‘VAT to hamper exports’ By Nasir Jamal

THE implementation of value-added tax (VAT) proposed from the next financial year may tend to do away with all exemptions to export-oriented industries.

The enforcement of VAT on the production chain of these industries is feared to eliminate what exporters call as their zero-rated status, result in a serious liquidity crunch and higher production costs for smaller exporters, and bring back the ‘old era of flying invoices and corruption’.

“The implementation of VAT will seriously hamper exports by eliminating zero-rated status of the export-oriented sectors, particularly of textiles, carpet, sports goods, leather, and surgical instruments,” argues Pervaiz Hanif, a Lahore-based exporter of readymade garments and carpets who heads the All Pakistan Carpets Manufacturers and Exporters Association (Apcmea).

These sectors were allowed exemptions from the payment of sales tax at any stage by the Shaukat Aziz government to remove the ‘unnecessary irritants’ in the way of export expansion and put an end to complaints of delays in the payment of refunds and corruption that often resulted in financial crunch for many smaller to medium exporters. The tax refund system was done away with after complaints that the government had to pay more money to exporters against their claims than it collected from them.

The decision to exempt these industries from the payment of sales tax and zero-rate them amounted to official acknowledgement of the fact that the bulk of their production is exported, a tanner from Sialkot says. “The scrapping of the zero-rated status under the VAT Act is no less than a nightmare for the smaller exporters.”

The VAT Act, 2010 will replace the existing Sales Tax Act, 1990 from July 1 if federal and provincial legislatures stamp their approval on the bills already moved in the national assembly and the four provincial assemblies under the International Monetary Fund’s $11.3 billion stand-by arrangement (SBA) programme..

The VAT would be applicable to all economic activities covering all supplies of goods and rendering of services, with very limited exceptions, a senior Federal Bureau of Revenue (FBR) official posted in Islamabad says. “Exemptions and exceptions on domestic supplies are against the very spirit of the VAT,” the official who did not want to be identified, adds.

Though the official contends that all exports would continue to enjoy the zero-rated status even under the VAT through the revival of the efficient refund of all taxes to exporters, most exporters do not agree with him.

“The exceptions given to the said industries have been removed for two reasons: One, the exemptions are against the spirit of the VAT. Two, the domestic supplies of these industries were also put outside the ambit of sales tax while zero-rating their exports. Now only exporters will still be zero-rated but the domestic suppliers will have to pay the tax on their local sales,” the publicity-shy official insists.

The exporters, however, reject the argument. “If the purpose is to tax domestic supplies alone, it can easily be done by taxing sales at the retail stage or by calculating the difference between the production and export of a manufacturer without disturbing the zero-rated status of the export-oriented industries,” says Pervaiz. “There wasn’t really a need to increase the capital requirements and the financial costs of the exporters to tax domestic supplies of the exempted industries.”

The tanner is of the view that the VAT on export-oriented sectors would encourage revival of the culture of flying invoices. “You will soon find the government paying more money against false refund claims than it is able to collect while genuine exporters are made to wait for months to receive their refunds. It is particularly bad for the smaller exporters who do not have enough capital and who cannot borrow to meet their capital requirements,” he insists.

He is of the view that it would be better for the government to broaden the tax net to improve its tax-to-GDP (gross domestic product) ratio instead of enforcing the VAT and bringing hitherto tax-exempt, export-oriented sectors under the new tax. “We demand that the sectors outside of the tax net, should be brought into the net rather than creating problems for exports and reviving the culture of corruption and misuse of authority.

Pervaiz says most export-oriented industries are in crisis because of energy crunch, security conditions, high cost of utilities and credit, and slow down in global demand.

“Exports of carpets alone have slid 50 per cent in the last couple of years and industry is on the verge of collapse. If the zero-rating status is withdrawn and VAT levied, the industry will collapse completely leading to massive unemployment and decline in exports.” Exporters are also not happy with the vast discretionary powers given under the VAT Act to tax authorities to even arrest a person believed to have committed a tax fraud. The act provides that a person suspected or believed to have committed tax fraud is a company, and every director or officer of such company may be arrested.

“Such provisions will only discourage the much needed investment in the economy, hitting the efforts for industrial expansion hard,” Pervaiz says. The exporters have already proposed that the implementation of the VAT should be delayed for one year. “In the meanwhile, the government would do well if it starts consulting stakeholders, particularly the export sector, and elicit their opinion on it,” Pervaiz adds.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/vat-to-hamper-exports-540