ISLAMABAD: As Pakistan’s steel industry aims to start exports for the first time, it has requested the government to facilitate the industry through a policy change in sales tax refund’s adjustment.
According to available documents, the steel industry has informed Federal Board of Revenue (FBR) that steel products could be exported if the government ensures timely payment of Sales Tax Refund to the steel exporters under Special Procedures.
The steel industry has requested that without introducing any new incentives, if the government could only ensure a simple adjustment in the sales tax refunds then it would make the industry viable for exports, said sources in the industry.
According to them currently, steel companies in Pakistan are not exploring export channels, as there is no clear mechanism for the exporter to get a sales tax refund in a timely manner. Since most steel melters and re-rollers are operating under the Sales Tax Special Procedures Regime, sales tax liability is paid in advance at the port upon import of raw material and this is adjusted against electricity bill as a full and final discharge of sales tax liability.
In order to realize the full export potential of the sector, the steel industry has suggested, a mechanism should be put in place where steel exporters under the special procedures are able to get a timely sales tax refund.
“One solution can be in the form of adjustment certificates issued by FBR based on a notified fixed per tonne rate on production of proof of export proceeds. Such adjustment certificates can then be used to adjust the sales tax paid at port against the import of raw material. This mechanism will help steel companies become viable in the export market without having a cash crunch due to sales tax refunds not paid by the government on time,” said the sources.
According to a letter sent to FBR by the steel industry, since steel melters and re-rollers come under the Sales Tax Special Procedures the regime, a number of policy measures need to be introduced from the government’s side to make exports of billets and construction bars viable.
As per the letter the un-adjustable sales tax of Rs7300 per tonne should be implemented at the import stage as proposed by Pakistan Association of Large Steel Producers (PALSP) in their budgetary proposal. This un-adjustable sales tax will make possible clearance of scrap imported without payment of duties, sales tax and other taxes under manufacturing bond scheme for export of construction bars and billets.
Besides, for the manufacturing bond scheme to work effectively, wastage of 10 per cent should be notified by a coefficient department on every tonne of scrap and Ferro Alloys consumed to convert into rebars. One tonne of scrap and Ferro Alloys gets converted into 900 kg of construction bars.
The industry as a whole has requested that the sales tax should be collected from electricity bills for the manufacturers of steel rebars, which amounts to Rs2,762 per tonne (Rs3.25 x 850 units) and other un-adjustable sales tax and duties and taxes on other input to manufacturing construction bars is approximately Rs2,500 per tonne. Therefore, the total impact of such sales tax is Rs5,262 and this amount should be notified so that an adjustment certificate can be issued based on quantity exported. This adjustment certificate can then be used by steel exporting companies to adjust the sales tax liability on electricity bills in future months. No company wants to explore exports without a mechanism in place to get timely sales tax refunds.
Apart from the tax adjustments for facilitating exports, the the steel industry has also demanded appropriate subsidy on energy, electricity and gas, for every tonne of bars and billets exported by the manufacturers as the energy cost of the industry is one of the highest in the regions. The benchmark to calculate this subsidy should be power and gas tariff in China and India.
According to sources in the industry, some of the leading steel manufacturers have received queries from some Middle Eastern countries regarding imports. Moreover, locally produced steel of some of these manufacturers also meet the international standards and quality.
The steel manufacturers of Pakistan during the past few years have made large investments for modernizing their steel plants to manufacture construction bars and billets conforming to international quality standards. The capacity of steel plants due to continuous expansion has increased many folds as well. Keeping in mind the recent slump in domestic demand, there is massive overcapacity in the domestic market that can be exported to regional countries that are net steel importers such as Afghanistan, U.A.E and Siri Lanka.