The zero-rate game

LAHORE: Now that the issue of export refunds has nearly been resolved, the power corridors are reportedly abuzz with talks of revival of zero-rating regime which, if it is restored, can be exploited for evading tax on local sales.

It is indeed surprising that our economic managers sometimes, under the pressure of vested interests, try to undo the measures implemented in the face of extreme resistance.

There are reports of a heated debate in the government spheres where a side is saying the small exporters face difficulty buying inputs by paying the sales tax first and then applying for refunds.

The ones in the favour are pushing Federal Board of Revenue (FBR) to restore the zero-rating regime for five exporting sectors.

It is pertinent to note that during most of the tenure of the previous regime the exporters used to pay taxes and claimed refunds after exports. The last government had introduced zero-rating in the final leg of its tenure, but it was reversed by the present regime on the advice of Shabbar Zaidi, the former FBR chairman.

Exporters protested strongly but Zaidi’s stance was that though the sales of textile products locally has crossed over Rs1,500 billion, the sales tax paid on local sales was pathetically low by a few billion. Even at a rate of 5 percent the sales tax should have been Rs75 billion. It was obvious the textile producers bought the inputs at zero rates from registered suppliers and consumed the same for local supplies only. They marginally showed some local sales.

The exporters complained there were inordinate delays in refunds that were squeezing their finances. Zaidi, admitting the drawback, assured exporters that system would be evolved under which their refunds would be made immediately after realisation of export proceeds.

The system was introduced through software, but there were some teething problems and also a lot of undue interference from the rent-seeking bureaucracy. The hiccups were gradually removed and it took the government more than a year to remove all the bottlenecks completely.

The exporters now have been acknowledging the efficiency of the system and most say they face no problems. Of course, those that try to cheat the system are caught and their refunds are blocked by technology. But they are very few in number. Most of them have realised it is not possible to beat the system therefore are filing the refund requests properly.

There are cases when the exporters (deliberately) tell their buyers to withhold payments expecting the rupee to depreciate. In those cases, the refunds are delayed because refunds are subject to the realisation of export proceeds.

In recent months the hope of rupee depreciating has declined and currently the rupee is swinging up and down on a daily basis. Those that withhold payments when rupee was traded at Rs166 rued their decision when it came down to Rs160 within a few weeks. In short, the refund system has been streamlined to the satisfaction of the exporters.

On the positive side the sales tax collection from sales of fabrics and apparel has reached record height. When the exports were under pressure it was the local market that kept most of the mills operating. If zero-rating is reintroduced, we are likely to see a decline in sales tax from local supplies.

In case of the SMEs, the problem is different. The SMEs in all sectors (not only textiles) have been marginalised by the deep recession the country faced. The exports also suffered as a consequence.

These small or medium entrepreneurs operate with limited capital. If for any reason one of their consignments is rejected, they go bankrupt. We have to strengthen our SMEs through prudent access to finances and procurement of inputs at competitive rates.

The SMEs do not have resources to buy most of the inputs in bulk. They procure them on a need basis from local suppliers. The local suppliers act just like the middleman in agriculture.

They are sharks. They provide inputs (if needed) to the larger exporters on official receipt as registered sales tax persons. To the SMEs they provide the same goods at the same cost but without paying the sales tax. They thus save 15-17 percent of the sales tax. The SMEs always faced problems in the refunds because they sometimes could not justify they procured inputs from sales tax registered persons.

The SMEs need government facilitation. The government should go through the policies of regional economic powers like India and Bangladesh in this regard where there are more SMEs but they operate smoothly by procuring inputs after paying sales and then getting refunds after exports.