Textile sector on the verge of collapse?

August 28, 2019

Textile sector on the verge of collapse?

August 28, 2019

Textile sector on the verge of collapse?

Shahid Sattar “Business Recorder” August 28, 2019
With the imposition of 17% GST on the previously zero rated textile sector, FBR is looking at collecting Rs 600 billion from the sector and giving a refund of approximately Rs 480 billion on exports. This is only part of the story, there are many other misguided ways in which FBR is planning to increase revenue collection as a figure to symbolically meet the completely unrealistic target of collection of Rs 5.5 Trillion in 2019-20. Withdrawal of zero rating has impacted the system extremely negatively but there are equally if not more anti-business and illogical measures that are surely going to induce a complete shutdown of industry. For starters:
The additional cost of borrowing Rs 600 billion for the sales tax prior to refund is likely to be Rs 72 billion. This apart from being a cash drain is an unnecessary increase in the cost of production on which we already score dismally.
This is directly the consequence of the fact that approximately 70% of all the textile production of Pakistan is exported. This is further complicated by the structure of the industry which is fragmented with very few vertically integrated companies leading to multiple taxation of the same goods. Bulk of the textile output is from indirect exporters such as spinners, weavers, finishers etc whose products after finishing are finally exported.
A 4 percent withholding tax on every transaction within the sector will result in Rs 115 billion being permanently transferred to the Government from industry.
Should the collection of 4% withholding tax continue, despite the clear interpretation in law, that it should not, in commercial terms this would mean a reduction of liquidity/working capital of the sector by further Rs 115 Billion. These are funds that sector does not have.
Being more than the profitability/margins of the great majority of the units in the textile chain this would directly cause these units closure leading to unemployment, lower GDP, and substantial reduction in Exports. In this connection FBR is invited to check and ascertain that the average profitability in this sector which under no circumstances can be 14% of turnover as a 4% withholding Tax translates to approximately a 14% profit on turnover.
Only 90 percent of input tax will be allowed to be set off against output and 10 percent to be refunded 14 months later. This will also permanently transfer Rs 60 billion from industry to the government. In commercial terms this means that 10% of all GST collected (1.7% of sale value) would remain permanently blocked with FBR as the refund provision kicks in only after a period of 1 year and two months. This translates into a permanent transfer of a float of Rs 60 billion from Industry to the coffers of government. This would directly cause further pressure on these units leading to closure, unemployment, lower GDP, and substantial reduction in exports. Coupled with the 4% withholding tax and the additional funds required to pay the 17% GST in the first place, there appears to be no chance of the Industry surviving the additional working capital requirement or the wiping out of the slim margins and the already low profitability. This will necessarily turn into a loss for the great majority of the registered and compliant units in the sector leading to their imminent closure.
Increase in Turnover tax to 1.5%
There are now over 60 withholding taxes and about 70% of revenue comes from them. These are extremely regressive in nature as they are applied to turnover and not on margins or profitability of the company and act as accelerators to hasten the demise of companies that could have survived a downturn turn in the market but cannot do so because of turnover taxes.
The fiscal measures taken in the budget are likely to hit the industry with an additional cash requirement of approximately Rs 800 billion plus. These are funds that the FBR is looking to collect additionally from the textile sector as part of their requirement to collect an additional Rs 1.5 Trillion this financial year to fulfill their completely unrealistic target of Rs 5.5 trillion this year.
The very interesting conclusion that can be derived from these measures is that the government must surely think that the industry is operating on net profitability of at least 20% Plus. This surely is not the case.
Given that such liquidity nor profitability exists in the sector, the current FBR strategy is a sure shot recipe to a monumental disaster. We are heading towards massive de-industrialization, a precipitous fall in exports and extremely unmanageable levels of unemployment.
To complicate matters further, the government’s well-intentioned but misguided documentation drive of seeking CNIC of all sales through registered, law abiding, taxpaying industries has not been accepted by the unregistered dealers and as a consequence all sales in the domestic sector have come to a standstill since 1st of August 2019. As a consequence there is no cash flow to pay wages salaries, utility bills, taxes etc and according to all estimates will lead to a shutdown of 50% of the currently operating mills by the second week of September with the rest following soon.
This misguided ill-planned thrust for taxation and documentation has driven the economy to the ground and economic activity is now gasping for air.
Surely, the government’s and FBR’s intent is not to induce a forced closure of the sector. Taxing transactions beyond a simple GST is inefficient and counter-productive. The above measures are designed to kill transactions. There is a clear need to review and assess the lacunae in these measures and weed out those that are impeding transactions.
We now fail to gauge the economic direction of the government, i.e., whether they want to promote industry, exports and employment or discourage it. The 17% S.T + 4% with I/T + 5% on utilities, 1.5% Turnover Tax and 15% mark up on the Rs 600 billion sales tax is far too great a liquidity drain and way beyond the profitability of the sector.


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