KARACHI, June 21: Textile sector can look up to a finer financial results next year, backed by BMR/expansion activities undertaken by mills. Contrary to market expectations, textile companies had managed to produce favourable financial results for the first quarter of 2004 (Oct-December 2003).

Analysts attributed the better-than- expected profit or lower losses from the textile companies to reasons ranging from 'savvy manoeuvring to plain luck'. More help has now come from budgetary announcements.

"Improved cashflows and BMR/expansion activities would respectively result from the sales tax removal/reduction in inputs and slash in import tariffs on plant and machinery.

Moreover, measures such as reduction in industrial power rates would serve to improve the competitiveness of the sector," commented Tanvir Abid, Head of Research at Jahangir Siddiqui Capital Markets (Pvt) Ltd.

He observed that removal of sales tax on the cotton ginning stage and reduction in sales tax rate on PSF from 20 to 15 per cent, would be beneficial to the sector.

"Though sales tax is a pass- through item, nevertheless, its removal and rate of reduction would significantly improve the cashflows of the textile manufacturers, thereby lowering financial costs," said Tanvir Abid and added that delays in sales tax refunds significantly burdened the liquidity position of the textile millers.

In a move towards encouraging investment, expansion and BMR activities the taxation structure on plant and machinery has been considerably liberalized. The import duty on machinery has been reduced to 5 per cent and sales tax/withholding applicable on machinery import/local purchase has been abolished.

This move will certainly encourage investment activities in the textile sector. Going forward, the aggressive approach by big units to replace, modernize and innovate their machinery along with the ongoing focus upon venturing new international markets for value- added products would positively impact the sector.

Furthermore, cotton prices are expected to recede on the back of an improved demand/supply situation with a depreciating rupee an additional benefit. Mohsin Ahsan, textile sector analyst at Global Securities Ltd. agreed that removal of 15 per cent GST on ginned cotton, would especially benefit large textile exporters like Nishat Mills, Kohinoor Textile, Crescent textile, etc.

The impact would come in the form of improvement in cash flows as large refunds remain stuck with CBR for years. Assessment of refund sometimes raises differences between tax authority and companies which then results in litigation and delays. "About 10m cotton bales are produced every year with ginned bale price in last two seasons averaging Rs13,000 (Rs2,850 per maund exclusive GST).

The amount of GST collected on ginned cotton, on the basis of above assumptions, comes to around Rs20 billion, though it is later refunded to companies after finished good is exported," said the analyst, and added that as companies borrow for procurement of cotton, the additional cost of financing, required for GST, would come down.

Reduction in import duty on machinery imports will also benefit as companies have been aggressively expanding their capacities to prepare for post-2005 quota regime. Removal of further sales tax of 3 per cent and reduction in power tariffs will benefit them though latter one would only apply to companies which are on Wapda grid.

Govt is planning to establish textile city in Karachi on the patterns of export processing zone which would be replicated elsewhere, if successful. Govt has also suggested helping companies in establishing effluent treatment plants to avoid any unexpected duties by western countries post abolition of quotas in CY05.

Govt has announced Re0.58 per unit reduction in power tariff for industrial consumers though this would mainly benefit small textile players as large players have their own power generation.