Plugging loopholes: High-ups consider slashing tax rate to single digit

This sales tax could be final liability with no input adjustment, refund.

ISLAMABAD:

The Federal Board of Revenue (FBR) is considering a proposal to overhaul the sales tax policy for the next financial year by drastically cutting 17% tax rate to single digit and making it a final liability without allowing input adjustment and refund to the taxpayers.

The proposal is being discussed at the top level with an aim to plug loopholes in the tax system that various rackets are exploiting to claim fake sales tax input adjustment and refund, according to sources in the FBR.

According to the proposal, the 17% sales tax rate could be brought down in the range of 5% to 9%. This will be the final liability for the taxpayers, doing away with refunds and input adjustments.

The move could raise the profile of the government and help reduce inflation, as a massive reduction in the tax rate would lower end-consumer prices of goods, said proponents of the proposal.

At present, a significant number of manufacturers and commercial importers were found involved in claiming fake refunds and input adjustments, the sources said.

In the last fiscal year, the FBR had collected Rs842 billion in sales tax excluding refunds and input adjustments. An amount of Rs430 billion was received at the import stage while the remaining was collected in the domestic market.

The amount was not in line with the volume of consumption in the country, highlighting massive revenue slippages.

A senior FBR official said overall input adjustments remained in the range of Rs400 billion to Rs500 billion.

According to a study conducted during the tenure of Pakistan Peoples Party (PPP) government, the effective sales tax rate was 3.6% when general sales tax stood at 16%. FBR officials were of the view that tax exemptions granted through Statutory Regulatory Orders (SROs) were one of the main reasons behind the low effective tax rate.

They said the actual volume of sales tax adjustment and effective rate could only be determined after conducting a thorough study. Studies carried out by independent experts suggest that the effective tax rate should be in the range of 9% to 11% based on the current consumption level.

Any decline in the effective tax rate will drastically reduce government’s revenues, which will not be acceptable to the International Monetary Fund (IMF) and World Bank.

Japan and Singapore had a single-stage sales tax regime but the problem with the FBR was that it did not have the capacity to bring entire country’s consumption in the tax net and charge sales tax as a final liability, said Dr Ikramul Haq, a Lahore-based tax expert.

He said many big manufacturers were keeping their sales out of the books aimed at evading taxes.

Downside risk

However, there was a downside risk to the FBR’s proposal, as the IMF and World Bank were against any such move, the sources said. The international lenders argue that these will break the value-added chain, which is used to document the economy besides collecting the tax at every stage of manufacturing and value addition.

If the government decided to introduce single-stage sales tax, both the FBR and taxpayers would face a lot of difficulties, said Ashfaq Tola, senior partner at Naveed Zafar Ashfaq Jaffery & Co, a chartered accountancy firm.

He said if the FBR disallowed input adjustment to export industries, it would make them uncompetitive in the international market.

If the FBR set the sales tax rate below the actual effective tax rate, the government’s revenues would sink. To make the single-stage tax system successful, the provinces would also have to bring their sales tax on services rates on a par with the FBR tax rate, he added.

Published in The Express Tribune, March 21^st, 2014.

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