ISLAMABAD: Instead of generating revenue from the textile sector, which has the largest share in the export basket of the country, the FBR is paying refunds/rebate to the sector and provision of zero-rating salex tax has also not yielded desired results. This has been revealed in Third Quarterly Review of the Federal Board of Revenue (FBR) on Wednesday, research done on Tax Contribution by Textile Sector by a senior tax official proposes that a Textiles Industry Group should be created; such a group should include taxpayers and representatives of government to resolve issues on tax non-compliance in this big sector. At aggregate level the picture is quite interesting, instead of getting tax revenue from the sector, the FBR is paying much more higher in the shape of refund/rebate to the sector. The extent of negative collection was Rs 25.9 billion in 2004-05, which has now reduced to Rs 1.1 billion in 2007-08. However, the provisional figures up to March 2008-09 indicate that the negative collection has again jumped to Rs 5.5 billion. The net revenue loss will be much higher if the refunds claimed under the head of income tax are included. Sales Tax: The very purpose of zero-rating the textile sector has not been achieved; the refund generation is still at large. In FY: 04-05, the gross collection was Rs 13.8 billion, as against refund to the tune of Rs 41.1 billion was paid back to the textile sector. Thus the net revenue loss to the government was Rs 27.3 billion. Undoubtedly, the loss of revenue has scaled down to Rs 6.5 billion during 2008-09 (up to March), still very high to absorb. Customs: A sizable amount of custom duty has been collected from the textile related imports during 2007-08. The visible improvement is there as the negative net revenue collection of about Rs. 4 billon in 2004-05 has gradually changed into positive during FY: 2006-07 and onward, resultantly, the effective rate which was negative during 2004-05 and 2005-06 both with total and dutiable imports as well, has started improving to 1.7 percent in and 4.6 percent 2007-08. Issues and Concerns: Low tax revenue: The contribution of textile sector in GDP is 8.5 percent, highest contributor in the manufacturing sector, whereas its share in tax revenue is negative for the last many years. It is hard to believe that the industry with huge investment contributes negatively. Zero rating/exemption: The purpose of Zero-rating the entire chain of textile sector was to address the issue of delay in refunds payments of sales tax and also to resolve the rampant use of fake and flying invoices by unscrupulous agents to claim illegitimate refunds. The situation as claimed had become a source of anxiety both for the taxpayers and tax administration. This initiative has broken the VAT chain and eroded the tax base, but was accepted that streamlining the STARR/STREAMs during the period will start operating as per best international practices. Unfortunately the decision of Zero- rating has seems to be ineffective. The returns of the textile sector have been investigated with respect to those tax filers who have declared business income or losses or those lodged nil claims. Interestingly only 268 (15 percent) of the return filers of this sector have declared business income in their returns, while 359 (20 percent) have shown business losses and 1155 (65 percent) have submitted nil statement. Thus, it is safe to assert that out of 1782 return filers only 268 or 15 percent of them have paid income tax and the rest 85 percent taxpayers have either declared business losses or there is nil income to declare. More ironically, the 65 percent taxpayers who declared nil income during Tax Year 2008 have claimed refund to the extent of Rs 430 million. Out of 1782 returns filed during tax year 2008, the returns of top 20 taxpayer\'s have been further examined and found that 13 (65 percent) filers have not declared their gross tax and all of them have left the column "net tax payable" as blank. Notwithstanding, positive collection (though meager amount) on account of income tax and customs duty, the overall collection turned into negative, mainly because of huge refund payments. This situation is alarming as the government is facing revenue shortages which lead to budget deficit and low tax-to-GDP ratio. However, there are other non tax issues confronted by the industry which need attention, that includes the increasing interest rates as compare to the regional countries, non-guaranteed energy supplies, lack of R&D and reduction in cotton production have had a negative impact on the industry\'s competitiveness internationally. In order to sustain the Textile Industry, there is a need to implement a suitable long-term strategy that provides a level-playing field against their regional competitors. Zero rating or exemptions should be for a shorter and specified period of time, longer the period of zero-rating creates greater inequalities in treatment of different taxpayers. To block the revenue losses the emergency measure would be to exempt the sector from the entire indirect taxes so that no refund claims are generated. The suggestion may be administratively viable but economically more dangerous for the economy as whole. The best way is to done away with the exemption-zero-rating and to develop a mechanised refund settlement system. In order to ensure voluntary compliance, strict punitive action needs to be introduced together with incentives to the compliant taxpayers. A Textiles Industry Group should be created. Such a group would include taxpayers and representatives of government. The group would identify the main problems (non-compliance from the standpoint of government, but also burdens of compliance from the standpoint of taxpayer) and solutions that aim at prevention of tax evasion, etc. They would also have to look at end markets, and determine what the impact on demand would be with changes to tax administration. The arrangement may also help in creating business friendly environment and harmony between Industry and tax administration.