Waking up to reality: In face of revenue shortfall, FBR slaps taxes on five sectors

Zero-duty withdrawn from textiles, sports and surgical goods, leather and carpets; tax on tea enhanced to 16%.

ISLAMABAD:

In what appears to be a significant development, the federal government has withdrawn tax exemptions extended to five influential sectors of the economy, besides increasing the sales tax rate on tea to 16%. The move is aimed at raising roughly Rs25 billion in additional taxes by June this year.

The Federal Board of Revenue (FBR) has already issued three separate Statutory Regulatory Orders (SROs) –a legal instrument used by the authority to introduce changes in tax rates – to give effect to these decisions.

While withdrawing its zero tax facility, the FBR has imposed a 2% sales tax on textiles – including jute, carpets, leather, sports and surgical goods, according to a notification issued. All registered manufacturers, importers, exporters and wholesale dealers will be liable to pay this tax, it added.

In February 2011, the federal government had slapped a 5% sales tax on the domestic sales of five export-oriented sectors, while keeping its zero rate policy intact for sales to registered persons and on exports.

“That decision could not be implemented, as instead of raising revenues, the FBR ended up paying Rs6 billion in refunds,” FBR Chairman Ali Arshad Hakeem told The Express Tribune. Following the February 2011 notification, he said all sales were shown to have been made to registered persons.

The latest move will end arbitrage, as the entire manufacturing sector will be taxed at 2%, irrespective of sales made to registered and unregistered persons, and refunds will be given only against verified exports, said Hakeem.

The rate of sales tax outside the five sectors has been kept intact at 5%, according to the FBR, while imports by these five sectors for manufacturing purposes are to be taxed at 2%. However, commercial importers will pay 2% in sales tax, in addition to a 2% value-added tax, bringing their total liabilities to 4%.

Finished goods, including textiles, carpets, leather, sports and surgical goods will also be subject to a 4% tax, including the 2% value-added tax.

The government has netted the textile sector from the spinning stage, while the leather sector will be bound to pay a 2% tax from the tannery stage onwards. The organised manufacturing of surgical and sports goods will be taxed in total.

Through another notification, the federal government has withdrawn the exemption on import of polyethylene and polypropylene for manufacturers of mono filaments; and also from net cloth and greenhouse farming; and slapped a 2% sales tax on all.

Through a third notification, the FBR has increased the sales tax rate on tea from 5% to a standard 16% both at the domestic stage and at the import stage. The decision to reduce the sale tax rate on tea had been taken in June last year. The FBR is expecting at least Rs7 billion in next four months through the enhanced tax on the highly-imported commodity.

“The FBR cannot achieve annual target until the government takes all tax measures proposed by the tax authorities,” said Hakeem.

Possible fallout

The decision was much-needed, but observers fear it may initiate tug-of-war between influential sectors of the economy and the federal government just ahead of the general elections.

The annualised impact of these revenue measures will be over Rs200 billion, says a senior officer of the FBR, and will help cover an important pre-condition set by the International Monetary Fund (IMF) for the next bailout programme.

The IMF had earlier asked Pakistan to withdraw concessions given to certain sectors if the country was keen on initiating meaningful reforms.

Efforts to remove anomalies in tax structures – created under pressure from lobbying groups – comes at a time when the FBR is facing massive revenue shortfalls. During the first eight months of the current fiscal year, which ends on June 30, the FBR could collect only Rs1.16 trillion.

The collection is mere 48.8% of the annual budgeted target of Rs2.381 trillion, approved by the parliament in June last year.

Published in The Express Tribune, March 2^nd, 2013.

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