Textile’s crocodile tears

Pakistan’s textile sector has been raising hue and cry over the removal of zero-rating regime announced in the latest federal budget. But are their arguments tenable? The short answer is a resounding no. For the long answer, read below.

The biggest argument produced by textile lobby so goes that the removal of zero-rating means further delays in tax refunds, leading to working capital shortages. That is indeed a genuine concern. Which is exactly why Finance Minister Hafeez Shaikh gave his “firm and solid commitment” in front of a 1000-plus audience at ICAP’s post-budget summit earlier this month. He said his team is working “very hard to ensure that the problem of refunds is solved once and for all”.

Let’s sit together and come up with a mechanism that works for you, he said at the summit. “At finance ministry, it is not our intention to block your refunds and use it our self – this is a new regime and we have to try find ways of cooperation.” This is a fair request and a believable promise considering that Hafeez’s chief taxman, Shabbar Zaidi, knows the industry’s refunds problems quite too well and has a corporate Can-Do mindset.

Despite these assurances that a smooth refund system will be put in place in consultation with export-oriented industries, the textile lobby is now saying that the size of domestic textile sales is too small and that removing zero-rating regime would yield very little tax revenues at the cost of refund delays which in turn would hurt exports.

In recent weeks, Hafeez and Zaidi have been found saying that the size of domestic textile sales is about Rs1200 billion, against which sales tax collection is only Rs6 billion. In contrast, All Pakistan Textile Mills Association (APTMA) maintains that the size of domestic textile sales is about Rs545 billion (their original claim: $5 billion converted at FY18 average exchange rate of 109).

“If we take their (government’s) estimate of Rs1200 billion as domestic sale of textiles, and divide it with population numbers, it would mean that every Pakistani spends around Rs5455 annually on clothing. How is that even possible considering that half of the country’s population lives below poverty line,” said Zubair Motilwala at the ICAP summit while criticising government’s estimates of Rs1200 billion.

Zubair, a renowned business who has also sat in government offices and advisory boards, and his colleagues in the textile lobby would do well to look the table produced here. The table shows estimates of textile sales in domestic market based on Euromonitor Intelligence, and Household Integrated Economic Survey conducted by Pakistan Bureau of Statistics. The former is a globally renowned market intelligence company that Zubair’s corporate sector colleagues frequently rely on, whereas the latter is a survey well-respected by leading Pakistani economists.

Based on both these estimates, BR Research’s calculations shows that domestic textile sales in FY19 - clothing and home textile - was at least Rs1000 billion, including conservative estimates of textile consumption by the likes of hospitals, hotels, restaurants, factories, offices (peons & drivers), private guards, police and other law enforcement agencies. And that’s according to government survey-based statistics. Estimates based on Euromonitor’s data is easily north of Rs1500 billion, whereas Shabbar’s estimates of Rs1200 billion are likely to be based on actual corporate sales datasets that accountants are better privy to.

This means that at the old sales tax rate of 5 percent the industry should be paying at least Rs50 billion. In contrast, the current collection is only Rs6 billion, as per government claims. Even if domestic textile sales equals Rs545 billion, as the industry claims in its adverts these days, at 5 percent rate the collection should have been Rs27 billion. Clearly textile sector does not pay adequate sales tax on domestic sales.

Pretty soon textile industry might start claiming that about 24 percent of domestic textile market is supplied by smuggled goods, whereas 44 percent of local market is imported goods, as they once claimed in media in August 2017. But those claims were not based on any sound economic analysis; nor should one expect them to release any sound analyses for wider public debate this time around.

The APTMA to-date lacks a sound secretariat and a credible research wing staffed with professional economists and finance experts, a trait it shares with nearly all other chambers and associations in the country. Besides, if smuggling was really one-fourth of local market as APTMA once claimed, wouldn’t textile lobbyists have raised a din over it all year long. Why is it so that the issue of smuggling comes up only when there are talks of removing the zero-rating?

The moral of the story: textile industry is trying to blackmail the government to take back the removal of zero-rating or at least halve the proposed tax rate. The pressure from textile lobby will test the strength of PTI’s political capital and its seriousness of reforms, where the government would do well to remember that in a not so distant past, the lot of textile barons took government-subsidized loans and punted in real estate and stock markets. Fix the refunds, address smuggling concerns but do not fall for textile’s crocodile tears!