Sales tax raise on steel products

The government has decided to withdraw the five percent increase in sales tax on steel products and abolish sales tax on import of scrap following countrywide protests by steel traders, says a Recorder Report quoting a high official in the Ministry of Industries. The government had announced in the federal budget an increase in sales tax from 15 percent to 20 percent, to be effective from June 10, 2007.
The Minister of Industries, Jehangir Khan Tareen, is reported to have said that sales tax on steel products would now be charged at the previous rate of 15 percent. The same percentage will be applicable to all steel products, including flat rolled products, hot-rolled, cold, galvanised steel sheets, corrugated steel sheets, re-rolling mill billets, etc.
In a related move, the government, in coordination with CBR, has decided to do away with 20 percent sales tax on import of scrap from the next fiscal year, and now the scrap would be imported at zero-rated sales tax. An SRO in this connection is likely to be issued in a few days. Some changes in sales tax rules are also being made, and now the tax will be charged on the real value of steel products.
Meanwhile, steel prices had shot up by Rs 2,700 per tonne to an all-time high of Rs 66,000 per tonne in the local market in the wake of 5 percent increase in sales tax (now withdrawn) but not before making a highly negative impact on the local steel trade. The traders have also demanded of the government to rationalise customs duty on steel products, which is at present being charged at the rate of 10 to 20 percent.
The increase in sales tax if it were not withdrawn immediately, could further push up prices of a range of steel products, thereby adversely impacting the domestic steel industry. The supply and demand dynamics would also come into play as Pakistan's domestic annual demand for steel billet alone stands at around 500,000 tonnes, of which some 200,000 tonnes are produced by Pakistan Steel while the gap is filled through imports from different countries, including Russia, South Africa, Ukraine and Egypt.
The gap will increase further as mega projects like dams, bridges and high-rise buildings are constructed in the country. This provides a sobering measure of our steel production constraints. Meanwhile, the global steel market has witnessed an upswing largely because of the "China factor," which has played a critical role in the rise in steel prices as well as those of numerous other raw materials.
According to one estimate, around 70 percent of raw material supplies in the global market are lifted by China. However, this factor cannot be cited as the sole cause of price increases like the ones made by Pakistan Steel from time to time. Many analysts believe that Pakistan will not be able to sustain its long-term economic and industrial growth without adding three to four million tonnes to its steel manufacturing capacity.
There is also a proposal that the import of steel be allowed from all countries, including India, to make up for the shortfall. (Incidentally, global steel trade constitutes about 60 percent of the overall international trade, and Pakistan figures almost nowhere in the global context.)
But back to highly controversial five percent increase in sales tax on steel products. Normally measures announced in the federal budget are applicable from July 1, but the government issued statutory orders imposing 5 percent increase from June 10, 2007, which upset the industry. Some analysts believe that the move could well be aimed at covering a possible shortfall in revenue collection during the current fiscal 2006-07.
If so, it was too transparent a subterfuge to escape notice. As we have argued above, such arbitrary tax hikes will have an adverse impact on the construction industry also. The government has done well to agree to withdraw the increase in sales tax on steel products, but considerable damage has already been done to market stability.