there is no income the industry is subject to income tax. This law also states that in case of income lower than 1.5% of the turnover, the taxpayer has to pay the amount on the basis of whichever is higher. Since industries were shutdown this year for roughly 3 months, which would inevitably result in losses for the year. The overarching question remains that how in this severe liquidity crisis will an industry pay this tax? In this new financial year nobody knows or can predict the performance of the industry and its capacity utilization and almost everybody believes that it will end with a negative bottom-line. Even the government has lost Rs 900 billion in tax revenue and there’s all the possibility that in case this virus persists for another 3 months then FBR would lose one trillion, it would be interesting to note that in the last 7 years corporate tax has been brought down from 35% to 29% which amounts to 18% lesser amount to be paid, on the other hand the rate of turnover tax which is also income tax has been revised upwards from 0.5% to 1.5%, which is a gigantic increase of 200% whereas both are income tax.
Therefore, our suggestion is to exempt industry from this levy for the current year and the new financial year and the clause “whichever is higher” is omitted and if it is necessary it should be levied at the rate of 0.5%.
2) Sales Tax for textile sector
In the budget of 2019-2020 zero-rating was withdrawn and sales tax at the rate of 17% was levied on the basis of goods sold in the local market and it was stated that Rs 1.2 trillion is the size of the textile sales in the local market at that time also we agitated and tried to convince them that the size of the market is no larger than Rs 300-400 billion, as it is common knowledge that 80% of textile produced in Pakistan is exported and 20% is utilized in domestic markets, we’ve been proven right as tax collection is according to our calculation and not consistent with the government’s calculation.
We believe it would not be wise to put the entire industry into refund regime where exporters are put into severe liquidity crisis due to long-pending refunds, it is also common knowledge that textile is a business of high volume and low margins (in the range of 2-5%).
In this difficult financial position of the government, where there would be a budget deficit of Rs 3.4 trillion, as per the document. As per our point of view it would be in excess of Rs 4.5 trillion. Considering all the facts mentioned above we are certain that government would not be able to refund our sales tax in a timely manner as the government has a list of priorities like governance, payment of interest on huge debt, Covid related expenditures etc. These factors would not allow the government to refund the sales tax in spite of all the sincerity to do so, therefore we suggest that zero-rate regime be reintroduced and there should no payment and no refund, only then exports can survive, with this 17 % blockage of funds majority would be unable to survive. It is the requirement of the time that sales tax is brought back to ‘zero’ or a lower percentage where exporters can bear the delay.
3) Reduction in cost of Energy
It is very surprising that the government in spite of being aware of current international crude oil prices and also reducing the prices of Petrol, RLNG and LPG by 30-40% has not bothered to reduce the price of gas and electricity for the manufacturing sector which has already been done in competing countries in order to reduce the cost of manufacturing and to get the industry ready for the price war, looming ahead.
The government can easily reduce the price of Gas by 30-35% as Brent prices have gone from $62 to $30 which is the base for calculation under the formulae WACOG (Weighted Average Cost of Gas) and this reduction would automatically reduce the price of electricity. This should be done sooner rather than later.
4) Suspension of collection of Export Development Surcharge (EDF)
Huge amounts of EDF collected by the government at the rate of 0.25% is lying unutilized in the possession of the government therefore, government could suspend the collection of EDF till the funds have been utilized this would also support the exporter’s compatibility.
There are other minor problems such as;
1) Delay in payment of DLTL.
2) Withdrawal of exemption certificates on import of raw material and machinery.
3) Rescinding of SRO 327 for export oriented units.
4) Uniform water tariff for export oriented industries
5) Suspension of collection of EOBI, WWF and social security contribution till Covid lasts
6) Reduction in duty of Reactive colors.
Concluding Remarks
One can see that most of the above recommendations are not in the direction of tax-cuts but rather they are either passing on of benefit by government to manufacturer or they are suspension of the levies which is the money of the businesses only the recommendation regarding the sales tax proposes loss of revenue intended to be collected from the local sales of textiles this can also be offset by introducing sales tax on retail stage more aggressively, there can be fixed tax as announced for other sectors, the same can be introduced for medium, small textile retailers to give much required liquidity space to exporters.
We would like to humbly advise the government to take all the necessary steps to give competitive edge to the manufacturing sector of Pakistan against competing countries in the international market, it is imperative that cost of manufacturing is brought at par with them.
We would go one step further as we have felt government’s lack of trust on exporters in their arguments therefore we suggest to hire an international reputed agency for preparing cost of manufacturing comparison chart mainly with Bangladesh, India, Cambodia, Vietnam and Sri Lanka which would crystallize the difference in cost of manufacturing between us and the competing countries this would also remove the impression that textile sector is factually uncompetitive due to higher cost of manufacturing and this is the fundamental reason of Pakistan hovering around $10-$12Bn of exports while Bangladesh out of nowhere, has reached $34Bn of exports and has declared the target of $50Bn by the year 2023. Which we believe they would achieve if we don’t change our policies and government does not take the cognizance of prevalent cost of manufacturing resulting into inability to beat them in the international market. We also believe that the government should stop labeling the textile sector as rent-seekers and rather look at the real difficulties of this sector and fully commit to resolve the same.
We believe that we have all the ability in terms of manufacturing, marketing and competing in the international markets provided that we are not faced with unjust and unfair competition due to government policies, utility tariffs and custom duty structure on import of raw materials. We assure that we can beat any competitor if government understands and supports we can double the exports in the next 3-5 years.