Budget proposals: Govt might tax hitherto exempted items at 5%

Another 17% sales tax might be slapped on imports for Gwadar

ISLAMABAD: The government is considering a 5% sales tax on previously exempted items in the federal budget for fiscal 2015-16. Besides withdrawing tax exemptions, another 17% sales tax might be slapped on imports for setting up hotels and water treatment plants at Gwadar.

The Federal Board of Revenue (FBR) has shortlisted these proposals for the upcoming budget, likely to be unveiled next month. Prime Minister Nawaz Sharif is yet to give his nod to these proposals.



The move to withdraw sales tax exemptions on imports for power generation and transmission projects coincides with implementation of the 10,400-megawatt power plants worth $15.5 billion that are planned to be set up during the next three years under the China-Pakistan Economic Corridor (CPEC).

The 5% sales tax proposed to be introduced from July will also affect the imports for mega projects like the 4,200MW Dasu hydropower project, the 4,800MW Diamer-Bhasha dam, the 2,700MW Tarbela 4th and 5th extension projects, the 1,300MW coal-fired Jamshoro power project and the 2,200MW nuclear power plants in Karachi.

However, in cases where the letters of credit are opened before June 30, the 5% sales tax will not be applicable, a source in the FBR said.

The government is already charging 5% customs duty on all types of imports for power generation, though the income from power generation is exempted from tax.



The tax authorities are expecting around Rs10 billion in revenue by withdrawing the two dozen or so exemptions listed in the Sixth Schedule of the Sales Tax Act, another source said. “There is a possibility that the government might exclude power generation machinery imported for CPEC projects from taxes,” he added.

The FBR has proposed that sales tax exemptions on imports for power generation through coal, gas, and nuclear and renewable energy sources, like solar, wind, micro-hydel, bio-energy, ocean, waste and hydrogen cells, be withdrawn and taxed at 5%.

The imports for power transmission and grid stations, including under-construction projects, should also be taxed at 5%, according to the proposal.

Similarly, sources said, the sale of machinery and equipment for desalination plants, coal firing systems, gas processing plants, oil and gas field prospecting, marble granite and gem stone manufacturing are also proposed to be taxed at 5%.

The 5% sales tax is also proposed on imports for reclaimed lead being supplied to manufacturers of lead batteries, waste paper and imported ginned cotton, poultry feed, cattle feed, including all their ingredients, and oil cake. The incinerators for waste disposal, motorised sweepers and snowploughs might also be taxed at 5%.

The FBR has also proposed that the imports by the Karachi Shipyard & Engineering Works should be subjected to a standard 17% sales tax.

Similarly, the board also wants imports for setting up hotels, power generation plants and water treatment plants in Gwadar to be taxed at 17%.

The machinery, equipment and other imports meant for mine construction phase or extraction phase are also proposed to be taxed at 17%, said the sources.

Under an agreement with the International Monetary Fund, the government is withdrawing tax exemptions in a phased manner.

Under the first phase, which was implemented last year and generated Rs103 billion in taxes, the government had withdrawn one-third of the exemptions.

In the second phase, which will be implemented from this July, the government will withdraw another one-third of the statutory regulatory orders, Finance Minister Ishaq Dar had said last week.

The international financial institutions and the local independent tax experts have long been advocating equity in tax laws and withdrawing the concessionary tax rates.

In the short-term, however, the standard sales tax rates are likely to push the cost of doing business further up, besides increasing the end consumer prices.

Published in The Express Tribune, May 18^th, 2015.