Pakistan – Tax on cotton: Nothing doing!


Agriculture and textile sectors are often in the limelight as they are among the biggest employers and exporters of the country. The ongoing controversy drawing attention to these sectors sparked on December 31, 2010 when the Federal Board of Revenue issued SRO-1161 imposing a withholding tax of 3.5 percent on the trade of raw cotton. According to informed sources, spinning factories were tasked with collecting the tax from ginners when making purchases from the latter.

The announcement drew a sharp response from the ginning sector that complained that this deduction would force them to perform tasks such as record keeping and collection of dues on behalf of the government. They assert that this is the job of tax authorities and that further taxes would also burden growers at a time when global prices of cotton are subdued. Resultantly, ginning associations particularly those from Punjab went on strike and industry representatives called for a complete halt on purchases of raw cotton.

Seemingly in response to mounting pressure, Prime Minister Gilani announced on August 13, 2011 that the tax would now be levied against commission agents; not buyers and sellers. Now the cotton exchange and circles of textile stakeholders are looking towards FBR in anticipation that the above-mentioned SRO will be repealed and the new tax, shelved. Cotton prices have plunged both internationally and locally since the start of the current harvest season. However, cotton brokers assert that the local market was dealt a double blow because of thin trade volumes since the strike called by ginners. Fortunately for growers, exporters who had locked-in forward contracts in recent months have remained active, lending some support to cotton prices. The implementation of the tax and its subsequent removal warrants some attention. First of all, the proposed tax targets agricultural income which is a provincial subject. So it is little wonder that stakeholders threatened to take the taxmen to court as soon as it was announced. Secondly, the SRO was not followed by any further official commentary to explain the mechanism that would have been used to levy the tax. So the ensuing confusion among growers, ginners and the textile industry is also understandable. If and when the new tax is repealed; the talk of taxing cotton produce is also likely to subside; which can also be contrary to the dire need of broadening the tax net. Market men believe that there is some ill will behind such half-hearted attempts to raise taxes. “Such announcements create volatility in the market and those who are in the know are able to capitalise on price movements while the rest of the industry sits and waits for a resolution,” commented one cotton broker, requesting anonymity. Experts also draw attention to the fact that a majority of legislators are involved in ginning, spinning and other textile related industries as well as in the agriculture sector. So there is a consensus that there will be few among the law makers, who would volunteer to bell this cat.