Cloak of confusion over Budget proposal on garments

The Board of Investment (BOI) has said it will not allow unrestricted flow of garments made by BOI-approved companies into the domestic market despite a government request made in the Budget presented on Thursday. Budget 2007 granted several tax concessions to the garment sector to help the industry but the proposal regarding release of garments to the local market has caused confusion and concern among non-BOI companies producing only for the domestic market.

In the section on apparel and textile industry, the government said in the Budget: “The release of garments to the domestic market will be encouraged. Consolidated duty of Rs 25 per piece inclusive of cess will be imposed.” It does not stipulate any controls on the quantities that can be released to the domestic market and the duty of Rs 25 is a sharp reduction from the previous rate of around Rs 60.

BOI Chairman Lakshman Watawala said BOI factories, which provide for only 20% for the local market and 80% for export, would continue to abide by the current controls despite the budget proposal. The proposal contained in the Budget 2007 has been included to boost garment manufacturers and retailers. Consumers are also expected to benefit through increased access to export-quality clothing.

However, BOI factories are recipients of various concessions that non-BOI factories do not get. Therefore, if allowed to compete in the domestic market, BOI factories may have an advantage over non-BOI factories. Hameedia Managing Director Fouzul Hameed said this would affect companies that make garments for the local market and hundreds of small-time enterprises. “There are hundreds of people with one or two machines and sew garments for the local market. What is going to be their plight?” he asked.
Companies making garments for the domestic market are asked to pay taxes upto 25 percent but BOI companies are granted tax concessions, he said.

Local industry sources said domestic manufacturers were already affected by the leakage of garments from BOI Comapanies to the local market. They include branded products with labels cut or torn to imply they were rejects. Some of the big fashion houses have even been taken to courts for selling branded items without any authority from the brand owners. Analysts said that the original concept of the Free Trade Zones was to invite top foreign manufacturers to make use of Sri Lanka as a manufacturing base and re-export. Bonded warehouses run by the Customs ensured that duty-free raw materials were used only for re-export purposes. Since then, a percentage of this produce is allowed into the local market with a tax.

However the latest proposal appears to permit an unlimited quantity of garments made for exports to be sold locally which negates the purpose of FTZs, they said.