Steel industry asks govt to keep special procedures intact in next budget

ISLAMABAD: Amid consideration of the government to abolish special procedures of sales tax for steel industry in the next budget, the steel industry has asked the government to keep special procedures intact but raise the GST at standard rate of 17 percent.

The FBR has estimated that its rate of GST under special procedures for steel sector stands at around 8 to 8.5 percent but the industry argues that it hovers around 15 percent under special procedures of sales tax.

The industry has sent out communication to the FBR and stated that Pakistan's steel industry, which was thriving just a year ago, was now heading towards the brink of collapse. Many steel mills have either closed down or drastically reduced capacity utilisations since demand has withered amidst uncertainty, inflation and signs of a contracting economy.

Units that are currently running are reportedly making losses and are getting ready to consolidate and downsize unless the government is able to provide a better framework. With further cost increases due to rupee devaluation, interest rate hikes, energy cost increases and taxation measure, the government needs to have a plan to counter the pressure that businesses will face across Pakistan in the upcoming fiscal year.

The steel industry has asked the FBR for various policy interventions aimed at reducing the cost of doing business and providing a level playing field between sectors.

The industry has suggested for removing all customs and regulatory duties on melt able steel scrap, a primary raw material, in order to counter the cost increases expected on account of currency devaluation, interest rate, energy and taxation. Industry players believe that if duties on re-melt able scrap are not removed, capacity utilisations will fall and government revenue will drastically decrease.

Another major issue for the industry as well as FBR is the Sales Tax Special Procedures. Currently, the law (under 58Hb, Sales Tax Special Procedures) prevents steel companies from using captive and third party sources of power other than DISCOs.

The industry argues that since Pakistan has some of the highest electricity rates in the region, it is imperative that the industry is free to invest and explore cheaper sources of power to become globally competitive. As such, it is important for FBR to remove such a clause from the Special Procedures.

Moreover, while the industry has accepted an increase in sales tax to end the concessionary nature of the regime, the documented steel players have strongly opposed an end to this regime. They claim that the FBR does not have the field strength to audit and collect sales tax under the ad valorem regime from such a vast and fragmented steel industry, which will result in undercutting of the formal segment of the steel industry and an overall reduction in tax revenue for the government. In this situation, particularly steel sector is the worst hit. Policy decisions taken by the FBR on these points will have long term effects on the steel industry’s potential.

The steel industry has demanded a level playing field between various sectors in the steel industry such as steel melting, re-rolling, ship breaking and other downstream sectors. According to industry experts, there are various tax anomalies where substitute products have very different tariff structures that create distortions in the market. For example, re-rollable scrap is a substitute product for ship plate and steel billet manufactured by the ship breaking and steel melting industries respectively. However, re-rollable scrap is only subject to 5% import duties whereas steel billets are subject to 28% import duties. In addition, the sales tax levied on steel melting sector is higher than that levied on the ship breaking sector.