ISLAMABAD, May 17: Sugar and textile sectors’ contribution in taxes is fairly negligible though these sectors have a relatively larger share in manufacturing sector, says a study.

The study reveals a great mismatch between sectoral share in GDP and taxes. The agriculture is nearly tax exempt. The services sector is lightly taxed and the tax contribution of the manufacturing sector is disproportionate to its contribution to the GDP.

The study conducted by Member and Chief Fiscal Research and Statistics CBR Dr Ather Maqsood Ahmed and Mrs Robina Ather Ahmed recommends that there is tremendous scope for raising revenues as there is no scarcity of sectors that are either outside the tax net or lightly taxed.

With 5 per cent share in GDP and about 29 per cent in manufacturing, textile is the main industrial activity in the country. However, partly as a result of zero-rating of sales tax and partly due to the wide-ranging tax exemptions and concessions, the industry has failed to contribute effectively to the federal tax receipts.

As a result of zero rating of sales tax on exports, a huge amount of refund was created in the past. In 2004-05 the CBR paid Rs40.7 billion as refund and rebate to the textile industry whereas the industry paid only Rs13.8 billion as indirect taxes (sales tax, customs and excise).

Resultantly, the net revenue paid by the industry was (negative) Rs26.79 billion.

In case of income tax, the only payment made by the industry is through withholding tax at the export stage, where tax rate currently in vogue ranges between 0.75 per cent and 1.5 per cent. The amount of tax collected through this tax regime has been an unimpressive sum of only Rs45 billion.

Furthermore, to improve competitiveness the textile machinery was also exempted from customs duty. Since, 80 per cent of textile products are exported and the rest are sold in the domestic market, to recover tax on domestic sale a 3 per cent retail tax was introduced that included 2 per cent sales tax and 1 per cent income tax on retailers of textile.

However, an insignificant sum of Rs12.1 million was collected under this scheme, which included Rs4.4 million in income tax and Rs7.7 million in sales tax.

A very simple calculation shows that for the textile sector GDP of Rs319,541 million, if 80 per cent is exported and only 20 per cent is sold locally, then at the rate of 15 per cent sales tax, there is a tax potential of Rs9,586 million for sales tax alone. Even if the reduced rate 3 per cent is applied, it should result in a tax yield of at least Rs1,917 million.

According to researchers, sugar industry is regarded as the second largest industry after textile. However, for one reason or another, the industry has not played its role in tax contribution.

Within the manufacturing sector, the sugar industry provides about 4 per cent of the value addition whereas its share in direct and indirect taxes is around 2 per cent and 0.4pc, respectively.

An analysis of individual sugar units in the country reveals an interesting fact that there is a large discrepancy in value addition across operational units – e.g., two sugar mills located in Faisalabad have indicated such diverse value addition as 3 per cent and 96 per cent during the same year. Such discrepancy creates enough apprehensions about low tax compliance by the industry that needs to be sorted out.

A historical profile of the industry confirms that its functioning has always been encouraged through peculiar economic policies. Handicapped either by obsolete sugar processing technology or insufficient R&D support, it has always tried to take refuge behind concessionary provisions of taxation policies to keep its profitability intact.