What you need to know about RGST

The Reformed General Sales Tax (RGST) Bill has become the latest ground for political games. While the Pakistan People’s Party (PPP) calls it a necessity, almost all parties are in strong opposition. Amidst the political rhetoric, economic experts are siding with the proposed taxation system and the public is flinching at the thought of yet another price hike.

What is the RGST? Why is it suddenly so important? Is it really as evil as they say?

Here are a few answers.

What is the RGST?

The RGST is actually plain old Value Added Tax (VAT) with a new name. Since the VAT has already had its fill of bad publicity, the government decided it would be a smart move to rename and repackage the new taxation system.

The RGST is a taxation system that operates by an addition of 15 per cent tax on each and every value addition on taxable products.

Who is involved?

The key players behind the proposed RGST are the International Monetary Fund (IMF), the World Bank, United States Mission to the European Union  (USEU) and other assorted donors who are tired of paying their taxpayers money to cover up for the leaks in our taxation system. But this is not to say that we do not need reforms in our taxation system. The International Monetary Organisations might be the catalysts towards the reforms just now, but in all reality, tax reforms have been long overdue.

Those who will be affected in one way or other are the suppliers, the manufacturers and the retailers who will all have to maintain and disclose proper sales and production records and would thus find tax evasion pretty difficult. Of course, the real victims are the consumers who would bear the burden of higher costs.

Why implement the RGST?

The government is trying its best to impose the RGST mostly because there is no way out of it this time.

The imposition of more taxes is a condition to which the IMF had agreed to give a monetary injection to the failing economy of the country. Add flood related damage to the economy and conditions of the donor countries,  and the imposition of the new tax has become a must.

Although the RGST is being imposed under pressure, economic experts say that Pakistan was in dire need of it. The new system of taxes will not only raise our revenue but also help in documenting the economic growth.

When will RGST be implemented?

The originally proposed VAT was supposed to come in effect back  in July, but due to massive public and political backlash, the government was forced to delay the imposition.

Now, the RGST Bill has been passed by the Senate. Eventually, it will be discussed in the Parliament and will be passed unless rejected through a vote. The government needs just a simple majority to pass the Bill. As soon as is passed by the Parliament, the RGST will be imposed.

How will it impact you?

The new tax does have a wider reach than the old GST. When the RGST is imposed, everyone from the suppliers to the middleman in small and large businesses will be brought within the tax net.

Unlike the old GST, the RGST will not be imposed just on the  final price of a product; rather, a certain amount of tax will be added at each stage of production.

For example if a supplier sells raw material worth Rs100 to a manufacturer, he would charge Rs115 instead of Rs100, and remit the extra Rs15 as tax.

After manufacturing the product, the manufacturer, for example, adds a profit of Rs2o. The product now costs Rs135, but instead of selling it to the retailer at Rs135, the manufacturer will add another 15 per cent to the value addition of Rs20 which will bring up the cost to Rs138. The extra Rs3 will be remitted as tax.

Finally, the retailer will add his profit. Assuming that is another Rs20, the price of the product is now up to Rs158 again. Instead of selling it at Rs158, the retailer will add yet another 15 per cent of the value addition and the final cost will be Rs161. The retailer will then pay the added tax back to the treasury.

There are exemptions and conditions, but so far the glitches are being worked out. According to economic experts, this system of taxation will help bring more people into the tax net. Not just that, tax evasion will become more and more difficult. Since everyone will be documenting and paying the tax at each level, any attempt at tax evasion will automatically be highlighted.