A Senate panel on Tuesday recommended to the government, with a majority vote, that it lower the sales tax rate to 16%. It also took the opportunity to remind Finance Minister Ishaq Dar of his stance, when he sat in the opposition benches, on reducing tax rates for broadening the tax base.
The Standing Committee on Finance and Revenue, headed by MQM’s Nasreen Jalil, also criticised the government’s decision to give sweeping powers to the Federal Board of Revenue (FBR) and enabling it to impose a tax on any sector, which it said remains a prerogative of the parliament.
On the second day of proceedings, the committee members fiercely opposed the move to burden existing taxpayers and consumers in the name of widening the tax base. They expressed fears that this would prove counterproductive and fuel inflation.
Senator Nuzhat Sadiq – the lone committee member from the treasury benches – independent Senator Hamayun Mandokhel and JUI-F’s Talha Mahmood, however, supported the increase in sales tax to 17% in the budget for 2013-14.
Opposition parties that enjoy a majority in the standing committee spoke against the tax increase.
Through the Finance Bill, the government has increased the sales tax from 16% to 17% in general, and to 19% for unregistered persons and entities, a move that is expected to bring in billions of rupees in revenues, but put an extra burden on existing taxpayers, thereby fuelling inflation.
“If the government is serious about broadening the tax base, it should begin with collecting taxes from the 3.9 million identified people (tax dodgers) that will serve both the purposes – bring in revenues and broaden the tax base,” PPP Senator Sughra Imam said.
The committee members viewed the levy of a 19% sales tax on unregistered persons with concern, saying it would cause immense problems as, with a few exceptions, almost no one is a registered taxpayer in the country. Senator Ilyas Bilour of the ANP commented that the government was punishing the people for the failures of the FBR.
“When Senator Ishaq Dar was in the opposition, he had called for slashing the sale tax to 15%, and this could be found in the Senate record,” noted Senator Haji Adeel of the ANP. Dar did not come to attend the panel meeting on Tuesday.
In a separate recommendation, the committee asked the FBR to lower the threshold for the mandatory registration of wholesalers and retailers, currently set at Rs5 million of annual turnover. FBR Chairman Ansar Javed gave an absurd statement, saying his primary aim was not to widen the tax base, but to catch big transactions.
The government is giving vast powers to the FBR through the Finance Bill, which will allow it to slap tax on any tax-evading sector. According to a proposal, the FBR can levy taxes based on a unit’s production capacity, the FBR chairman said.
He said the proposal was added to the budget after the FBR found that the sugar industry had kept 100,000 tons of production out of the books and evaded taxes worth billions of rupees.
The idea behind this was to tax the sugar mills on the basis of the steam consumption of boilers, which will provide a fair idea of production.
He said the capacity tax had been proposed to also be levied on the beverages sector, which he claimed was hiding 30% of its production out of the books.
The FBR has also kept discretionary powers to exempt any sector from the 0.1% withholding tax at the manufacturing stage, which detractors say may open new avenues of corruption for the FBR’s officials.
In the last budget, the FBR had levied a 0.5% withholding tax on all types of manufacturing. This year, it has proposed to reduce the rate.
Through the Finance Bill, the government is also introducing administrative changes in the FBR, which, the senators observed, was a violation of the constitution, as the Finance Bill was only meant for taxation proposals.
“The FBR wants to give legal cover to an ongoing but bitterly criticised practice of giving rewards to its officers,” they said. It is also proposing to establish a Directorate General of Law and a Directorate General of Research and Development, which the committee said did not fall in the category of taxation measures.
Published in The Express Tribune, June 19th, 2013.
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