Five export-oriented sectors get major tax relief

Against IMF’s recommendations, government moves decisively towards single-stage-tax

ISLAMABAD: The government’s decision to charge tax only at the retail stage of a textile product is the first practical step towards the single-stage tax - a concept that was vehemently opposed by tax authorities until Sunday when Finance Minister Ishaq Dar approved a new regime for five export-oriented sectors.

Pakistan moved decisively towards the single-stage sales tax regime after representatives of five export oriented sectors and the government agreed to zero-rate these sectors, Ashfaq Tola - a member of the Tax Reforms Commission (TRC) on Wednesday told the Senate Standing Committee on Finance.



The government has decided to zero-rate the local supplies of textile, leather, carpets, surgical and sports sectors from July. However, the 5% sales tax on retail stage of garments and fabric would stay that means that this would be full and final liability - a concept that is contrary to the concept of IMF-backed Value-Added mode sales tax.

The government would also abolish the sales tax that the textile sector pays on inputs.

The zero-rating regime was the first real step towards ending the difficulties faced by the textile sector, said Finance Minister Ishaq Dar on Wednesday. He said the government would now clear the outstanding sales tax refunds of the textile sector by August 15. Dar said after that new refund claims will be cleared within two months of filing.

The tax refunds have become a major source of corruption in FBR. “People pay a certain percentage of the claimed amounts in bribes to FBR officials to get their refunds,” said Senator Kamil Ali Agha during the standing committee meeting.



Masoud Naqvi, chairman of the TRC, told the committee that the extremely narrow tax base and obsolete information technology system were the two most pressing issues that the government has to address on a priority basis.

He said that the TRC has recommended short, medium and long-term measures for tackling FBR problems, as the country’s tax base was quite narrow and number of return filers dropped by 18.4% this year to only 980,000.

The compliance level in the FBR, he said, stands at 19 to 20% as many people who were obligated to file returns but there was no one in the FBR to ask about non-compliance. He cited the example of Turkey and said that its tax to GDP ratio increased to 23% due to improvement in compliance.

Foreign Exchange Bill

Amid concerns over misuse of additional powers by the regulator and foreign exchange companies, the finance standing committee approved amendments into Foreign Exchange Regulation Act (FERA) of 1947. The amendment would allow State Bank of Pakistan to impose up to Rs500,000 fine on currency exchange companies on violation of rules and regulations.



The National Assembly has already approved the Bill, reducing the penalty amount from the original Rs1 million to Rs500,000.

Director Exchange Policy of the SBP, Fazal Mehmood, said that the central bank did not have powers to impose penalties on violations. He said the central bank has the powers to suspend or cancel the licenses but these were extreme measures.

He said that such extreme powers could be used only in case of committing frauds, forgery or money laundering.

Since the enactment of the Act about 70 years ago, the volume of foreign currency transactions to and from Pakistan has considerably increased, the central bank needs to have effective enforcement powers to regulate the foreign exchange business of banks and exchange companies, according to the SBP.

However, Senator Kamil Agha of PML said that giving more powers to regulator would mean facilitating violators. His apprehensions were that the central bank officials would impose minor penalties against major violations and in return would mint money from the exchange companies.

“The penalties should be severe, as the exchange companies were still committing violations despite the threat of cancellation of their licenses, said Agha.

Published in The Express Tribune, June 2^nd, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.