Audit of impact of incentives to five zero-rated sectors: Mechanism will be devised, Hafeez tells cabinet

ISLAMABAD: Finance Minister, Dr, Abdul Hafeez Shaikh is said to have assured the Cabinet that a mechanism will be devised to audit the impact of incentives given to the five export-oriented sectors on the overall economy, well informed sources told Business Recorder.

At a recent Federal Cabinet meeting, when the Economic Coordination Committee (ECC) of cabinet decision regarding procedure for registration under concessionary regime of electricity, RLNG and gas under export-oriented sectors came under discussion, some members noted that the export-oriented sectors (erstwhile zero-rated sectors) were receiving incentives for decades without any data to confirm the benefit these sectors brought to the economy.

The Advisor to PM for Commerce responded that it is extremely difficult to assess the performance of these sectors in relation to the concessions they receive as there were multiple factors, mainly exchange rate, which determined the net economic benefit these sectors bring home. It was also clarified that export is mainly linked with exchange rate, whereas subsidy on utilities has a positive impact on domestic sales.

The Adviser to PM on Institutional Reforms and Austerity (IRA), Dr. Ishrat Hussain, commented that Pakistan has been following the same export structure since to 1990s. Focus should be shifted towards sunflower (emerging) industries to increase Pakistan's international market share, which has come down to half in three decades.

Dr. Abdul Hafeez Sheikh assured the forum that some framework would be devised to address the question. It was also maintained that in future a well thought-out merit order will be followed while granting such incentives. On December 2, 2020, the ECC was informed that the Ministry of Commerce has submitted a summary for consideration of ECC which was discussed in an ECC meeting held on October 19, 2020. During Cabinet's meeting before ratification of the ECC decision, the Minister for Energy and Adviser to Prime Minister on Commerce requested to hold ratification of said decision for further deliberations which were held on November 02, 2020 chaired by Dr Hafeez Sheikh and attended by the Adviser to Prime Minister on Commerce and Investment, Minister for Energy, SAPM on Revenue, SAPM on Power and Secretary Finance Division.

Ministry of Commerce was of the view that the direction given in the above-mentioned FCC decision was in contradiction with the spirit of earlier decisions on concessionary utility regime which was aimed at reducing input cost.

Further, the government provided concessionary utility rates to manufacturers or exporters of erstwhile zero-rated sectors registered with FBR under SRO-117 in accordance with condition (i) and (xii) of SRO-1125 and that there had been no distinction between manufacturers or actual exporters.

Other arguments of Advisor to Prime Minister on Commerce and Investment on the decision were: (i) units carrying out the outsourcing work would not be able to differentiate that purchase orders they have to process or complete was for actual exporters or local suppliers; (ii) utility consumption was negligible for actual exporters i.e. commercial exporters and standalone stitching units, as prices of their inputs i.e. yarn, fabric and processed fabric would not be reduced; and (iii) up-stream industry may initiate export of raw/ semi-processed input materials to take advantage of concessionary rates. Ministry of Commerce apprised that yarn, greige and processed fabric segments of textile sector cannot be segregated as actual exporters and local suppliers.

It was further added that the only beneficiaries would be Chinese and Bangladeshis who would be purchasing our yarn, greige and processed fabric or the big domestic composite units.

Revenue Division was of the view that support may be provided through drawback of local taxes scheme directly to the exporters and importantly, zero rating of electricity and gas was their internal arrangement and they would be liable to re-establish paraphernalia to initiate registration again.

It was also discussed that status quo may be maintained for FY 2020-21 and no new units be registered. Finance Division opined that status quo may be maintained for FY 2020-21 and proposed that FBR, Petroleum Division and Power Division may conduct an exercise to review the previous list of beneficiaries. Ministry of Commerce responded that since July 2019 no new unit had been registered under the concessionary regime resultantly discouraging investment and depriving new units. Moreover, FBR was already registering new units till June 2019 and could restart the exercise as Power and Petroleum Divisions had refused to register new units under the said regime. It was decided that FBR would start registering new units and matter of linking concessionary regime with actual exporters would be considered under Subsidy Review Exercise for FY-2021-22.

Ministry of Commerce submitted the following proposals for consideration of the ECC: (i) previous list of manufacturers or exporters declared zero-rated by FBR under condition (xii) of the SRO 1125 may be adopted in export oriented sectors;(ii) FBR may register new manufacturers or exporters of five export oriented sectors (erstwhile five zero-rated sectors), in accordance with past precedents of SRO -117, under Commerce Division's O.M. of December 13,2019 in a manner specified by the FBR and;(iii) FBR, Petroleum Division and Power Division may formulate periodic rechecking/ monitoring/ withdrawal strategy for previous and newly registered units along-with procedure to penalize in case of misrepresentation and misuse.

The ECC approved the proposal with the modification that "FBR shall register new manufacturers or exporters of five export oriented sectors (erstwhile five zero-rated sectors), in coordination with Commerce Division."

Copyright Business Recorder, 2020