Govt mulls GST hike, tax relief withdrawal

Looks to generate additional revenue to collect over Rs2tr through sales tax

Shahbaz Rana May 25, 2019
Representational image. PHOTO: REUTERS

ISLAMABAD: In a bid to collect over Rs2 trillion through sales tax, the government is weighing between walking on an easy path and increasing general sales tax (GST) rate to 18% or taking politically challenging decision of withdrawing concessional rates being availed by politically connected sectors.

The current sales tax collection is in the range of Rs1.7 trillion and the government is looking for avenues to generate additional over Rs350 billion from sales tax alone in fiscal year 2019-20. If the Federal Board of Revenue (FBR) takes the politically challenging route, the government will have to sacrifice ‘sacred cows’ like the textile and steel sectors. One of the budget proposals for fiscal year 2019-20 is to withdraw zero-rating facility being availed by five export-oriented sectors, said sources in the FBR. The FBR also wants to do away with the special sales tax procedure meant for steel sector.

The new FBR Chairman Syed Shabbar Zaidi is aiming at domestic sales of these sectors that according to him have not been fully tapped. The income tax and sales tax payments by the textile sector are paltry compared with the volume of their sales.

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The total annual turnover of the textile sector is roughly Rs900 billion but the sector paid only Rs32 billion in income tax and Rs16 billion in sales tax, according to a senior member of the FBR. More than 90% of the Rs16 billion is paid by handful retail outlets.

Catching the holy cows will require amending or even abolishing the controversial Statutory Regulatory Order 1125, which offers concessional tax rates to textile, leathers, garments, sports and surgical goods. The cost of the SRO 1125 alone has been estimated at Rs62 billion to the exchequer in the last fiscal year - a figure that is substantially higher for this fiscal year. The textile tycoons have already sensed a change and they raised the issue with Prime Minister Imran Khan last week, according to the FBR officials.

Against the standard sales tax rate of 17%, the effective tax rate is only 7.2% due to numerous exemptions and concessional sales tax rates, according to the FBR officials.

For the next fiscal year, the FBR faces the mammoth task of increasing its low tax-to-GDP ratio to 12.3% in next fiscal year, which would mean generating Rs5.35 trillion in taxes in the next fiscal year. The FBR plans to collect around Rs2.05 trillion under the head of sales tax. For this fiscal year, the FBR had set the sales tax collection target at Rs1.7 trillion but the actual collection is likely to remain far lower than the target. It will need around Rs350 billion additional sales tax measures to collect over Rs2 trillion in sales tax in the next fiscal year.

There were two options before the FBR - either to increase the GST rate by 1% to 18% or withdraw the concessional tax rates. The FBR is also aiming at increasing the sales tax base to 500,000 entities. So far, only 38,000 are registered sales tax filers as against 348,000 industrial consumers in Punjab.

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It will be a political decision which option the government takes, said Zaidi.

Pakistan and the International Monetary Fund (IMF) have agreed to the principles of equitable and fair taxation and withdrawal of concessionary tax regimes. The IMF Board will approve the new $6 billion bailout package only after approval of the taxation measures in the new budget. The government plans to unveil next year’s budget on June 11.

Under the last three-year programme, the Pakistan Muslim League-Nawaz (PML-N) government had also committed to completely phase out its concessionary tax regime by July 2016. But it too could not touch ‘sacred cows’.

In case the government decides to increase the sales tax rate by 1%, it will collect additional around Rs150 billion. In case the government decides to withdraw the concessional rates, the net impact will be close to Rs300 billion.

But due to concessional tax regimes, increasing standard GST rate will not fully serve the purpose. The exports are exempted from the payment of sales tax - a facility that the FBR believes is abused by the textile millers who show their domestic sales as exports to evade taxes.

The FBR has apprehensions that the millers do not fully reflect their domestic sales in the books, which are charged at 6% rates at the sale point.

The FBR’s proposal, which is subject to the approval of the government, is to introduce different tax rates at the manufacturing stage. However, this will create the issue of sales tax refunds to the exporters - an area where both the FBR and the exporters do not enjoy a good reputation. The FBR accuses the textile millers of claiming bogus refunds.

The textile sector paid Rs16 billion in sales tax but it claimed Rs45 billion in refunds, according to the FBR officials. It suspects that the sector was claiming bogus refunds in guise of packaging materials. However, this cannot be done without the involvement of the FBR officials.

The government may also withdraw some of sales tax exemptions, currently protected under sixth schedule of Sales Tax Act of 1990. This would increase the prices of certain edible goods and various kinds of plants and machinery including for power generation. The total cost of the sixth schedule is estimated at Rs75 billion by the FBR, which the IMF thinks is understated, said the sources.

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