Don’t increase sales tax rate: Steel makers

Rise would hurt sector, not augment revenue collection.

KARACHI:

Pakistan Steel Manufacturers Association (PSMA) urged the government not to increase the percentage of sales tax on the steel melting sector via Special Procedures regime at the fixed rate on the electricity bill.

The Federal Board of Revenue (FBR) must focus on widening the tax net in the steel melting sector to meet revenue targets instead of burdening those units that are already paying full taxes, the association said in a press release.

The proposed increase in this fixed tax from its current level of Rs4 per unit of electricity consumption needs to be reviewed, it added.

The sales tax is being charged from the steel melting sector via Special Procedures at a fixed rate on the electricity bill. Importantly, the Special Procedures regime does not allow for any input so all sales tax on purchases is additional revenue for the government.

The industry developed the Special Procedure in conjunction with the FBR to bring more units into the tax net, which has been successfully implemented as the FBR revenue has been jumped to more than double. Hence, the FBR should continue this practice of collection of sales tax on the electricity bill, the association urged the FBR.

Basic economics say that increasing the sales tax amount will increase the price of the end product in the melting industry – resulting in lower demand of the product. This will force units to further lower their output once again resulting in lower electricity consumption and, therefore, lower revenue for the FBR.

Steel melting units are already operating at about 50% capacity and have been regularly closing down over the past few years; any increase in sales tax will be a final blow to the industry, rendering thousands of people jobless, closing down many units, and, subsequently, exponentially decreasing revenues for the FBR, the release said.

It is evident that increasing taxation in the steel melting sector will not guarantee an increase in the revenue for the FBR but will only further burden those units that are already paying heavy amounts of tax, rendering many units unviable and creating unfair competition in the steel industry.

The best way to collect sales tax is through the current Special Procedures but the strategy should be to widen the tax net and fix the anomalies which will be a more sustainable way.

Published in The Express Tribune, May 13^th, 2014.

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