ISLAMABAD: All Pakistan Textile Mills Association (APTMA) has sought Finance Minister’s support in resolution of key issues of the sector, saying the industry could collapse if these issues are not urgently addressed.
In a letter to Finance Minister, Chairman APTMA, Kamran Arshad has said that withdrawal of the sales tax exemption/zero-rating on local supplies for export manufacturing under the Export Facilitation Scheme (EFS) via the Finance Act 2024 is dealing a severe blow to the textile sector.
This matter is extremely urgent as upstream segments, particularly spinning, are being wiped out because of it. This must be taken up with the IMF urgently to secure an exemption allowing zero-rating on local supplies for export manufacturing under EFS to provide a level playing field with imports.
The Association is of the view that following the withdrawal of zero-rating on local supplies under EFS, domestically procured inputs for export manufacturing are subject to 18 percent sales tax, while imports of the same remain tax-free. Although sales tax is refundable through the FASTER system, significant delays have forced many manufacturers to increasingly rely on imported inputs.
Currently, only Rs 8-11 billion in refunds are processed monthly out of the Rs 35 billion due. The Rs 27 billion held by the FBR could generate Rs 4 billion per month in the bank and many times more as working/investment capital.
Pakistan is one of three countries in the world with the entire textile value chain. This complete chain is now under threat as segments like spinning and weaving are no longer viable because of high energy and operational costs and tax distortions.
As upstream segments become uncompetitive, over 40 percent of spinning mills across the country have shutdown with machinery scrapped or under export. If this trend continues, it will de-industrialize Pakistan’s entire spinning sector.
The EFS is revenue-neutral by nature; the withdrawal of zero-rating on local supplies is simply managing government cashflow at the cost of employment and domestic value addition in exports. If domestic inputs continue to be substituted by imported ones, this will cause domestic value addition in exports to decline substantially with negative implications for the economy’s trade balance.
Moreover, there has been a significant increase in the misuse of EFS. Fraudulent imports of yarn under EFS meant for export manufacturing are being illegally sold for domestic production/consumption to the further detriment of domestic industry. Fine-count yarn is being imported and sold locally, while low-count is being used towards exports.
The structure of EFS, which allows a period of 4-5 years for reconciliation of imports and exports is highly liberal and being exploited by unscrupulous elements. This is the main avenue which allows for misuse of EFS.
Additionally, the original number of users under DTRE + MBL was ~300; however, under EFS this has surged to 1,782 users as of August 2024. The unchecked increase in EFS users, including non-manufacturers and commercial importers, is contributing to misuse of EFS as some EFS imports are ending up in local markets.
To address these challenges and safeguard the textile value chain, APTMA has recommended; (i) restore EFS to its pre-Finance Act 2024 form, including the sales tax exemption/zero-rating on local supplies used for export manufacturing; (ii) conduct a rigorous reappraisal of all EFS licensees and limit EFS licenses to firms that are engaged in manufacturing activities; and (iii) consider a reduction in the period allowed for reconciliation of EFS imports and associated exports.
On energy tariffs, APTMA has said that the textile industry is grappling with prohibitively high energy costs compared to regional and global competitors. Electricity tariffs for industrial consumers in Pakistan range between 14 to 16 cents per kWh, fluctuating monthly due to FCA/QTA components. In contrast, tariffs in competing economies like India, Bangladesh, and Vietnam range between 6 to 9 cents per kWh.
“While the reduction of cross-subsidies in industrial tariffs in July 2024 was appreciated, it fell short of bringing energy costs to a competitive level.
The impact of stranded capacity costs in the tariff structure has increased substantially over the past two years and is expected to further intensify over the coming months. In August 2024, power generation was 20 percent below Nepra’s benchmark, which will result in a QTA surcharge of Rs 3-4 per kWh in the upcoming quarter, compared to Rs 1.80 per kWh at present,” said that the chairman.
Similarly, industrial gas prices have surged to as high as $13/MMBtu, compared to $3.7/MMBtu in Uzbekistan, $4.9/MMBtu in China, and $7.4/MMBtu in Bangladesh. Inefficiencies in the ring-fenced RLNG tariff, including subsidies to the fertilizer sector and excessive unaccounted-for-gas rates, have added further financial pressure on RLNG consumers.
Energy accounts for 30-54 percent of conversion costs across the textile value chain and it is simply impossible to compete internationally with such high energy cost differentials.
