KARACHI, May 31: Governor State Bank Dr Ishrat Hussain has said on Friday that the existing sales tax system was totally wrong because it includes zero-rated exports within its ambit.

In a meeting with a delegation of Pakistan Bedwear Exporters Association (PBEA) led by its chairman Shabir Ahmed the governor said under the law on zero-rated exports there should be no change of money at any level in the course of shipments.

The SBP governor who was sympathetic towards the problems confronting exporters said that physical transaction under the sales tax refund system is prone to corruption, and ultimate losers are genuine exporters and the exports.

Responding to a point raised by the governor, the chairman PBEA said that the CBR claim that it was paying higher amount towards ST refunds for the last few years was not sufficient to prove that these payments had been made to deserving or genuine exporters.

After giving a patient hearing to the delegation members’ problem regarding the existing sales tax and refund system, Dr Ishrat Hussain agreed that the existing ST system was wrong, a participant told Dawn.

The PBEA members also apprised the governor about the factors discouraging foreign and local investment. Shabir Ahmed informed the governor that a tax on company’s reserve funds under Section 129-A discourages fresh investment in the country.

The PBEA chief further said that if a company was allowed to build its reserves it would encourage investors to come to Pakistan. He further said that 15 per cent tax on dividend, too, had a negative impact as no investors would like to pay this amount.

Dr Ishrat Hussain informed the delegation members that the SBP had responded towards the issues raised by the PBEA in its earlier representation on April 29, 2002.

He said that the shipping documents pertaining to a Form ‘E’ which, has been certified by one bank, can be discounted or negotiated by another bank, as already permitted under Para 16 of Chapter XXI of the FE Manual (Eighth edition 2002).

Therefore, the governor said exporters already have an option to get their export bills discounted from any other authorized dealer of their choice after getting necessary NOC and other particulars from the bank that has originally certified the Form ‘E.’

Referring to another point raised by the PBEA in its representation the governor said the matter was taken up with Pakistan Banks Association (PBA), which was of the view that a disbursement of post-shipment export finance under expired Letters of Credit or discrepant documents transfers the credit risk to the exporter instead of the L/C opening bank.

Under these circumstances, he said appropriate credit limits secured by tangible collateral need to be in place prior to this disbursement and an indemnity by the exporter, as proposed, is therefore, not sufficient.

Nevertheless, the governor said the banks can consider such disbursements on a case-to-case basis, based on the past credit performance of the exporter, his relationship with the importer and on his overall financial strength, as demonstrated by his financial statements.