Textile value chain evades Rs236bn tax annually

LAHORE: Tax evasion to the tune of Rs236 billion has been estimated annually by the textile value chain, spanning from ginning to retail levels.

According to an assessment of Pakistan Cotton Ginners Association (PCGA), over Rs36 billion annual tax evasion was estimated last year only at ginning stage. The breakup of evaded amount is also calculated on account of various taxes. Additionally, PCGA claimed Rs200 billion tax evasion at various other stages of textile value chain.

The disclosure of massive tax evasion has been made at a time when country faces severe financial crunch partly due to low tax collection. Association blamed what it called heavy taxation on cotton value chain including ginning industry for the tax fraud.

At the ginning stage alone, as many as different 12 taxes and duties have been levied, PCGA pointed out. The ginning industry currently subjected to pay various taxes and fees, including multiple 18 percent sales taxes on cotton lint, cotton oil, and oil dirt. Additionally, they are liable to pay income tax, professional tax, market fees, contributions to social security and old age benefits, and several highway-related fees, such as the highway right off fee and highway NOC fee. An excise highway/property tax and a cotton fee collected by the Excise Department are also applicable.

As per stance of ginning body, the heavy taxation is already discouraging the ginners to continue their business and resultantly out of 1200 ginning factories only 665 remained functional during 2023-24 season. Further levy of Sales Tax on cotton seed cake and increase in fixed charges of electricity w.e.f 1st July, 2024 will definitely lead to ‘complete collapse of ginning industry.

PCGA believes a number of unnecessary taxes levied on cotton commodities are not only hindering the fair business but also supportive to unfair business. The ginners do business of these commodities without invoices which results in hiding actual production of the commodity and non-payment of taxes.

The ginning industry, being the only buyer of cotton, is crucial for farmers, and its collapse would adversely affect them. Moreover, taxes on cotton seed cake have been imposed three times in the last decade, but tax recovery has been zero.

The issues arise after imposition of Sales Tax on cotton seed cake include growing undocumented transactions at ginning level. In addition to ginning stage, part of cotton lint flow is unaccounted at later stage of value addition. On top of that, PCGA observed, when all products namely cotton lint, yarn, fabric, garments are undocumented then none of the above industry chain pay withholding tax, income tax and all other government taxes related to trade.

Explaining tax evasion on ginning industry due to Sales Tax on cotton seed/cotton seed cake, PCGA evaluates 20 percent out of books selling of cotton last year alone. While listing various taxes and fees associated with cotton and oil at different stages, including sales tax, withholding tax, excise fees, and market committee fees, ginners association assessed total amount of such taxes and fees on the ginning stage to be Rs36.22 billion. As per break up, 18 percent Sales Tax on cotton lint translated into Rs32.40 billion, 1.2 percent withholding tax on cotton lint valued at Rs2.16 billion, 1 percent withholding tax on cotton seed/cake calculated at Rs312 million, 1 percent withholding tax on oil stood at Rs87 million, 18 percent Sales Tax on oil cost Rs1.05 billion, 18 percent Sales Tax on oil dirt Rs5.0 million, cotton excise fee per bale Rs9.6 million, market committee fee per bale Rs19.20 million, 12 percent withholding tax on raw cotton supplier Rs28.50 million, 12 percent withholding tax on cotton lint brokers Rs10.80 million, 12 percent withholding tax on oil seed/cake brokers Rs3.72 million and 12 percent withholding tax on oil brokers Rs16.80 million.

PCGA deliberates tax evasion at various stages of the textile production process, including spinning, weaving, finishing, dyeing, and retail. The expected tax evasion by the textile industry is estimated to be Rs200 billion or more, ginners body believes.