According to a Business Recorder exclusive, the Federal Board of Revenue (FBR) and the tax experts from the International Monetary Fund (IMF) are going to hold discussions in Dubai on the pitfalls of the General Sales Tax (GST) presently collected in VAT mode; they are said to be seeking to replace it with Single Stage Sales Tax (SSST).
GST in VAT mode was introduced in the 1980s @ 12.5 percent for the documentation of economy. However, even after its introduction and gradual enhancement of rate to 17 percent, not only have we failed to fully document our economy, we have also failed to take any concrete step to make its collection at the retail stage possible. Sales tax is collected at the factory gate – based on the retail price.
Even though GST now provides bulk of our revenue, exporters have been struggling for refunds and the present mechanism has led to corrupting both taxpayers and tax collectors. Flying invoices have become rampant and export industry has been clamouring to be zero-rated at the manufacturing stage while food industry wants to remain GST exempt.
The Fiscal Affair Division of the IMF has collected data from various countries. However, Pakistan has certain peculiarities. Thus, the country needs to do its own homework and streamline the mechanism system with a view to ensuring the removal of the present irritants for businessmen and also enhance revenue collection.
Tax Reform Group (TRG) advising the government has only given an interim report thus far and its final report is awaited. Meanwhile input-output ratio for every sector is being worked out and effective collection rates in individual sectors are also being calculated.
One thing is, however, certain that GST collected at the import stage is mostly adjusted as an input tax and as such the effective collection – at import stage – is negligible. Last year, Rs 495.3 billion was the collection in GST head. The share of GST collection by customs on imports was Rs 565.28 billion.
Thus, by even reducing the rate to eight percent, ie, less than half of the existing rate and making it non-adjustable, FBR would be better off in terms of collection. Moreover, there will be a marked reduction in the incidence of refunds and flying invoices. However, the raw materials imported by exporters would need to be zero-rated so as not add to their cost.
Thus a ‘no payment-no refund’ system for exports is desirable. FBR’s failure to collect GST at the retail stage is also desirable but for various reasons has not been possible thus far. What about other manufacturers? This is what needs be studied. One option may be to keep the GST in VAT mode for them at a higher rate. However, the rate of GST fixed by the federal and provincial governments needs to be uniform.
Let us avoid getting into a race of lowering tax rates at this stage for political point scoring. Economic reasons are altogether different. Provinces need to compete for investment and lowering of tax rate on industry can be an attraction. Sometimes, rates are also lowered for more collection of revenue by bringing more stakeholders under the umbrella.
The present system is cumbersome for businesses. National companies are being badgered from all sides. Punjab wants sales tax on services based not only on points of initiation but also on point of usage or consumption as it has over 60 percent of the population.
Sindh, on the other hand, wants GST on services on point of initiation. Businesses have had to file legal cases to protect themselves. Exporters, especially those in the textile sector, have billions of refund claims. In certain instances, cheques issued by FBR to TDAP cannot be encashed. SBP and FBR also do not see eye to eye. It is a mess royale. Although, everyone and sundry is legally obliged to pay withholding tax, a discrimination between filer and non-filer is, however, essential.
The clamour has subsided because the retailers want their Eid sales to go on smoothly. We are afraid the hullaballoo may rise once again once the Eid euphoria is over. Expecting small businesses to adhere to all the legal obligations that our present taxation system entails may be very difficult and costly for them. We are afraid that resistance may emerge once again. So be warned!