Sales tax refunds

During a pre-budget seminar organised by the Commerce Ministry and attended by officials from Federal Board of Revenue (FBR), State Bank of Pakistan, National Tariff Commission and ministries of Finance, Commerce and Textile Industry, academia, trade associations, chambers and leading exporters, Special Assistant to the Prime Minister on Revenue Haroon Akhtar Khan pledged that zero-rating for five export-oriented sectors will continue next year as well. This implies there is no sales tax refunds from July 2016 onwards as the government introduced zero-rated regime for five main export-oriented sectors - textile, leather, sports goods, surgical goods and carpets. Unfortunately, this was limited to the five export sectors and Younus Dagha, the newly appointed Commerce Secretary, urged the Special Assistant to the Prime Minister on Revenue to extend the zero-rating scheme to all export sectors.
This seminar was held in the background of a Business Recorder exclusive sourced to the FBR revealing that sales tax refunds amounting to a whopping 100 billion rupees have yet to be cleared by the FBR. Additionally, the report noted that instructions have been issued to roll-back Refund Payment Orders (RPOs) defined as verified refund claims from field formations ready for issuance of cheques though Business Recorder could not verify the exact amount under this head.
The Federal Finance Minister, Ishaq Dar, as well as Haroon Akhtar Khan periodically pledged to ensure the release of all refunds within a stipulated period. During the federal budget speech 2016-17, Dar pledged that all pending sales tax refund claims till April 2016, whose RPOs had been approved, would be cleared by 31st August 2016. The schedule for clearing refund claims for May and June 2016 would be drawn up later, the exporters were informed, though that is still awaited. On 20th August 2016, Haroon Akhtar Khan and the then FBR Chairman, Nisar Khan, informed the Finance Minister of the status of the refunds and their break-up sector-wise. However, refunds remain pending to this date which is generating a severe liquidity crisis in the manufacturing sector which, in turn, accounts for higher private sector borrowing from the commercial banks that is raising input costs making our exports uncompetitive in the global market.
Be that as it may, it is relevant to note that there is a wide divergence in the refund claims by exporters and the calculations of the FBR. A senior FBR official stated that the "exact amount of refunds is far less than the claims made by the exporters, who often claim it is above 200 billion rupees." During a pre-budget seminar, Haroon Akhtar Khan stated that there was an agreement between the government and the exporters not to include packaging material in refund claims but that this agreement was being violated; and he further stated that the government had estimated lower refunds after zero-rating regime was applied; however, refund amount actually increased. FBR has paid refunds of 100 billion rupees to exporters this year as opposed to 79 billion rupees last year; adding that the date for payment of refunds of 30 billion rupees will be announced by the Finance Minister.
However, what is disturbing is that the FBR has been directed not to release the amount of cleared RPOs or in other words, genuine claims are not to be released. The reason remains the same: the paucity of funds, to date the FBR's revenue collection shortfall is around 150 billion rupees and with two months remaining in the current fiscal year this shortfall is expected to rise, coupled with failure to contain current expenditure, thereby raising serious concerns in the Ministry of Finance that the budget deficit may once again become unsustainable. And the way out that has been consistently supported by the Dar-led Finance Ministry as well as his predecessors is to stop all releases for refunds while at the same time collecting advance tax to present a picture that does not reflect ground realities.