All major steel industry associations warned the Federal Board of Revenue (FBR) on Thursday that the proposed measure to eliminate the 17 percent Federal Excise Duty (FED) on industrial units located in tribal areas would be a total disaster for the documented industry and economy, resulting in revenue losses of over Rs. 50 billion per year.
Simultaneously, manufacturers of ghee and cooking oils have spoken out against the discriminatory and unlawful budgetary policy, arguing that it is an anti-competitive move that promotes and supports cartelization in the sector.
The government will lose Rs. 42 billion in revenue just as a result of the FED’s exemption of edible oil imports by tribal entities. In short, by removing the Edible Oil sector from FED status, the existing government is creating an imbalance in the sector, allowing undocumented players to thrive at the expense of those paying full taxes, according to quality standards, and trying to enable ‘Naya Pakistan,’ the industry stated.
At a joint press conference on Thursday, Abbas Akberali, Patron-in-Chief Pakistan Association of Large Steel Producers, Javed Iqbal, Chairman, PALSP, and Javed Mughal, Sr Vice Chairman, PALSP, collectively expressed industry concerns and reservations regarding the proposed withdrawal of FED for steel producers in FATA/PATA in the federal budget 2021-22.
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 all participated in the press briefing from Karachi, Lahore, and Gujranwala.
The industry was caught aback by the government’s decision to make such a significant change without engaging the documented steel sector or any other stakeholder. The proposed measure to remove the FED on units located in FATA/PATA appears to have been rushed through for unclear reasons.
Ch Muhammad Server of the steel melters association stated definitely that following this revision, it will be impossible to compete with operations located in the now-Pakistani tribal areas. This is a tax anomaly that must be corrected immediately. This, he said, would result in the closure of units in various parts of the country.
They stated that the steel sector pays an additional 2% customs duty at the import stage; 5% regulatory customs duty at the import stage; 17% GST at the import stage and later 17% FED in GST mode at the finished stage on all value addition charges; and 1% withholding income tax at the import stage. Taxes on our steel products total 25%.
The federal government recommended in its fiscal year 2019 budget to withdraw 17% of FED from steel mills operating in FATA/PATA zones. If granted, this budget proposal will result in the closure of numerous steel mills operating outside FATA/PATA districts, as the concession is so large that no industry can compete with it.
Already, all raw materials imported by FATA / PATA steel mills are tax exempt. Now, this proposed concession is unprecedented in the country’s history. Even in other districts of Khyber Pakhtunkhwa, such as Peshawar, Swat, and Hattar, the steel industry will be unable to compete. “We urge the government to reconsider its decision and restore the balance to its pre-budget level,” they stated.
They stated that the primary issue is to overturn the decision to shift the steel sector from the FED to the GST regime, since this will give over 40 units in FATA carte blanche to illegally sell tax-exempt items in major markets across the country. This will have a direct impact on the tax-paying and quality-conscious sector of the industry, resulting in deindustrialization, mill closures, price distortions, and, most significantly, a revenue loss of approximately Rs 50 billion for the government.
The steel sector, which includes producers of long steel products like as steel billets and steel bars, pays the government billions of rupees in taxes.
Due to lax administrative oversight, several rent-seekers have relocated steel production plants to FATA areas, misused tax incentives, and circumvented the law by selling tax-free items in settled areas, undercutting the tax-paying industry.
Over the last few years, FATA’s steel capacity has increased to roughly 1 million tonnes per year, accounting for approximately 16% of the country’s long steel output. They stated that if this trend continues, it will result in the shutdown of numerous steel plants, notably in Punjab, over the following year.
Additionally, the government rejected another steel industry proposal to decrease the turnover tax on downstream retailers to 0.25 percent. Currently, the majority of steel sellers are obliged to operate illegally due to the high incidence of turnover tax. There is no motive for merchants to enter the tax net because the turnover tax eliminates their razor-thin profit margins on steel commodity sales. By rejecting the idea, the government indicates that it is not interested in documenting the steel supply chain, enhancing the ease of doing business, or assisting stakeholders in achieving compliance.
Additionally, PSMA has complained to the Ministry of Commerce for failing to rationalise the industry’s tariffs as agreed. The National Tariff Policy intends to minimise import duties on non-manufactured raw materials and to avoid revenue-driven tariff policies. The government, on the other hand, has been unable to walk the talk on its own National Tariff Policy, maintaining tariffs on major raw materials for revenue purposes, so rendering the domestic industry uncompetitive. Currently, imports of raw materials for the industry are taxed at a rate of between 7% and 10%.
The steel sector accuses the government for failing to interact with stakeholders in order to reach a consensus. Without consultation, policy decisions will be impossible to implement by regulators.
Additionally, because legislators are disconnected from the realities of the steel sector, the effects of numerous policies are overlooked, harming both the industry and the country’s prospects.
In this environment, the sector is attempting to maintain a constant pace with fluctuating and shifting raw material prices and costs. Steel scrap, the industry’s basic material, has increased from USD 300 at the start of the fiscal year to USD 535 at the moment, equating to a 37,000 percent increase in PKR costs.
Additionally, tariffs and taxes on raw materials total PKR 5,500 per tonne. Electricity prices climbed by 37% this fiscal year, from Rs 13.5 to Rs 18.5 per unit, resulting in a cost rise of nearly Rs 4,000. As a result, cumulative cost increases exceed Rs. 40,000 per tonne, which is absorbed in part by the industry and the remainder must be passed on through increased prices. According to industry experts, prices must climb again because recent increases in electricity and raw material costs have not been passed on to consumers and manufacturers are operating on razor-thin margins.
Pakistan Association of Large Steel Producers (PALSP) appeals to the government to consider the proposals submitted in order to avert a major crisis within the industry that would jeopardise numerous national objectives such as the Prime Minister’s Naya Pakistan Housing Scheme, PSDP Projects, CPEC Projects, and various other commercial and residential projects that are the bedrock of a growing economy.