The textile sector has obtained huge amount of sales tax refunds in the name of past cases (2004-2005) following zero-rating of sales tax on exports of textile products in 2005-2006. According to CBR quarterly review issued on Thursday, the zero-rating of sales tax on exports of textile items has resulted in creation of huge amount of sales tax refunds despite low tax payments by the textile sector.
Zero-rating has forced the Central Board of Revenue (CBR) to pay a huge amount of Rs 40.7 billion as refund/rebate to the textile industry in 2004-2005 against its contribution of Rs 13.8 billion as indirect taxes during this period.
The textile industry has failed to contribute effectively to federal tax receipts as a result of zero-rating of sales tax and wide-ranging tax exemptions and concessions.
As a result of zero-rating of exports for sales tax purposes, a huge amount of refund was created in the past. In 2004-05, CBR paid Rs 40.7 billion as refund and rebate to the textile industry whereas the industry paid only Rs 13.8 billion as sales tax, customs and excise). Resultantly, the net revenue paid by the industry was (negative) Rs 26.79 billion.
In case of income tax, the only payment made by the industry is through withholding taxes at the export stage, where tax rate currently in vogue ranges between 0.75 percent and 1.5 percent. The amount of tax collected through this tax regime has been an un-impressive sum of only Rs 45 billion.
To deal with this issue, the entire textile chain from ginning to ready-made garments was zero-rated for VAT purposes in 2005-06. The inputs used in the industry including electricity and natural gas are also zero-rated. Furthermore, to improve competitiveness, textile machinery was also exempted from customs duty.
Since, 80 percent of textile produce is exported and the rest is sold in the domestic market, to recover tax on domestic sale a 3 percent retail tax was introduced that included 2 percent sales tax and 1 percent income tax on retailers of textile. However, an insignificant sum of Rs 12.1 million was collected under this scheme which included Rs 4.4 million in income tax and Rs 7.7 million in sales tax.
At this stage it is pertinent to determine whether the textile sector is paying any amount under the heads of sales tax or income tax on its domestic supplies that are not zero-rated.
A very simple calculation shows that for the textile sector GDP of Rs 319,541 million, if 80 percent is exported and only 20 percent of value addition is sold locally, then at the rate of 15 percent sales tax, there is a tax potential of Rs 9,586 million for sales tax alone. Even if the reduced rate 3 percent is applied, it should result in a tax yield of at least Rs 1,917 million. As indicated, the collection is no where near this amount, it added.