In a recent assessment, the Pakistan Cotton Ginners Association (PCGA) has estimated that the textile value chain, from ginning to retail levels, evades taxes amounting to Rs236 billion annually. The report highlights a significant Rs36 billion tax evasion at the ginning stage alone, with the remaining Rs200 billion attributed to other stages of the textile value chain.
This revelation comes amid a severe financial crisis in Pakistan, exacerbated by low tax collection rates. The PCGA attributes this widespread tax evasion to the heavy taxation imposed on the cotton value chain, including the ginning industry.
At the ginning stage, 12 different taxes and duties are levied, including multiple 18% sales taxes on cotton lint, cotton oil, and oil dirt. Ginners are also subject to income tax, professional tax, market fees, social security contributions, old age benefits, and various highway-related fees. An excise highway/property tax and a cotton fee collected by the Excise Department further burden the industry.
The heavy taxation has discouraged many ginners from continuing their businesses, with only 665 out of 1,200 ginning factories remaining operational during the 2023-24 season. The PCGA warns that additional sales tax on cotton seed cake and increased electricity charges from July 1, 2024, could lead to the complete collapse of the ginning industry.
The association argues that the excessive taxation encourages unfair business practices, such as conducting transactions without invoices, which conceals the actual production of commodities and results in non-payment of taxes. The ginning industry’s collapse would also severely impact farmers, as ginners are the sole buyers of cotton.
PCGA’s report details the various taxes and fees imposed on cotton and oil at different stages, estimating total tax evasion at Rs36.22 billion at the ginning stage. This includes Rs32.40 billion from 18% sales tax on cotton lint, Rs2.16 billion from 1.2% withholding tax on cotton lint, and other taxes on cotton seed, oil, and brokers.
The association believes that tax evasion extends across the textile production process, including spinning, weaving, finishing, dyeing, and retail, with an estimated Rs200 billion or more in evaded taxes. The PCGA’s findings highlight the need for a reevaluation of the taxation system to ensure fair business practices and improved tax collection.
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