Proposed zero-rating for textile sector: MoC to be eyeball to eyeball with FBR today

ISLAMABAD: Ministry of Commerce (MoC) will be eyeball to eyeball with Federal Board of Revenue (FBR) at an Economic Coordination Committee (ECC) meeting on Wednesday (today) on zero-rating for the entire textile sector proposed in Rs 900 billion incentives-based Textile Policy 2020-25.

Finance Minister, Dr. Abdul Hafeez Shaikh, who is dealing with the International Monetary Fund (IMF), will preside over the ECC meeting.

Recently, Prime Minister Imran Khan as Minister in-charge, Ministry of Commerce approved Textile Policy for onward submission to the ECC. The textile sector has already held meetings with the concerned government stakeholders including Finance Minister, Commerce Advisor and SAPM on Revenue, Dr. Waqar Masood, for smooth sailing of the textile policy.

Commerce Ministry, sources said was supporting zero rating for all the textile sectors so that small industry should also grow and contribute to the national exchequer, as without zero rating, small units cannot survive. The key players of textile sector get their refunds from FBR but refunds of small units remain stuck for years, due to which they face serious liquidity issues.

According to the draft policy, the government will provide consistent, long-term policies for the foreseeable future, while undertaking following measures: (i) electricity will be provided at cents 9/kWh; (ii) RLNG at $6.5/MMBtu; (iii) system gas at Rs. 786/MMBtu during the policy period; (iv) Long Term Financing Facility (LTFF) and Export Financing Scheme (EFS) rates will not be changed; (iv) review of LTFF and refinance scheme for SMEs, and indirect exporters and building cost will be included; and (v) brand development fund will be launched.

The government will extend fiscal incentives of around Rs 900 billion for five years. Of this, the impact of electricity at Cents 9/ kWh- all-inclusive is estimated at Rs 123 billion, RLNG- Rs 111 billion, DLTL for textiles and apparel products (garments/technical textile at 4 per cent and made-ups at 3 per cent) - Rs 420 billion, LTFF to continue at 5 per cent - Rs 75 billion and EFS to continue at 3 per cent- Rs 109 billion.

Realizing the potential of value-addition in each segment of textiles and apparel supply-chain and inherited know-how of products and markets by private sector, the Commerce Ministry has decided to set the target of value-added and textiles at $20.865 billion, of which $ 16.294 billion will be value-added sector and $4.571 billion for textile sector by 2020-25.

Commerce Ministry, in the draft policy, has claimed that targets set were ambitious and financial commitments of Rs. 188 billion and Rs. 65 billion respectively for first (2009-14) and second ( 2014-19) Textile Policies were made by the then Governments to achieve them. However, commitments were not fulfilled and timely payments were not doled out in financial support schemes. Further, funds were not allocated for public sector development under infrastructure, vocational training, productivity and compliance-related programme.

The Textile Policy 2020-25 is aimed at addressing shortcomings in previous policies and multipronged strategy will be devised as follows: (i) having a strong resolve to fulfill the commitments, it is imperative to mention that present government disbursed Rs. 97 billion in pending liabilities of previous governments for last two years, while the previous two governments only disbursed Rs. 68 billion; (ii) market-driven exchange rate is a great boost to increase exports and reduce imports; (iii) National Tariff Policy (NTP), working now under the domain of the Ministry of Commerce, is determined to rationalize the Textiles and Apparel value-chain; (iv) Pakistan has abundant labour force, including women, temporary importation schemes and re-export would help increase value-added exports with (a) simplification and proposed bond to bond transfer to diversify product base; (b) availability of raw materials at a competitive price to value-added exporters; (c) product diversification and; (d) improvement in fiber mix as cotton currently accounts for only 27% of the total fiber consumption in the world.

According to the draft Textile Policy, customs duty drawback rates will be revised. The government is committed to revitalizing Pakistan Textile City Limited and Karachi Garment City Limited. A mass-level training programme will be launched specially on industrial stitching and mostly for women. Marketing strategy will be reviewed. First-ever E-Commerce policy is under implementation phase, and this will provide an open access to textile and apparel manufacturers/exporters to tap available business opportunities across the globe. Amazon has already started registering Pakistan manufacturers and exporters, including textiles.

The draft policy states that due to high tariffs on value-added products, domestic manufacturers end up importing more MMF rather than fabric, while countries such as Vietnam and Cambodia import MMF fabric and export high value- added products. Tariff Rationalization is imperative to ensure equal distribution of profits and encourage industry for investment to improve productivity.

