After VAT refund was scrapped textile factories are operating below 50pc capacity

Citing that the government’s decision to scrap the VAT refund facility in the textile industry has made Nepali textiles further uncompetitive, textile entrepreneurs have been urging the government to review its decision. Moreover, entrepreneurs have threatened the government to shut down their factories completely across the country from November 1 if the government fails to address the concerns raised by textile entrepreneurs. Sujan Dhungana of The Himalayan Times caught up with Shailendra Lal Pradhan, president of Nepal Textile Industries Association, to get more details on the aforementioned issue. Excerpts: 

Textile entrepreneurs have warned the government that they will shut down their businesses completely from November 1 if their concerns are not addressed. What is the actual problem?

The government introduced the Value Added Tax (VAT) Act 2052 and textile industry had been enjoying subsidy facilities ever since. Along with other facilities, the government also started giving us VAT refund facility — up to 70 per cent — from 2013. As the production cost of Nepali textiles is very high making domestic textile products uncompetitive, the VAT refund facility and other subsidies on textiles had been providing relief to textile entrepreneurs to some extent. However, government scrapped the VAT refund facility for textiles through the budget of the ongoing fiscal year. As a result, production cost of textiles in the country has started surging. This has made Nepali textiles further uncompetitive in the domestic market and textile factories across the country have started cutting down on their production. As of today, textile factories are operating below 50 per cent of their capacity. We reported all these circumstances to the government and two months back the Ministry of Finance (MoF) had vowed to address our concerns and had formed a committee for the purpose. However, the committee has not come up with its report and suggestions though it was given a mandate of one month. Thus, the Nepal Textile Industries Association (NTIA) has decided to stop operation of all textile factories across the country to put pressure on the government to address problems being faced by textile entrepreneurs. However, the government is still reluctant towards addressing our issues. As a result we are being compelled to shut operation of factories from November 1, as announced earlier. We should note that the government earlier had been giving us VAT refund facility realising the fact that domestic textile products cannot compete with foreign textiles which are comparatively cheaper. Along with the problems that have resulted after the VAT refund facility was scrapped, NTIA has also submitted a report to the government on necessary long-term and short-term policies that need to be introduced to make Nepali textile industry competitive in the domestic and international market. We had high expectations with this government as it holds two-third majority in the Parliament. Unfortunately, the government seems unwilling to address the problems of the private sector. The government has been saying that its top priority is to reduce the trade deficit gap, create employment opportunities and foster economic growth. However, it is crystal clear that none of these goals can be achieved without promoting domestic products and industries, especially the textile industry. Similarly, promotion of textile industry should be given top priority as this industry is directly related to the promotion of other industries. Looking to India, it has a separate ministry to look after textiles while we do not have even a unit at the Ministry of Industry, Commerce and Supplies to deal with issues related to textiles. The government earlier had formed a textile board which is defunct today. The government should revive this board and form a separate institution to deal with textile issues.

Does this mean that the government is not taking the textile industry’s problems seriously?

As the government has set ambitious goals to reduce the trade deficit gap and generate additional 500,000 job opportunities within the next few years, the government has to be serious towards the issues of the textile industry and other sectors too. Though the government’s decision has affected the textile industry today, such decisions can leave a negative impact on other sectors also in the future. In case the government fails to address industrial problems today, other industries will also shut down their operations gradually. As ‘prevention is better than cure’ we expect the government to take necessary steps to promote the industrial sector on time.

In what ways can the government address the contemporary problems of textile industry?

We want the government to review its decision to scrap VAT refund facility for textile entrepreneurs. The VAT refund system in the textile industry is crucial to make domestic textiles competitive in the market amid the availability of cheaper imported textiles. However, the government today is saying that VAT refund system is against the principles of VAT, which is false. Had it been, the government had been adopting wrong VAT policy since the last two decades. If VAT refund is not possible, the government should subsidise the sum equivalent to what textile entrepreneurs had been getting under VAT refund. The government has been subsidising sugarcane farmers. It can subsidise textile entrepreneurs in a similar way. Textile industry is one of the major contributors to the country’s economy. The private sector has injected more than Rs 15 billion in the industry while more than 200 textile factories in the country have been providing employment opportunity to thousands of people. The government should realise this fact and seriously deal with concerns raised by textile entrepreneurs. Investment in the textile industry increased especially after the government implemented VAT refund facility for entrepreneurs. Such incentives had also been encouraging textile entrepreneurs to give priority to the quality of the product using latest technologies in recent years. Cancellation of the VAT refund system will hit all these aspects in the textile industry. In the context of Nepal, industries cannot sustain without the support of the government.

Entrepreneurs have been stating that the increasing illegal import of textiles in the country has been affecting their business. Why do you think the country has not been able to curb this trend?

This is especially because of the weak regulatory system in the country. In fact, almost 90 per cent of the domestic demand for textiles is met through illegally imported textiles. We do not have data on per capita consumption of textiles in Nepal. But taking the reference of neighbouring nation India, an individual there requires almost 30 metres of cloth per year to fabricate clothes. Hence, as Nepal’s population is almost 30 million, the country requires almost 900 million metres of textiles annually for clothing purposes. As textile is also used in various other purposes, we estimate that Nepal requires almost two billion metres of textiles annually. Domestic textile factories have the capacity to produce up to 70 million metres every year and some 200 million metres of textiles are being imported through legal channel annually. This clearly shows the stake of illegally imported textiles in the domestic market. The rise in illegal import of textiles is not only affecting domestic manufacturers but the government has been losing huge revenue too. If the government seriously adopts effective measures to control illegal import of textiles, the trend can be controlled. However, the government seems less serious about this issue.

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