The additional sales tax on local production of cotton is 10 percent whereas the sales tax on yarn is 17 percent. In this scenario, no one will buy cotton and yarn due to their sales tax amount will get stuck in export cycle and this will be only beneficial to the imports schemes under the DTRE and bonds.
If sales tax has to be imposed then local and imported cotton under bond or EOU has to be treated at par otherwise this will create loopholes detrimental to local supply chain and as a consequence, all Indian raw materials will be used if the government allow zero-rating for them. This could be counterproductive.
In order to save the local industry and farmers, a uniform policy is needed which must state the imposition of sales tax on all imports of cotton, whether through DTRE, bonds or EOU. In the absence of such policy, we are quite certain that 50 percent of the phutti in the local market this year will not be picked up. To great consternation of the farmers and all ideas about the support price and minimum price will fall by the way side.
APTMA has considered the proposals put forward.
a) Import parity which works out to Rs 4500/maund without any differential for quality.
b) Export parity which works out to Rs 3500/maund that effectively accounts for quality differential.
Our stance on cotton pricing is based on the following:
1. 75% of cotton is exported and if the pricing is pitched higher than the price available to the export market then Pakistan will further worsen its competitive edge.
2. Quality differential is a very difficult parameter to establish for administered prices. The only true measure can and should be market forces. The export parity, say 5 cents for transportation is a robust and true parameter for determining a competitive and fair price.
3. A farmer's true income from cotton can only be increased if his yield per acre is increased and the price of oil seed is set right.
4. To use the cost per maund as a measure of determining price has a fatal flaw. Suppose the yield drops by another 25 percent in the next year, would the price have to be increased by 25 percent to cover the costs?
The cost plus argument only works in a situation where there is a captive internal market, ie., that of sugar and wheat, etc., where you can charge from consumers exorbitant prices while protecting from cheap imports through unjustified import duties.
Our stance remains the same. Furthermore, with the sales tax being applied on cotton the exporters have stated that they will not buy domestically and import through the tax-free bonds as cottons, yarn or greige cloth. Under these circumstances, a crisis-like situation has been created as local cotton will not be lifted. Our suggestion is that this matter should be addressed post-haste before any such farmers' schemes are established.