The Rupp Report: Incentives For The Pakistani Textile Industry

The whole Asia-Pacific Rim is under economic pressure. Most of the countries are suffering a heavy
downturn in their industries in general, and in the textile industry in particular. This is also
the case for Pakistan, one of the giants (not only) in home textiles production.

According to official sources, the Pakistani government is not very happy with the
performance of its textile industry. That’s why the so-called Economy Monitoring Committee (EMC) is
considering supporting the suffering textile industry with a package.

However, another committee, the Economic Coordination Committee (ECC) was faster than the
EMC, raising the issue in the cabinet. The majority of the ECC members have the impression that the
rupee had devalued by 22 percent in one year’s time, and the ultimate advantage of this had gone to
the exporters. That’s why they are asking for a special package, some sources mentioned. The major
reason for this action was that the All Pakistan Textile Mills Association (APTMA) had the idea
that the government “should do something” that they think is reasonable for the troubled textile

Consequently, the ECC articulated its displeasure over the performance of the textile sector
but also decided that any action concerning the textile industry should be discussed by the EMC
first. It was mentioned that the EMC would submit its suggestions to the ECC in its next meeting.
The proposal, if approved, would be a complete negation of the budgetary proposals for the period
2008-09 to extend zero subsidies for research and development support to the textile sector. The
budget for 2007-08 had envisaged zero subsidies on R&D. However, some interested groups
successfully lobbied the previous government to extend 19 billion rupees for the purpose.

New Incentives Package

In the new incentives package, the ministry proposed that duty drawback may be granted to the
industry on domestically acquired inputs including taxes on energy — that is, gas and electricity.
The drawbacks would only be allowed to those products that do not require further value addition.
The drawback on locally acquired inputs would not affect the eligibility of the exporters to claim
the normal duty drawback. According to the ministry, the drawbacks would be allowed to
manufacturers and exporters having in-house facilities at least for cutting and stitching, and will
cover shipments made with effect from July 1, 2008, to June 2009. The ministry has proposed that 30
billion rupees may be allocated to cover R&D expenditures during the financial year 2008-09.

Another proposal from the ministry was that this drawback scheme for locally acquired inputs
may graduate into an investment support fund. This initiative would facilitate balancing of the
value chain in the textile and apparel industry, upgrade technology, bring the unorganized sector
into the organized sector, generate employment and create economies of scale.

Investment Promotion Fund

The investment promotion fund would reimburse 5 percent interest on investments in machinery
to the targeted textile and apparel sectors and cover imports effected through letters of credit to
be established from July 1, 2008. The fund would be operational for five years and would be
reviewed thereafter. The ministry has suggested that the scheme may also be announced, with the
name of the drawback scheme, to encourage investments that would not have financial implications in
2008-09. However, any claims may be covered from the amount allocated in the budget.

Tax Credit Facility

Another important proposed incentive is said to be a 20-percent tax credit facility on
investment under the drawback scheme. Furthermore, it was also proposed that reimbursement of
interest on loans to the textile industry for 2007-08 may continue for another year at the rate of
5 percent. It was also mentioned that the textile industry has also required separate power tariff
for it, but it is unlikely to be approved by the government.

September 17, 2008