Textile industry protests taxes on exports, SRO 350

ISLAMABAD: The textile industry has protested over massive taxation on exports and the issuance of SRO 350 by the government, saying these measures are severely detrimental to textile and apparel sector, and the overall economy.

The taxes include increase in tax on exporters, withdrawal of sales tax exemption on local supplies for export manufacturing, and issues pertaining to SRO 350(1)/2024 that remain unaddressed despite the PM’s personal assurance.

All Pakistan Textile Mills Association (APTMA), in a letter to Ali Pervaiz Malik, minister of state for finance, sought a meeting with top government functionaries to resolve the issues so that deindustrialisation in the country could be stopped.

The APTMA wrote the letter to the state minister on July 13, 2024, raising the issue of increase in taxes on exports, saying that the shift from a 1pc fixed tax regime on export proceeds to a 2pc advance tax adjustable against a 29pc final tax on income, plus an additional 10pc super tax, is unviable for the industry, especially export-oriented units.

“The textile sector operates on low margins and high volumes, and this significant tax burden will erode profitability, leaving businesses with insufficient working and investment capital. This financial impact cannot be passed on to international customers, who are already hesitant due to our high operational costs. Low regional tax rates for comparable firms further put the exporters at a severe disadvantage, which inevitably leads to a loss of business to more favourable economies,” said the letter.

APTMA also agitated the issue of withdrawal of zero rating on local supplies for export manufacturing, arguing that removal of zero-rating on local supplier for export manufacturing is a highly regressive step taken under the Finance Act 2024. “The Export Facilitation Scheme (EFS) was designed to promote indirect exports by allowing domestic procurement of raw materials and intermediate inputs without the burden of sales tax, thus lowering the cost of doing business and providing local producers a level playing field with their foreign counterparts. Its withdrawal will disproportionately impact small and medium enterprises and remove all incentives for exporters to use domestically manufactured inputs, causing a significant reduction in domestic value addition in exports as evidenced by the increase in yarn imports between July 2023 and May 2024.

Withdrawal of zero rating on local supplies for export manufacturing is a non-revenue related measure and implemented because the FBR’s audits revealed misuse by a small number of firms out of 1,800 beneficiaries. However, instead of implementing stronger checks and balances, the government resorted to collective punishment and done away with the entire scheme. The EFS was implemented with input from all stakeholders and is essential for reducing business costs and enhancing exports. Its revocation undermines these objectives and will lead to significant disruptions. APTMA also raised the flag on the issuance of SRO 350(1)/2024 saying it has been implemented under strong protest from the business community and the FBR remains reluctant to fix legitimate issues despite the PM’s personal assurances.

Due to the new requirement of linking the entire supply chain to file sales tax returns, several APTMA members as well as other firms across the country were unable to file their returns within the deadline since their upstream suppliers had not filed their returns and the FBR also eliminated the option of delinking of invoices from the return. It must be noted that various government entities such as SSGCL, IESCO and FESCO, as well as KE, failed to file their returns by June 30, rendering their customers unable to file their returns. While the FBR had extended the date for payment of sales tax and filing of provisional returns due to the Eid holidays, it did not extend the date of filing the final returns. Whereby input claims of the buyer are restricted to the payment of tax liability of the seller by the last day of the month in which the due date falls, despite payment of the entire amount of supplies (inclusive of sales tax) to the seller, buyers are unable to claim input tax for the only reason that the seller has not timely paid their due tax. Hence, the buyer is suffering for an act they are not responsible for and are unable to file their return without payment of additional tax which is not otherwise their liability. The operation of this Rule has cascading effects, i.e., when a buyer is unable to file their return because of the above-stated situation, their customers are also unable to claim input of sales tax invoices issued by them, and these customers cannot file their sales tax returns either.

The FBR’ s recent clarification in this regard fails to address major operational constraints faced by businesses across the country. The issues APTMA has outlined are having a severe negative impact on the industry. The FBR’s insistence on continuing with them is incomprehensible, especially given most of these issues are non-revenue related.