Export growth dependent upon sales tax refunds

Over the last twelve months it has been clearly demonstrated that our exports can grow provided we are given a "level playing field" to compete with our competitors. When the Indians and the Bangladeshis get export rebates and subsidies and are guaranteed supplies of power and gas at world competitive rates, and we have to make do with power and gas cuts, as well as beg for our sales tax refunds then that is not a "level playing field." To top it all both our sub-continental competitors have invested heavily in educating their populace and imparting skills to their labour force. Countries like China, the Philippines, Thailand, Malaysia and Singapore have already excelled in developing a skilled work force. Any "begum "of substance can vouch for the fact that a single Filipina maid is equal to four Pakistani servants. As a consequence, the per capita income of those countries is more than double of ours, and the Filipina maid gets four times the salary of a Pakistani maid. The dismal state of our education system has produced endless poverty and ignorance. But that is a long-term issue. Let's first talk of the short-term problems, which can be fixed easily.

We see a number of ministers stating that they have "released" billions of rupees to the export sector. In fact, all they have done is refunded some of the billions of rupees they had collected from the export sector as refunds. Billions are still stuck. The first essential for our exporters is that their sales tax refunds are granted as soon as they become due. Although, of late, the government and the FBR have been prompt in releasing funds for tax refunds yet the pace the implementation is slow. It is correct that the FASTER system processes refund applications of exporters quickly, after they are submitted, yet there are many drawbacks.

Firstly, the refund becomes due on a monthly basis and not when exports are affected. This means the exports of say early November shall be applied for in early December, a month after they have been affected. If manufacturing them has taken a month then this means that two months have elapsed already when an exporter applies for a refund. So as a minimum the exporter has an amount of two months sales tax in the process.

If for example his process time is longer than a month then add another month to the chain. In fact, exporters seldom consume all they buy within a month. The smaller they are and the more value they add the longer the manufacturing chain and the more the funds tied up in sales tax.

As the current rate of the sales tax is 17%, so 34% percent of the working capital is tied up in sales tax refunds at the very least. Very often the more value added orders take longer. So, essentially, with all the systems working perfectly something like 34 to 51% of the exporters inputs are tied up in refunds pending; this when everything is absolutely perfect.

The rule is that not only should an exporter's goods leave the country but all the vendors from whom he has bought his raw materials, accessories and other inputs like packing materials must have submitted their sales tax returns properly and deposited the sales tax with the FBR. If they have not done so and are running late then the exporters' refunds will be reduced by the amount owed to the FBR by those errant suppliers. So for the failure of a supplier the exporter is made to suffer. Frankly, this is a strange logic that the exporter must suffer for the sins of someone else with whom he has not relationship except that of a customer. In actual fact, in most cases exporters do not apply for refunds when they become due for the fear that if any of their material supplier has not submitted the sales tax due with his monthly return or is delayed then the exporters' applications get bounced!

The system of the computer is working well but if there is any lapse, and there are plenty, there is no system of appeal and redressal. If the computer has deducted an amount from your application then you must apply again to the very same system rather than to a court of appeal which must work independently from the computer system to judge the veracity of the case. This is an accepted practice in all administrative and judicial systems, and should be adopted by the FBR as well. There are plenty of pending refunds pertaining to this year from the period when the system was not working at all. Then there are huge unpaid refunds due from previous years and all these must be paid out to restore the export sector to good health.

It would be better to revert to the older system of industry wide declared refunds which are paid as soon as exports are made. So, for example, it is determined by the FBR assisted by other experts including industry representatives that for a particular industry, say terry towel, the average sales tax refund for the whole industry would come to say 14 percent of the export value of the towels; then that should be declared as the refund rate for towels. It should be payable upon each shipment as soon as exports are affected. This will half the waiting time for refunds being faced by exporters. More importantly, it will take away the suspense of waiting and wondering when the refunds will be paid.

The fact that the FBR is the chief agent for collection of taxes and must meet pre-determined targets is not compatible with paying out refunds promptly. The temptation for the bureaucrats to stifle refunds just to meet their quarterly/annual targets by holding back refunds for a couple of weeks is too strong. The refunds are too important to exporters to put them into jeopardy. If there are any delays again as there were in July to December last year then the whole momentum will be lost and exporters will become despondent again.

Copyright Business Recorder, 2020