Cutting corners: Industrialists and retailers win major tax concessions

Govt issues four new SROs in violation of memorandum agreed with IMF.

ISLAMABAD:

Pakistan has backtracked on its commitment to the International Monetary Fund (IMF) that it will not issue any new statutory regulatory order (SRO) for tax exemption and instead issued four SROs to give benefits to industrialists and exempt retailers from registration.

The Federal Board of Revenue (FBR) on Friday issued the SROs, an instrument used to make changes to the Acts of Parliament, following Finance Minister Ishaq Dar’s decision to offer tax breaks to the affluent who had threatened to stage a countrywide strike.

The major concession came after a sharp reduction in sales tax on purchases from unregistered persons from 17% to 1%. The decision of slashing sales tax from 5% to 3% on imports and supplies of fabrics also took effect while tax on value addition was further cut to 2%.

According to the Memorandum of Economic and Financial Policies (MEFP) that the PML-N government has submitted to the IMF for winning a $6.7 billion loan programme, “the government has already stopped issuing any new tax concessions or exemptions (including customs tariffs) through SROs except for an Act of Parliament.”

The MEFP stated that the government would approve laws by the end of December 2015 to permanently stop issuing SROs. Even the government’s three-year tax base expansion plan hinges on eliminating exemptions and concessions embedded in SROs and in the law, as well as on eliminating powers of the executive to grant preferential tax treatment through SROs.

Analysts describe the new SROs as a major blow to the drive aimed at broadening the tax base, which also put a question mark over the ability of the government to sustain pressure.

Last year, only 711,000 people filed income tax returns while the number of active registered sales tax payers stood below 100,000, showing the extremely narrow tax base in the country.

Like its predecessors, the PML-N government too increased the burden on existing taxpayers in the new budget and the only measures that it took to encourage people to come into the tax net were eventually withdrawn.

The preferential tax treatment is expected to cause a revenue loss of at least Rs10 billion against government’s claim of less than Rs5 billion. This loss may make it more difficult to meet the annual tax target of Rs2.475 trillion. The revenue board has already missed its first quarter target by a wide margin.

According to an SRO, the government also withdrew a condition that had required retailers to submit their address, computerised national identity card number and national tax number with their withholding statement. This will keep the retailers out of the tax net, leaving a significant sector out of the formal economy.

The same SRO reduced the amount required to be withheld by wholesalers, dealers and distributors from 20% of total sales tax to 10% of tax.

Through SROs 895 and 896, the government removed dozens of items from the Third Schedule of Sales Tax Act 1990. Before the omission, the manufacturers were bound to print price and sales tax amount on their products and withhold the sales tax.

These items had been added in the Third Schedule at the time of announcement of budget with estimates that Rs8 billion would be collected on this account.

The items removed from the Third Schedule include household electrical goods such as air conditioners, refrigerators, deep freezers, television sets, recorders, electric bulbs, tube-lights, fans, irons, washing machines as well as telephone sets and household gas appliances. Other items deleted from the schedule were ovens, mattresses, auto parts, lubricant oils, tyres and tubes, storage batteries, arms and ammunition, paints, distempers, enamels, pigments, varnishes, gums, resins, dyes, glaze, tiles, biscuits and chocolates.

Published in The Express Tribune, October 5^th, 2013.

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