Pakistan identifies PKR 800 billion tax gap in textile, cement sectors

Pakistan's Federal Board of Revenue (FBR) has identified a tax gap of around PKR 800 billion — equivalent to 10% of the GDP — in the textile and cement sectors.

A FBR document shared with Nukta revealed that the tax gap in the textile sector alone is around PKR 700bn, which includes PKR 520bn sales tax and Federal Excise Duty (FED), PKR 150bn income tax and PKR 30bn customs duty.

The textile sector is Pakistan's most critical manufacturing sector. It has the longest production chain, with inherent potential for value addition at each processing stage, from cotton to ginning, spinning, fabric, dyeing and finishing, made-ups and garments.

The sector contributes nearly one-fourth of industrial value-added products and employs about 40% of the industrial labor force. Barring seasonal and cyclical fluctuations, textile products have maintained an average share of about 54.5% in national exports.

The FBR document shared with Nukta showed total potential revenue collection from the textile sector is PKR 1,350bn. However, the FBR is only collecting PKR 650bn at present — PKR 300bn as sales tax and FED, PKR 320bn as income tax and PKR 30bn as customs duty.

The reason behind the tax gap is the exploitation of the input tax by manufacturers, with around 1.5 million cotton bales going unreported under the 'gool' trade, flying invoices to mask sale of unregistered weaving units and cash-based transactions. If these issues can be addressed, the FBR can get additional PKR 820bn sales tax and FED, PKR 470bn income tax and PKR 60bn customs duty, according to the document.

Meanwhile, the document revealed a PKR 100bn tax gap in the cement sector, which includes PKR 70bn sales tax and FED and PKR 30bn income tax.

Pakistan's local cement industry has a total market size of PKR 671bn. There are 26 plants operating in the sector with a total production capacity of around 83 million tons per year

The document shows that the total potential of taxes from the cement sector is PKR 320 billion. However, the FBR is collecting PKR 220bn at present, including PKR 165bn as sales tax and FED and PKR 55bn as income tax.

The tax department is mulling introducing digital invoicing at the manufacturing and distribution level which could significantly enhance tax compliance and transparency in the textile and cement sectors.