The government has decided, in principle, to use the mechanism of statutory regulatory orders (SROs) to withdraw tax exemptions, instead of through the controversial 'reformed GST' (RGST), to meet a critical condition of the International Monetary Fund (IMF) under the Stand-By Arrangement (SBA), sources exclusively told Business Recorder.
The government had agreed to implement value-added tax (VAT) as a condition for the SBA in its first Letter of Intent dated November 20, 2008. The proposed VAT, whose mode is similar to GST in Pakistan in that the two are levied at each stage of value-addition, have one major difference: the number of exemptions. VAT was earmarked to exempt only food essentials, while there are quite a few exemptions on GST.
Finance Minister Dr Hafeez Sheikh, cognisant of the reservations of the stakeholders with respect to implementing the VAT proposed RGST, did not clarify what items would be exempted under GST. Analysts maintain that all exemptions would be withdrawn, except on essential food items, which would equate 'RGST' with VAT.
However, with RGST rendered controversial as well, with MQM expressing strong opposition to its implementation, sources said that the Finance Minister is now considering to withdraw exemptions through SROs.
Under the cover of RGST, the SROs would be rescinded to abolish certain sales tax exemptions, without obtaining approval of the Parliament. Legal experts categorically observed that the government would withdraw sales tax exemptions and zero-rating facility through SROs, under the garb of RGST. In this way, the basic concept of VAT would be implemented by merely withdrawing sales tax notifications in the name of RGST.
The government would, however, need to introduce the draft of the RGST Bill in Parliament to amend the Sales Tax Act and Federal Excise Act to bring legislative changes in tax laws for introducing 'reforms' in the sales tax regime. Withdrawal of sales tax exemptions of the Sixth Schedule of the Sales Tax Act, however, would require parliamentary approval.
The Federal Board of Revenue (FBR) is legally empowered to rescind the exemption related SROs after obtaining due approval of the Ministry of Finance. However, no prior approval of the Parliament is needed in cases where exemptions had been granted through SROs. The FBR has the authority to rescind, or amend, the SROs which empower the federal government to take decision without going to Parliament.
The government of Pakistan has already informed the IMF that the authorities believe it politically easier to reform the GST to include the substantive features of VAT (broader base, reduced exemptions, and input crediting) rather than introducing a VAT. Following intensive negotiations with provinces, an agreement has been reached, in principle, on the allocation of revenues of 'reformed GST' on services.
According to IMF report on observance of standards and codes (ROSC), some public enterprises have, in the past, received favourable tax treatment through issuance of SROs, and it has been difficult to determine the overall impact of these exemptions on revenue. These discretionary tax exemptions are, however, being reduced.
A tax expert said that various exemption notifications deal with different items. For example, the Board is reviewing sales tax exemption notifications including SRO.542(I)/2008, SRO549(I)/2008, SRO.549(I)/2008, SRO.551(I)/2008, SRO.524(I)/2008, SRO.535(I)/2008, SRO. 483(I)/2008, SRO.193(I)/2008, SRO.880 (I)/2007 as well as many other notifications issued in the past.
Quoting a few examples, sources said that SRO 193(I)/2008 exempts the import and supply of agricultural tractors below 35 HP, falling under HS code 8701.9090 of Pakistan Customs Tariff, from sales tax chargeable thereon. Similarly, SRO 542(I)/2008 exempts sales tax on the import or supply of cellular telephone sets (hand-held sets) to the extent that the effect of sales tax shall be Rs 500 per such set. SRO 535(I)/2008 has exempted import and supply of fertilisers from payment of sales tax. SRO 720(I)/2009 has granted sales tax exemption on the import and supply of diamonds and precious stones etc.
Different kinds of zero-rating facility have also been allowed through SROs, like zero-rating of sales tax on power and natural gas consumption by five leading export sectors. The sales tax zero-rating facility allowed by the board could also be withdrawn by the same authority, without obtaining prior approval of Parliament.
Similar kind of exemption trend has been observed in SROs issued in past years. For example, SRO 880(I)/2007 has exempted diagnostic kits or equipment falling under the relevant HS Codes from sales tax.
Under SRO 549(I)/2008, the FBR is charging sales tax at the rate of zero percent on plant, machinery and equipment (whether or not manufactured locally), including parts thereof and other items prescribed in the notification. SRO 205(I)/2006 has exempted import and supply of iodised salt bearing brand names and trademarks whether or not sold in retail packing from whole of the sales tax. The import and supply of commercial catalogues, falling under PCT heading 4911.1000 has been exempted from sales tax as per SRO 758(I)/2006. The import and supply of dried milk without addition of sugar or any other sweetening matter, whether packed or not, has been exempted from sales tax under SRO 552(I)/2006. The data further showed that SRO 495(I)/2004 has exempted supply of locally manufactured agricultural machinery, equipment, implements and other items from payment of sales tax. SRO 497(I)/2004 has exempted plant and machinery used by specific industries from payment of sales tax. SRO 555(I)/2002 has exempted substances registered as drugs under the Drugs Act, 1976 and medicaments from payment of sales tax. On the same pattern, SRO 211(I)/2002 granted sales tax exemption on raw materials for the basic manufacture of pharmaceutical active ingredients and for manufacture of pharmaceutical products.
In most of the cases it has been observed that the FBR is legally authorised to withdraw exemptions specified in the SROs under the powers of the Sales Tax Act and Federal Excise Act. In such cases, the FBR is not bound to approach Parliament for obtaining any prior approval for withdrawal of exemptions. The FBR has been empowered to withdraw exemptions extended through the notifications due to available powers under the Sales Tax Act and Federal Excise Act. Wherever the FBR granted sales tax exemption through the SROs, the same could be withdrawn by the board without involving Parliament, experts stated.
Under section 13 of the Sales Tax Act, the federal government may, by notification in the official Gazette, exempt any taxable supplies made or import or supply of any goods or class of goods, from the whole or any part of the tax chargeable. The FBR may, by special order in each case stating the reasons, exempt any import or supply of goods of such description or class, as may be specified from the payment of the whole or any part of the sales tax.
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