Zero-rated no more

The latest casualties in light of the recently agreed IMF bailout are the zero-rated sectors which are likely to lose their zero rating privilege very soon. As part of the condition of removing special tax privileges the government has decided to say goodbye to its goal of increasing exports, instead aiming to go for revenue mobilization as part of efforts to curtail the fiscal deficit.

This means that the five export oriented sectors which constitute of textile, leather, carpets, surgical and sports goods will likely have to pay 17 percent sales tax post this budget with SRO 1125 being removed. This comes as a surprise to many exporters who say the government is going against its promise of supporting the export oriented sectors in making a comeback.

The industry associations are up in arms against the decision with textile associations in the lead. That’s natural given that textile exporters are the biggest ones to lose if this move goes through. Feeling betrayed by the government, calls are already being issued of textile exports witnessing a steep decline in the times to come if the decision is not reversed.

One thing that is clear from this intended move is that both the thinking and priorities have changed in policymaking circles with the recent cabinet reshuffle. Initially under the previous FM Asad Umar, the focus was to provide maximum relief to export industries where subsidized gas and electricity were provided to help bring down the cost of production. There was also the decision to continue with duty drawbacks and zero-rating granted under the previous government in a bid to reduce the current account deficit by increasing exports.

However, the perception has changed under the new team which is toeing the IMF’s line of reducing the fiscal deficit at all costs even if it comes at the back of a reduction in exports. The other issue is that there has always been the misuse of the zero-rated regime by many exporters where over invoicing of refunds has taken place by selling in the local market yet availing the benefits reserved for exports while verification has also been difficult.

Over the years, the textile tycoons have also lost goodwill over their failure to become competitive by investing in technology up gradation and capacity expansion when they were in a position to do so. Now it seems with the current macroeconomic conditions, there is no more room for the government to dole out incentives anyways.

In the long run textile exports are dependent on a lot of factors including product diversification by firms, efficiency in production processes and the general change in mindset where the private sector does not base its business model on government incentives.