Government to declare erstwhile zero-rated sectors as export-oriented sectors

The government has decided to declare erstwhile five zero-rated sectors as export-oriented sectors which are eligible for incentives, well-informed sources in Commerce Division told Business Recorder.

This proposal will be tabled before the Economic Coordination Committee (ECC) of the Cabinet on Wednesday (today).

Sharing the background, the sources said, Statutory Regulatory Order (SRO) 1125(1) 2011 of December 31, 2011 issued by the Revenue Division was the only legal instrument used for the identification of the sectors eligible for the zero-rated incentives package of the Federal Government. However, with rescinding of the SRO 1125(1)20111 through the Finance Act, 2019, the available legal instrument has ceased to exist, thus, creating a void for the concerned government departments to indentify the sectors for the purpose of extending the facility of zero rated.

In order to resolve the issues related to this issue, the ECC, in its decision of August 8, 2019, on a summary submitted by the Petroleum Division, constituted under the chairmanship of Minister for Economic Affairs, comprising Special Assistant to the Prime Minister on Petroleum, Secretary Finance, Secretary Commerce and Chairman FBR, to review the proposal of the Petroleum Division and submit its recommendations to the ECC.

In pursuance of the decision of the ECC of the Cabinet, the committee held a series of meetings. During the second meeting of the committee held on October 3, 2019, the committee tasked the Commerce Division to issue a clarification or SRO, as appropriate, in place of the rescinded SRO 1125(1) 2011 of December 31, 2011, for the purpose of defining the new nomenclature of the previously zero-rated industry.

Subsequently, the committee, in its meeting held on October 23, 2019, agreed, among other things, that the nomenclature of the sectors mentioned in the ECC decision of August 8, 2019, will be "export oriented sectors, which includes textile, carpets, leather, sports and surgical goods", and the Commerce Division will issue the necessary SRO for clarification of the new nomenclature.

Citing the recommendations of the committee, Commerce Division has proposed that the erstwhile zero-rated sector, namely textile (including jute), carpets, leather, sports and surgical goods, may be declared as "export oriented sectors, which include textile, carpets, leather, sports and surgical goods".

The committee also approved extension in prevalent tariffs of RLNG and electricity for a few months.

According to official documents, on August 8, 2019, it was also pointed out that in the absence of notification of ECC approved weighted average tariff of $ 6.5 MMBTU for export-oriented industry in Punjab, SNGPL has to charge full price of system gas/RLNG to the export-oriented sector and upon receipt of subsidy has to issue adjusted bills on a monthly basis. But owing to stay order granted by Lahore High Court (LHCC), textile industry was making payments to the extent of $ 6.5 per MMBTU against the invoices raised by SNGPL which is impacting on the balance of payments of SNGPL towards PSO and PLL against supply of RLNG. Whereas release of subsidy amounts are often delayed by the Finance Division due to procedural issues and this prompted SNGPL to levy Late Payment Surcharge (LPS) on the partly paid bills by zero-rated sector. However, on May 2, 2019, LHC disposed of all the petitions of textile industry where stay was granted earlier with the direction to federal government to devise a procedure for disbursement of subsidy to export-oriented sector (formally zero-rated sector within 30 days of the decision i.e. May 2, 2019). Federal Board of Revenue with the approval of government has rescinded SRO No.1125(1) 2011 of December 31, 2011 which has brought the export-oriented sector under 17 per cent sales tax regime. However, no further SRO has been issued by the FBR with respect to clarification of former zero-rated sector. In order to resolve the issues of export-oriented textile industry, Secretary Finance chaired a meeting on July 23, 2019 wherein a way forward on the issues was agreed upon.

In the light of meeting and directions of LHC with respect to development of subsidy release mechanism, Petroleum Division submitted the following proposals for consideration of the ECC: (i) subsidy claims for the month of March (based on 100 percent RLNG supply), April, May and June 2019 amounting to Rs 5,173,701,600 based on actual verified bills/claims of SNGPL may be approved for release out of the budgetary allocation of current financial year and any resultant shortfall in the budgeted allocation at subsequent stage will be met through supplementary grant; (ii) in order to further simplify the subsidy disbursement process, SNGPL may raise verified subsidy bill/ claim of preceding month by 8th day of every month and Finance Division may release the subsidy within seven days of receipt of claim from Petroleum Division. Upon receipt of subsidy amount, SNGPL shall promptly issue adjusted invoices to export-oriented sector in the next billing cycle; (iii) The export-oriented sector shall pay the invoices at ECC approved tariff of $ 6.5 per MMBTU along with applicable taxes; (iv) waiver of interest/ LPS charged by SNGPL on the amounts over and above the tariff of $ 6.5 MMBTU during the FY 2018-19 which was due to the delayed subsidy release by the government. FY 2019-20, LPS shall only be charged on the delayed payment of $ 5.6 per MMBTU and it will not be applicable on the subsidy amounts to be released by government SNGPL; and (v) in order to enable the gas utility companies to supply gas/ RLNG to export oriented sector (formally zero-rated sector), FBR may clarify the nomenclature of this sector that benefit of concessional tariff be limited to exporters under previously notified zero-rated regime as per SRO 1125(1)2011 General Sales Order. Any exporter who was previously not a beneficiary of the SRO will need certification of falling under the new, clarified regime from FBR.

The ECC approved Petroleum Division's recommendations which were later ratified by the Federal Cabinet.