The local textile sector has turned out to be one of the greatest beneficiaries of the FY05 Budget as the government abolished sales tax on ginned cotton.
Even though other sector-related measures would be announced in the FY05 Trade Policy, the textile sector has been able to garner a few much-wanted incentives in the FY05 Budget.
The government has obliged the sector in this regard and abolished the 15 percent GST charged on ginned cotton.
GST collected from ginned cotton was largely refunded to textile exporters anyway. Experts believed that this is a positive step for the textile sector, as textile players would not have funds stuck up with the government and be waiting for refunds.
This usually caused textile exporters to borrow in order to finance working capital requirements.
Also, GST on PSF has been cut from 20 percent to 15 percent. This would entail lower PSF prices for the textile millers, and would further encourage the use of PSF, which would help the textile sector become competitive globally, especially in the value-added segment where PSF usage is quite common.
Import duty on industrial machinery reduced to 5 percent. This decrease will further provide opportunity to local players to expand the existing, or set up new plants.
Pakistan's textile machinery imports during Jul-May FY04 stand at $433 million, which is part of $1.6 billion of textile machinery imports over the last four years.
Analysts expect this move to be favourable for the local textile sector, as it would help prepare it for the quota-free regime starting January 2005.
Also, GST and withholding tax that was previously leviable on duty-paid value of imports has been abolished as per the finance minister's budget speech.
Import duty on PSF has been maintained at 20 percent. This has been done, as the government couldn't lower the duty owing to sovereign guarantee provided to PPTA for 15 percent protection till end-FY08.
Khalid Iqbal Siddiqui, research analyst from Investcapital Securities, believes that this would have no impact on the textile sector.
He said that the textile sector has performed admirably during 1H2004 (Oct 2003 - March 2004). Profitability, (based on our sample of 30 textile cos.) has risen by 62 percent during the said period.
"Amongst the listed textile cos., we actively cover Nishat Mills, which has also seen significantly improved results. Nishat's profits for 1H2004 are up 34 percent, mainly on the back of improved dividend income due to DG Khan's dividends, and on the back of 42 percent lower financial charges."
With textile sector exports surging by 13 percent in FY04 to-date, and Nishat being the largest listed textile exporter, Khalid expects it to continue to reap the benefits of this growth in exports.
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