All major steel industry associations Thursday jointly warned the Federal Board of Revenue (FBR) that the proposed measure of withdrawal of 17 percent Federal Excise Duty (FED) on industrial units located in tribal areas would be a total disaster for the documented industry and economy having revenue impact of over Rs. 50 billion per annum.
At the same time, the ghee and cooking oil manufacturers have also raised their voice that against the discriminatory and unconstitutional budgetary measure is also an anti-competitive step promoting and backing the cartelization in the sector.
The government would suffer a revenue loss of Rs. 42 billion only from FED exemption on the import of edible oil by units of tribal areas. In essence, by removing the Edible Oil sector from FED mode, the incumbent government is creating an imbalance in the sector that will allow undocumented players to flourish at the expense of those that are paying full taxes, complying with quality standards, and working towards enabling the ‘Naya Pakistan’, the industry added.
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Addressing a joint press conference on Thursday, Abbas Akberali Patron-in-Chief Pakistan Association of Large Steel Producers along with Javed Iqbal, Chairman, PALSP and Javed Mughal, Sr Vice Chairman, PALSP collectively raised industry concerns & reservations on withdrawal of FED for steel producers in FATA/PATA area in federal budget 2021-22.
The associations which participated in the press briefing from Karachi, Lahore, Gujranwala included the Pakistan Association of Large Steel Producers; the Pakistan Steel Melters Association; the Pakistan Ship Breakers Association and the Pakistan Steel Line Pipe Industry Association.
The industry was shocked that the government has taken such a major decision without consulting the documented steel sector or any other stakeholder. It seems that the proposed measure of abolishing the FED on units located in FATA/PATA has been taken in haste due to unknown reasons.
Ch Muhammad Server from steel melters association categorically stated that following this amendment, it is impossible to compete with the units located in the tribal areas which are now part of Pakistan. It is a tax anomaly that must be rectified without delay. This would result in the closure of the units in tariff areas of the country, he cautioned.
They stated that the steel industry is paying additional custom duty @2% at import stage; regulatory customs duty @5% at import stage; GST @17% at import stage and later FED in GST mode @17% at the finished stage on all value addition costs and withholding income tax @1% at import stage. This total incidence of taxes on our steel products comes to 25%.
The federal government has proposed in the federal budget to withdraw 17% FED from steel units operating in FATA/PATA areas. This budget measure if approved, will cause the closure of many steel units that operate outside FATA/PATA areas, as this concession is so huge that no Industry can compete with it.
Already, FATA / PATA steel units enjoy sales tax exemption at the import stage on all their raw materials. Now this proposed concession is unmatched in the history of the country. Even the steel industry in other parts of Khyber Pakhtunkhwa like Peshawar, Swat, and Hattar will not able to survive in the competition. “We urge the government to review its decision and maintain the balance as already it was there prior to this budget”, they stated.
They informed that the major issue is to reverse the decision of moving the steel industry from FED to GST regime as it will give a free hand to over 40 units located in FATA to illegally sell tax-exempt goods in major markets across the country. This will directly hit the tax-paying and quality compliant sector of the industry, causing de-industrialization, closure of mills, price distortions, and most importantly, an estimated revenue loss of Rs 50 billion for the government.
The steel industry covering manufactures of long steel products like steel billet and Steel bars are paying billions of rupees in taxes to the government.
Due to weak administrative controls, many rent-seekers have moved their steel manufacturing facilities to the FATA areas, taken advantage of the tax incentives and abused the law by selling tax-free goods in settled areas that undercuts the tax-paying industry.
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Over the past few years, the steel capacity in FATA has risen to approximately 1 Million tons per annum and represents about 16 percent of the long steel output of the country. Continuation of this practice will lead to the closure of many steel units, particularly in Punjab, over the next year, they said,
The government has also rejected another proposal of the steel industry to reduce turnover tax on its downstream retailers to 0.25%. Currently, most steel retailers are forced to work in an undocumented environment due to the huge incidence of turnover tax. There is no reason for the retailers to join the tax net as the turnover tax wipes out their very small profit margins on selling the steel commodity. By rejecting the proposal, the government does not want to create documentation in the steel supply chain, improve ease of doing business and facilitate stakeholders
towards compliance.
Furthermore, PSMA has also lodged its complaints to the Ministry of Commerce for not rationalizing the industry’s tariffs as agreed upon. The National Tariff Policy aims to reduce import tariffs on the imported raw material that is not manufactured in Pakistan and abstain from revenue-centric tariff measures. However, the government has not been able to walk the talk on its own National Tariff Policy and has kept tariffs on primary raw material for revenue reasons, which makes the domestic industry uncompetitive. Currently, the industry’s raw material is taxed at 7% –
10% on import.
The steel industry criticizes the government for not having proper stakeholder consultation to create consensus. If policy decisions are taken without consultation, it will be impossible for the regulators to implement the policy.
Moreover, since policymakers are not in touch with the ground realities of the steel sector, the consequences of many policies are not accurately considered and this hurts the industry and country’s prospects.
In this backdrop, the industry is struggling to keep pace with volatile and changing raw material prices and costs. Steel scrap, the industry’s raw material, has risen from USD 300 at the beginning of the fiscal year to USD 535 currently, translating into a PKR cost increase of 37,000.
Further, duties and taxes on raw materials account for another PKR 5,500 per ton. Electricity has increased by 37% this fiscal year, climbing from Rs 13.5 to Rs. 18.5 and causing a cost escalation of over Rs. 4,000. As such, cumulative cost increases are above Rs. 40,000 per ton, which is partly absorbed by the industry and balance has to be passed on by increasing prices. Industry experts believe prices must rise again as recent electricity and raw material cost increases have not been passed on and manufacturers are working on razor thin margins.
Pakistan Association of Large Steel Producers (PALSP) appeals to the government to pay attention to the proposals submitted in order to avert a major crisis within the industry that will jeopardize various national objectives such as PM’s Naya Pakistan Housing Scheme, PSDP Projects, CPEC Projects and various other commercial and residential projects that are the cornerstone of a growing economy.
