Simplifying collections: Standard sales tax can be brought down to 5%

Study reveals reduction will not impact inflation.

ISLAMABAD:

A study has worked out that the standard sales tax rate can be brought down from the present 17% to just 5% without compromising on revenue mobilisation and documentation, offering an alternative to multi-stage taxation that is promoting corruption.

The study has been carried out on the premise that the sales tax will be charged at a single stage and it will be collected as the final liability without giving input adjustments and sales tax refunds.

However, the reduction in nominal sales tax rate will not have significant impact on inflation, as input adjustments will not be allowed, which will be built into cost, resulting in higher effective sales tax rate.

At present, sales tax is charged in a value-added mode but supply chain has been distorted by giving exemptions.

Due to the administrative weaknesses and capacity constraints, the FBR also could not broaden the sales tax net.

The standard GST rate is currently 17% but because of various exemptions, input adjustments and refunds, the effective sale tax rate is below 4%, according to a study of the FBR.

The 5% single-stage tax rate is still higher than the effective sales tax rate. The documentation, which is said to be the reason to introduce value-added mode sales tax regime, has been protected in the proposed regime by trailing the supply chain.

The study was carried out by Ashfaq Tola, a renowned tax practitioner and senior partner at Naveed Zafar Asfaq Jaffery and Company.

Prime Minister Nawaz Sharif expressed the interest to carry out a study for bringing down the sales tax rate to the single digit.

The 5% rate is being worked out on the assumption that the tax is levied on all goods and services currently covered by the FBR under the GST regime. In addition, the SROs in the sales tax are assumed not to be applicable any more. However, it has recognised only statutory exemptions protected in the sixth schedule.

The study has worked out the effective sales tax base at Rs23.7 trillion. Additionally, sales tax base at import stage has been worked out at Rs4.2 trillion excluding exemptions granted on food items, pharmaceuticals and imports under the special arrangements. The domestic sales tax base has been assessed at Rs19.5 trillion. This analysis is based on final data of fiscal year 2012-13.

However, the effective sales tax rate varies from industry to industry due to impact of cascading. It is the highest at 11% for the automobile industry and the lowest for the crude oil at just above 5%.

After doing the sensitivity analysis by rationalising the FBR’s data of taxable sales of POL products and electricity, the study has worked out standard single-stage sales tax rate at 5.5%. In case, the government does not withdraw the existing exemptions, the effective sales tax base will come down to Rs19.7 trillion and the sales tax rate will be 6%.

With the change in system, the composition of revenues by sector has also been shown as more diversified, with the top 12 items contributing 56% as compared to over 78% in the present system. The share in revenues of POL products will be more than halved, from 46% to 22%.

The study is expected to be taken up by the government’s constituted Tax Reforms Commission (TRC). The TRC has been given an assignment to redo tax policies aimed at making these more simplistic and equitable. In the value-added sales tax regime, there have been many lacunas that are exploited by the vested groups in connivance of the corrupt FBR officials.

“There was a constant increase in illegal input adjustments and refunds,” said the officials. They added the present system has also not helped in broadening the base.

Published in The Express Tribune, November 6^th, 2014.

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