Package for textile sector

The committee set up by the Ministry of Textile to recommend measures to cut down the cost of doing business in textile and clothing sector in Pakistan, has come up with some useful proposals which, if implemented, can revitalise the sector and impart to it a competitive edge in global market.
The committee has recommended a Rs 47.2 billion package for the textile sector to neutralise the multi-faceted negative impact it has had to sustain over the years.
Some of the recommendations made by the committee include: grant of 10 percent financial support for capital investment in textile sector, including import of second-hand machinery, revision of export refinance rates to 50 percent of six months average Kibor rates, and the reimbursement of five percentage points by reducing Kibor on outstanding long-term loans for the existing and future projects.
The committee, headed by Zubair Motiwala, has also made six recommendations on taxation and duties. These include, firstly, zero-rated custom duty on import of textile machinery, including spare parts, and generators for captive power plants. If any, the sales tax on these items should also be made zero-rated.
Secondly, the withholding tax on textile exports, instead of its current multiplicity, should be charged at a flat rate of 0.25 percent.
Thirdly, the supply of textile raw material, including yarn and fabrics through indirect export schemes should be considered export for all types of taxation purposes, which will facilitate the supply of raw material to small and medium-sized value-added sectors.
Fourthly, Section 107 A4 be restored to allow investment of tax credit at the rate of 20 percent to textile industry. Fifthly, collection of export development fund (EDF), currently being charged at the rate of 0.25 percent on textile exports, be discontinued.
And sixthly, the rules for calculating the duty drawback be so amended as to allow computation on the basis of deemed import of the fibre consumed, but the facility be restricted only to export of value-added products like garments, processed fabrics, home textile and made-ups.
A major factor that has made doing business in Pakistan comparatively an unattractive proposition for many investors is the high utility rates charged here. A study has revealed that while gas rates for captive power plants and general industries in Bangladesh stand at $1.90 and $2.65 respectively, a unified rate of $4.02 is being charged for both categories in Pakistan.
As mentioned in the committee report, the gas tariff even in India for captive power plants is lower than that charged from general industries.
The committee's report also calls for removal of the burden of subsidy granted to domestic consumers and fertiliser companies from the textile industry, which should be declared a priority sector. Pakistan's textile industry has lost its relatively more prominent position of the 1960s and 1970s, and today holds only a little over 2 percent of the world market as against 11 percent it held between 1962 and 1970.
By 1972 Pakistan had a share of about 3.5 percent of the world market in textiles, which fell to 1.5 percent in just four years. It rose again to 2.5 percent in 1983 and has since stabilised at around 2 percent. A declining trend was also discernible in cotton cloth manufacturing, which stood at 625.3 million square meters in 1970-71, but fell to 123.5 million square meters by 1988-89, largely due to a seminal shift from large-scale to small-scale sector.
Analysts believe that the negative productivity in textile and garment sector is thus mainly the result of "fragmentation" of the industry. Another major reason for the decline was failure of Pakistan to diversify into other products and lines at a time when the world textile industry was undergoing a change.
However, the government claims that things have improved a lot, and the export target it has set for 2007 stands at 10.6 billion dollars.
Obviously, it will be very hard to meet this ambitious target without putting together for the textile industry a Rs 47.2 billion package, which the committee has proposed. The sector can be pulled out of the doldrums by massive financial incentives in the form of tariff concessions and loans.
For a start, subsidised provision of inputs like gas etc can help stabilise the sector. Further, the government should relieve the textile industry of the burden of subsidy it provides to domestic gas consumers and fertiliser sector.
The committee's demand that the government should extend 10 percent financial support for capital investment, including import of second-hand machinery, is also quite justified, as such imports will help strengthen the textile manufacturing base. And lastly, it will be much better if the focus is gradually shifted back to large-scale manufacturing, in order to reverse the trend that overtook it in the 1980s.