Withdrawal of zero-rated status of cotton likely

In order to generate additional revenue in remaining months of 2016-17, the federal government is considering withdrawal of zero-rated status of cotton, recently given in the Prime Minister' incentives package for exporters, it is learnt. Sources said that the withdrawal of sales tax zero-rating on cotton is a revenue generation measure to generate additional revenue in the last quarter (April-June) of 2016-17.
There was 4 per cent customs duty and 5 per cent sales tax on cotton import. However, due to decline in cotton production, the government withdrew customs duty and sales tax on import of cotton in the Prime Minister Nawaz Sharif package for exporters. Under FBR's SRO No 38(I)/2017 and SRO No 39(I)/2017, the Board had exempted customs duty and additional customs duty on the import of 13 items including cotton, artificial staple fibre and other types of cotton during January 17, 2016 and June 30, 2018. Through SRO No 38(I)/2017, the Federal Board of Revenue (FBR) has exempted 13 items from payment of additional customs duty on the import of 13 items including imports of goods classifiable under specified PCT codes.
Through an SRO 36(1)/2017, zero per cent sales tax would be applicable on machinery, not manufactured locally, if imported by textile industrial units registered with Ministry of Textile Industry, as specified in Part-IV of the Fifth Schedule to the Customs Act, 1969, subject to same conditions as specified therein.
The Ministry of Finance had estimated financial impact of withdrawal of duty and sales tax on cotton imports at Rs 5 billion but the ECC later increased it to Rs 10 billion. The official sources revealed that Finance Division had moved a summary to the Economic Co-ordination Committee (ECC) of the Cabinet to withdraw the zero-rating facility and restore 4 per cent customs duty and 5 per cent sales tax on import of cotton. But the Ministry of Textile Industry and Commerce rejected the proposal while saying it would hurt the sector.
However, Finance Minister Ishaq Dar has constituted a committee comprising three secretaries, including secretary textile, secretary commerce and secretary national food and security, and Special Assistant to Prime Minister Miftah Ismail who will head the committee.
The committee would further discuss the issue and present its recommendations to the ECC. The ECC would take final decision in the light of these recommendations. According to sources, zero-rated status of cotton was not part of the package but the concession was announced along with the PM package.
The textile package on exports was announced by the Prime Minister for textile and non-textile sector in January 2017. It will certainly improve the comparative competitiveness of Pakistan's struggling textile industry viz-a-viz its regional competitors like India, China, Turkey and Bangladesh. The concession has been made available till 30th June, 2018 unless revoked earlier and total impact of concession in terms of customs duty and sales tax has been estimated by the Finance Division at Rs 17 billion. However, it will certainly improve the comparative competitiveness of Pakistan's textile industry.
The FBR said that the Economic Co-ordination Committee of the Cabinet considered the summary dated January 10, 2017 submitted by the Finance Division regarding "Prime Minister's Package of Incentive for Exporters" and approved the proposal contained in para-3 of the summary which included withdrawal of customs duty and sales tax on import of cotton and grant of zero-rating on import of textile machinery. In pursuance of the package, sales tax notification SRO 36(1)/2017 has been issued granting zero-rating of sales tax on import of cotton which was otherwise chargeable to sales tax at reduced rate of 5%. Moreover, sales tax-zero-rating on import of textile machinery has also been granted which, otherwise, was chargeable to sales tax at reduced rate of 10%.
Also, the whole of customs duties were exempted by the federal government on the import of raw cotton and manmade fibres (other than polyesters) vide SRO 38(l)/2017 and SRO 39(l)/2017 dated 23.01.2017 on the specified PCT codes, the FBR added.