An alternate sales tax refund system for exporters

The current system of sales tax refunds for value added textile exports is not working. It has been over eight months that the government has devised a computerized refund system, which in theory should process the exporter's application in 72 hours without any human intervention. Unfortunately the system does not work - either the computer breaks down or its managers run out of funds. Either way the exporter is left without his refunds and without any cogent answer to his pleas. Nobody, including the computer has any idea as to what is going on - and more important when it may right itself. The denial, delays and the uncertainty created by the authorities in sales tax refunds has completely demoralized the export sector. It has also drained their life blood just when the contest to re capture lost markets had begun. It appears that we are not capable of devising a system of refunds and implement it.
These sectors are too important for our economy to be allowed to fail. They contribute over ten billion dollars of exports, almost half our annual total. They comprise the heart of our domestic manufactured exports. If we can achieve a 10% growth rate (in dollar terms) of these items it will add a billion dollars a year to our export earnings. This billion dollar increase will create about a hundred and fifty to two hundred thousand jobs directly. This increased employment will have its own multiplier effect into many more. Moreover, these jobs will be created in the most impoverished sector of the economy where unemployment is rife. It will also help close the foreign exchange gap. Such an increase in the exports of this sector has been achieved in the past, and given the right policies can be achieved again.
The base has already been set. The rupee was devalued more than a year ago. Exporters were given concessionary rates for power and gas. They already enjoy export refinance under very favorable terms. It would be a great pity if we cannot put the refund payments right and all these incentives achieve nothing in the end.
The current system is flawed in its very perception. Even if it is implemented perfectly it will still be deprive the export sector of about 40 % of its working capital. Working capital is the "life blood" of any industry, suck this out and the body is left listless. It will not be able to improve its export performance without cheap and abundant working capital at its disposal.
The sales tax is collected on all inputs except wages at 17 %. This translates into about 11/14 % of the export value depending upon the value addition in any product. The more elaborate the product the more the value addition.
As per current refund rules the exporter concerned has to submit his refund application for say January after the 15th of February. Similarly the vendors supplying the exporter have also to submit their returns by that date along with their payments. The department then ensures that every rupee claimed as refund is matched by the tax paid in by its vendors. If they do not the application is rejected. If for example a vendor has not submitted his application in time - or paid in his due tax - then also the exporter's application is rejected or kept pending within the computer. A typical exporter relies upon dozens if not over a hundred vendors in the manufacturing process. The exporter has no way of knowing if the vendor has complied with the tax department - except his say so. As such many of the refund claims get rejected - and once rejected they are subjected to Kafka style justice. There is no clear cut redress systems and many applications for as early as July last year are still pending.
The wiser exporters delay their refund applications for a month or two and apply when they feel all their vendors have paid in their taxes. So the application for January refunds have still not been submitted. Even if they get submitted by mid-April and by some miracle get approved and paid by end April the tax paid in January will have been refunded in May - three to four months after it was paid. At the rate of 12 % per month this is 36 to 48 percent of the monthly sales value of the exporter which is tied up in sales tax refunds. This is a burden no normal functioning company can bear - and that is the biggest drag on our exports.
A possible solution:
Unfortunately we cannot frame our own economic policies and have to comply with IMF conditionality's. One of the most sacrosanct of these is the imposition of sales tax across the board. So a simpler mechanism for refunds has to be devised. In the past we have practiced duty draw back schemes. These were a flat percentage of the FOB value repaid to the exporter soon after his consignment was shipped and all documents cleared by customs and the bank.
The main problem with this system was that a cash-strapped government would not release funds for refunds; especially at the close of the budget year or at year end. Then the FBR or the ministry of finance would hold back refunds for two to three weeks to show a rosier picture of tax collection. However, when refunds got delayed they got delayed for everybody. Each exporter knew that his refunds were pending, and would be released after the 30th of June or the 31st December, or after the IMF review was over. As the amounts grew so did the pressure on the finance ministry to release the funds. The system was clear and transparent. As long as the refunds were routed through the State Bank - they worked well.
The rate of refund was worked out in consultation with the stake holders and declared for each category. Then there would only be a change when the rate of sales tax is changed. The exporter would declare the category of export and attach his refund claim for examination by the customs at the time for export. As soon as the goods are exported and the payment received against them the refund would be forwarded to the state bank through the exporter's bank.
Moreover, the refund becomes due after export - so the three months wait for application as in the current system was not there. If the government then really wants the exports to flourish they can release the refunds to be paid before they calculate the sales tax receipts of any particular month. This way no one if fooled by inflated figures of tax collection and the true picture will emerge. It`s not a perfect system - but it is still better than the current one.