Furthermore, Pakistan is a major supplier of greige/semi-processed raw materials; there is therefore, a need to make a shift towards value-added products, i.e., garments, made-ups and functional/technical textile products. Due to a lack of state-of-the-art infrastructure facilities, the industry has to invest in infrastructure-related components, Captive Power Generation and effluent treatment plants. This needs to be covered through development of state-of-the- art Textiles and Garments Parks having the status of Special Economic Zones (SEZ) to avail the benefits. This would also facilitate in defragmentation of textiles and apparel value-chain.

The draft Textile Policy also states that foreign direct investment could not be attracted to the Textiles and Apparel sector due to inconsistent policies, including exchange rate, a lack of infrastructure facilities and availability of energy at competitive rates. The challenge would be to restore confidence of international investors by implementation of Textiles Policy in letter and spirit. Pakistan has recently been able to clinch a favourable deal in the Pak-China Free Trade Agreement phase-II. Development of Gwadar Port and projects under the China-Pakistan Economic Corridor (CPEC) will also provide a launching pad to help textiles and apparel value-chain to attract investment.

The major issues of textiles and apparel value-chain relate to other ministries/organizations and a few subjects have also been devolved to the provinces. The better collaboration among various stakeholders (government ministries, organizations and provinces) is needed for proper implementation of the Textiles Policy 2020-25. Moreover, provinces are required to either offer additional benefits to manufacturers for investment in their respective provinces or at least provide them a conducive environment.

A looming challenge is textiles and apparel sector demand for the restoration of zero-rating regime, and release of delayed refund payments by the government. This is crucial if exporters are to enhance capacities and production. A timely refund mechanism is essential to address liquidity crunch of exporters, otherwise, the government must restore the zero-rating regime.

One of the important reasons for not fully utilizing export potential in textiles and apparel value-chain is inconsistent policies, especially in availability/pricing of energy and raw materials, taxation, refunds and regulatory regimes therefore (a) during Policy period, the Ministry of Commerce will ensure that energy pricing remain, consistent, regionally competitive and rationalized among provinces; (b) deliberations would be made with provinces that additional facilitation may be given from their own resources to attract investment in their respective provinces and; (c) the government will automate refund mechanism, and continuously simplify the procedure to the satisfaction of SMEs.

Tariffs have been kept high to encourage investment in the upstream value-chain. Nevertheless, high tariffs encourage domestic sales and inefficiencies are induced in pricing. To encourage exports of value-added products and product diversification, the Ministry of Commerce will take the following measures on priority: (i) tariff structure of entire textiles and apparel chain including MMF and cotton based value-chains will be rationalized on priority followed by accessories and dyes and chemicals;(ii) Customs Duty Drawback rates of textiles and apparel products will be reviewed taking into account additional customs duty and regulatory duties and; (iii) simplification of temporary importation schemes in perspective of SMEs - the Ministry of Commerce will ensure common warehousing and include indirect exporters in temporary importation schemes.

Ministry of Commerce in consultation with SMEs and large-scale industry will review federal, provincial and other organization-based taxes/cess and provide recommendations to the government to rationalize them to reduce the cost of manufacturing. Textiles and apparel machinery will be zero-rated. Import tariffs of accessories, dyes and chemicals utilized by the textiles and apparel value-chain will be rationalized.

As Pakistan has been a net cotton importer for a long period, suppliers, therefore, do not feel the need to improve the quality of cotton. The cotton trade is between a buyer and a supplier; however, provinces will be encouraged to implement Cotton Control Act. Moreover, cotton is a basic raw material, however, export of cotton will be encouraged to improve quality and avoid any chance of depressed Cotton prices by the user industry.

Ministry of Commerce in consultation with stakeholders will introduce a quality/grading-based Cotton marketing mechanism. Ministry of Commerce will coordinate with the MNFSR to support farmers to reduce their cost of production and both Ministries will jointly endeavour to ensure quality inputs for cotton farmers. Ministry of Commerce will join hands with the MNFSR to increase cotton area, production and, importantly, yield. Further, scope of better cotton initiative will be increased to ensure bulk availability of BCI certified cotton to textiles and apparel value-chain.

Ginning needs immediate technology up-gradation and provincial departments of industries issuing the ginning licenses will be approached to link technology up-gradation of ginning sector with licenses. Provinces will be approached to implement the Cotton Control Act in true spirit. Further, the matter will be debated to convert ginning sector into a service industry and policy solution will be identified. This would help the farmers get fair price. Introduction of hedge trading will also facilitate in achieving this objective.

Ministry of Commerce will enact the Trade Resolution Act and strengthen Directorate General of Trade Resolution Organization (DGTRO) to address trade disputes between suppliers and buyers. Moreover, an online portal will be established to register the trade complaints. Textile associations will also be involved to settle trade disputes.

Copyright Business Recorder, 2020