Export-oriented sector: Ministry of Finance to link subsidies to higher growth
ISLAMABAD: Ministry of Finance (MoF) has proposed that subsidies to export-oriented sectors be tied to increase in quantity export growth instead of betting on price increase as multiple incentives make place a heavy burden on the government, according to knowledgeable sources told Business Recorder.
The ministry made its observations during a high-level meeting during a discussion on a proposal by the Ministry of Commerce on the “Local Tax Reimbursement Scheme (DLTS) for 2022-23”.
According to the Ministry of Commerce, to maintain the momentum of the export growth trajectory, the ECC approved the extension of the Prime Minister’s export program for three fiscal years 2018-21. As a result, programs were implemented through a Local Taxes and Levies (LTLD) (non-textiles) SRO Order. 711((l) 2018 on June 18, 2018 and Textile Duty Rebate Order, 2018 (DDT) on August 3, 2018.
The federal government had worked to reduce the cost of doing business and increase competitiveness by streamlining tariffs on raw materials and inputs, regionally competitive energy tariffs for five export-oriented sectors and a exchange rate determined by the market.
The ministry asserted that under this multi-pronged approach, the country’s export sectors under both regimes have witnessed positive export growth. Based on data from fiscal year 2020-21, exports under the two regimes grew at a compound annual growth rate (CAGR) of 6% over the three fiscal years, or $16.18 billion, 13 $.04 billion and $13.75 billion in fiscal years 2020-21, fiscal year 2019-20, and fiscal year 2018-19, respectively. Pakistan recorded record aggregate exports of $25.3 billion. This upward trend in exports has been demonstrated in the majority of sectors covered by the incentive schemes.
The Ministry of Commerce argued that in order to continue this pattern of export growth on a sustainable basis, it was necessary to further extend the refund incentive scheme for the five-year period with some modifications/improvements for export sectors to solve their liquidity problems and provide predictability. The program would encourage product diversification in traditional sectors, new product development to broaden the export basket, geographic diversification to access markets now not fully exploited and encourage value addition.
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The Ministry of Commerce further informed the meeting that a new Local Tax Refund System (DLTS) for a period of five fiscal years i.e. July 1, 2021 to June 30, 2026 has been prepared in consultation with the Finance Division. To this end, a summary has been sent to the Finance Division for advice/comments. Subsequently, the Finance Division, in its letter of March 4, 2022, provided its detailed views/comments on the summary to incorporate its comments into the proposals, such as:
(i) sectoral setting of sectoral export objectives and pre-allocation of the budget to be ensured in the medium term; (ii) the continuity of the DLTL program will depend on the achievement of the objectives; (iii) comments from SBP and FBR to be solicited; (iv) sectors already benefiting from gas and electricity subsidies will not be eligible for DLTL aid and the proposed estimated budget amount of Rs. 141 billion for the financial year 2021-22 to be streamlined; (v) the review mechanism to be put in place regarding ongoing export industry promotion initiatives and incentives; and (vi) the announcement of the Prime Minister for the promotion of exports of the information technology sector to be included in the estimates.
The MoC maintained that the comments of the Finance Division have been taken into account in the summary. Export projections by sector with estimated financial impact from fiscal year 2021-22 to 2025-26 have already been incorporated. The periodic review of the program to be introduced to assess its impact on export performance and the estimated amount of Rs 141 billion for the financial year 2021-22 has been reduced to Rs 78.8 billion and a major streamlining has been was carried out in zero-rated sectors. A study to determine the impact of several programs extended to the export industry has been launched. In addition, with regard to the promotion of exports of the IT sector, the Ministry of Information Technology and Telecommunications is already in the process of implementing a separate financial incentive program for remittances for the export of IT and IT after its approval by the Cabinet on October 27, 2021.
The Department of Commerce has proposed a revised/streamlined local tax refund scheme for a period of five fiscal years, i.e. July 1, 2021 to June 30, 2026, with the following key features:
(i) (new) developing sectors may be allowed DLT @ 3%, 4% and 5%; for diversification into existing sectors, DLT @ 4% may be permitted for continuation of scheme for sectors covered by former SRO 711(1)/2018 and Notification No. 1(42-B) TID-TR- II, DLT @ 1.5%, 2% and 3% may be permitted; and additional DLT @ 2% for market diversification covering markets under OAR and additional potential new markets; (ii) exports of the above categories made through e-commerce may also be eligible for the respective drawback rate under the facility; and (iii) the estimated total financial impact will be Rs 79.27 billion for FY 2021-22; however, actual claims up to June 30, 2022 are estimated to be around Rs. 50 billion.
The meeting discussed in detail the proposal of the Ministry of Commerce in which it was desired that the cost-benefit analysis of the program be carried out on a quarterly basis, preferably through a third party and that a subsequent decision can be taken accordingly. It was stated that there must also be an accountability mechanism in the regime. SBP Governor Dr. Reza Baqir said an objective study should be conducted to assess the benefit of the subsidy on export growth. He added that the subsidy given to traditional sectors and especially large manufacturers has resulted in very high profit margins for them. Therefore, the program needs to be reviewed to support appropriate medium-sized industries. He added that the Finance Division needs to present an overview of the approved TSGs/SGs for the different ministries/divisions to understand the burden on finance.
The Finance Division added that the multiple subsidies offered in various forms, such as reduction in the cost of energy, etc., impose a heavy burden on the government, adding that generally the increase in exports is not due to the increase in quantities but rather to the rise in product prices on the international market. Therefore, it was suggested to link subsidies to increased export quantities.
After painstaking discussions, the meeting took the following decisions: (i) the Ministry of Commerce ordered to submit a detailed mechanism to undertake an independent impact assessment on a “quarterly basis” to review performance at the export sectors, as well as the exporting companies benefiting from the program; (ii) The Ministry of Commerce will receive funds/budget amounting to Rs. 50 billion for the financial year 2021-22 for the clearance of claims under the scheme; and (iii) when requesting budget allocation for the program for FY 2022-23 and beyond, the Department of Commerce will submit the detailed impact analysis of the program prior to the allocation of funds.
Copyright Business Recorder, 2022