The energy crisis is compounded by the IMF’s structural benchmark requiring the elimination of captive power plants by January 2025, disconnection of gas supply to which the Petroleum Division has reportedly started in several parts of the country. A significant chunk of the industry relies on self-generation of power for up to 80 percent of their energy needs, and a forced shift to the national grid at 14-16 cents/kWh is financially unfeasible. The result will be the closure of several production units or a shift to alternative energy sources like coal, biogas or furnace oil, further damaging the industry and exacerbating the country’s economic crisis.
Additionally, export manufacturing requires a stable and reliable supply of electricity. Grid electricity is unreliable, with frequent outages that disrupt production and poses a risk to expensive machinery, jeopardizing billions of rupees in potential losses.
Industrial in-house generation is also highly efficient. Cogeneration Combined Heat and Power (CHP) plants, which comprise a bulk of captive power plants, simultaneously produce electricity and heat for various industrial processes and outperform boilers as they generate two forms of energy—mechanical (converted to electricity) and heat—from a single molecule of gas.
This dual functionality eliminates the need to supply separate gas molecules for power and heat generation each. Cogen CHPs are essential for numerous industrial applications that require heat, such as water and steam generation, printing, stenting, mercerizing, bleaching and pad steaming, leading to enhanced energy efficiency and reduced operational costs.
These applications necessitate efficient use of gas to ensure maximum productivity and output. As such, in-house generation of power cannot be separated from the industrial process, as also declared by the Supreme Court of Pakistan in the case “No 159-L/2018”, SNGPL Vs Bulleh Shah Packaging (Pvt) Ltd and others.
It is pertinent to mention that Cogen CHP plants also have a much higher net thermal efficiency compared to RLNG GPPs as on-site energy production minimizes transmission and distribution related energy losses and allows greater flexibility and scalability. They also support integration with intermittent renewables and BESS that can help achieve CBAM targets, thus increasing competitiveness in key markets. CHP plants play a key role in meeting climate goals and transitioning to a low-carbon economy.
The elimination of captive power plants from the gas network will also have broader economic consequences. Captive power, for instance, cross-subsidizes other consumers by Rs 381 billion per annum. Removing this will deepen the gas sector’s circular debt and cause severe instability in the energy sector.
Captive is also the main off-taker of RLNG after the power sector. Removing these consumers from the gas network will result in surplus RLNG in the system which must then be diverted to domestic consumers at highly subsidized rates while curtailing domestic production of gas, causing further monumental losses to the exchequer and build-up of circular debt.
APTMA is of the view that physically cutting off gas supply is not a wise decision; rather allocation of energy resources should be managed through price signals with full-cost recovery across all sectors.
The Association has also raised serious concerns regarding recent actions taken by the FBR against textile sector entities under the guise of countering sales tax evasion.
The FBR’s actions are based on flawed and inaccurate analyses of input tax to sales ratios across different segments of the value chain (enclosed). As a result, numerous business owners, CEOs, CFOs and other textile sector professionals have been arrested without following due legal process, for no fault of theirs, which is causing significant distress and damaging the business environment.
The FBR’s expectations from the industry are both unrealistic and unreasonable. Businesses cannot be held accountable for ensuring that every supplier they deal with has fully complied with their tax obligations. Transactions completed years ago are being scrutinized and businesses are being penalized for non-compliance on the part of their suppliers, which by any stretch of imagination is beyond their control. This approach places an unfair burden on businesses that are operating in good faith.
Furthermore, the FBR is now asking business owners and management to sign one-sided affidavits (sample enclosed), making them responsible for ensuring that all our suppliers and customers are tax compliant.
The consequences of failing to meet this impossible standard include potential imprisonment of up to 10 years. This is creating an environment where continuing operations is becoming increasingly unfeasible for many industrialists, who are now contemplating shutting down their factories, scrapping machinery, or relocating their operations to other countries with more favourable business environment and tax authorities.
“Businesses are also facing harassment in the form of excessive and unlawful notices from tax officials. Genuine taxpayers are being subjected to undue pressure through repetitive demands and fabricated cases, despite having already complied with documentation requirements. This kind of environment is highly discouraging for the business community and is making it difficult for us to continue operations smoothly,” Kamran Arshad maintained.
Copyright Business Recorder, 2024
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