FeaturedNationalVolume 13 Issue # 23

Woes of the textile industry

As per figures released by the Pakistan Bureau of Statistics, Pakistan’s textile and clothing exports fell 1.30pc to $1.064 billion last month on a year-on-year basis. Overall textile exports declined by 1.65 percent to $6.156 billion during the first six months of the last fiscal year as compared to $6.2589 billion for the same period a year ago. An analysis of the provisional export data of selected commodities indicates a 49.87 percent decrease in export of raw cotton during July-December 2017, as compared to the same period of last fiscal year. A primary factor underlying the fall in exports of value-added textile products is said to be that Pakistan’s preferential access to the European Union under the GSP-Plus scheme did not boost the country’s exports as expected owing to a slump in demand in the 28-nation bloc.

The textile sector recently launched a public campaign to seek relief with respect to two major issues that are impeding its exports: a cumulative rise in pending sales and income tax as well as customs duty refunds and export incentive package that would minimize the cost differential between Pakistan’s textile sector and their international competitors, regional as well as beyond.

Delays in sales tax refunds have constrained the liquidity needs of textile exporters, particularly ones in the small and medium enterprise segment. Many are struggling to process new orders while falling behind on existing export commitments. For this neglect the government is solely responsible. Refunds are not a subsidy but payment to the exporter withheld by the Federal Board of Revenue at earlier stages of production to be paid at the time of export of the finished product and zero rating domestic supplies used during the product’s manufacturing process. In other words, an exporter legitimately calculates refunds as cash in hand and FBR’s failure to refund has resulted in a severe liquidity crisis that in several instances necessitates borrowing at a cost that adds to the cost of the finished product making our exports uncompetitive in the international market.

In a recent statement, All Pakistan Textile Mills Association (APTMA) Chairman put the pending sales tax refunds alone at a massive Rs120 billion. Ideally, these should have been cleared within ninety days. The Pakistan Textile Exporter Association (PTEA) has drawn attention to the fact that not even one processed sales tax refund claim has been paid in the last eight months, while a large amount of sales tax RPOs is also pending payment. The association also highlighted the government’s inability to honour the duty drawback of taxes under the incentive package with only 20 percent of the amount being paid. The Pakistan Hosiery Manufacturers and Exporters Association (PHMA) has also complained about the billions stuck in previous drawback of local taxes and levies (DLTL) with some going as far back as 2011.

It is estimated that refunds to be cleared by the FBR total over 200 billion rupees. In 2009, the FBR, with assistance from the World Bank, had launched the Expeditious Refund System (ERS) which was designed to process claims electronically under certain risk-based parameters for manufacturers-cum-exporters in major export-oriented sectors. So why does the FBR routinely delay refunds and allow them to pile up? The reason lies with the Ministry of Finance, with the FBR under its administrative control, and its perennial shortage of revenue to meet its ever-rising expenditure. In other words, to show a lower budget deficit, Pakistani governments instruct the FBR to go slow, and in years like the present when the budget deficit is expected to reach unsustainable levels, the instructions may well be to simply stop paying refunds. This, unfortunately, has a negative impact on exporters’ capacity to be competitive.

Last year, the government announced a textile policy that gave a 4pc rebate on the exports of readymade garments on a 10pc incremental increase over the preceding year. One of the reasons cited for the textile package was the need for countering the rising cost of production. The rebate was 2pc and 1pc on the incremental increase in the exports of home textiles and fabrics, respectively. However, no concession was announced on raw material or yarn exports. Under this policy, the government paid Rs2.5bn to exporters in the last fiscal year.  Further, from January 2017 onwards, the government not only increased the rebate to 7pc for readymade garments, but also allowed cash support of 4pc on yarn and grey cloth under the Rs180bn package announced by the prime minister.

The government has reportedly proposed yet another export promotion package of 28 billion rupees – the third since January 2017. The first 180 billion rupee export package announced in January 2017 was never fully implemented due to the government’s financial constraints, while the second one announced last year was abandoned half-way as it was to be funded by savings from increasing duties on import items which were never implemented. The Economics Survey 2017-
18 acknowledged that the textile industry contributes nearly one-fourth of industrial value-added and provides employment to about 40 percent of industrial labour force. Barring seasonal and cyclical fluctuations, textile products have maintained an average share of about 60 percent in national exports – a share that textile products achieved during the first nine months of the current fiscal year. The textile sector remains an extremely important contributor to the national economy. As such, its genuine concerns need to be addressed at the earliest possible.