Call it ambitious, but it seems the government wants to make the FY12 FBR tax collection target of Rs1,952 billion look realistic. Efforts are underway to abolish tax exemptions on five zero-rated export sectors by restoring the standard sales tax rate of 17 percent on local supplies, which include electricity and gas utilities.
A study on Pakistans tax system carried out by the Andrew Young School - titled Pakistan Tax Policy Report - highlights that Pakistans sales tax collection has been underperforming since FY03-04, mainly because of the broad exemptions and zero rating. The report notes, "The narrowness of the tax bases adds to the low buoyancy of the tax system" and sales tax exemptions undoubtedly create distortions in the system.
The zero-rated export sectors, though understandably enough, share a different view, completely rejecting the proposal to impose the standard rate of sales tax on supplies. "The government, if it accepts the proposal, will hit the last nail in the coffin of the ailing textile sector. They should reduce their own expenditures rather than initiating such a move against us," said a prominent textile player, speaking to BR Research.
While one is entitled to his/her own views, there certainly seems to be no conspiracy in the governments effort to widen the tax base and bring the economy under documentation. Several studies have cited sales tax exemptions as the major reason for Pakistans abysmally low tax-GDP ratio. Pakistans sales tax productivity is 24 percent, which implies that it collects less than one-fourth of what it would in case of a uniform rate of GST on all value-added sectors.
Zubair Motiwala, a renowned textile expert, alleges that withdrawal of sales tax exemptions will be a breach of promise by the government, and, in fact, is rather uncalled for. "The government had recently committed to us the continuation of the rate of 4-6 percent for three years...They can back out. The sector cannot absorb such a massive increase in cost and will lead to the closure of the textile sector. We would strongly oppose any such move," he warned. The proposed measure is believed to generate approximately Rs28-30 billion during FY12. It remains to be seen whether the government follows its plan to abolish sales tax exemptions in an effort to document the sector or it succumbs to the textile sectors demand. Either way, it won be an easy decision. Another proposal, which appears less controversial and more practical is to bring the large number of industries, wholesalers, etc; into the tax net by imposing GST at the rate of 30 percent on utilities, should they not register themselves with the tax authority.
There is, indeed, a great potential in documenting the undocumented players, as studies reveal that 90 percent of the GST comes from just 3 percent of all filing business. Moreover, there is also an increasing reliance on a few commodities in GST collection which makes the collection process volatile. Therefore, getting the unregistered into the income tax ambit would serve a great purpose to mitigate GST vulnerability.
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Development Expenditures in Pakistan (Rs bn)
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FY09 FY10 FY11
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Actual Budgeted Actual Budgeted Actual** Budgeted
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PSDP 397.5 550 517.9 646 246.5 663
of which: Federal* 195.7 373 259.5 421 130.4 290
Provincial 201.8 150 258.4 200 116.1 373
ERRA 23.1 26.7 10 25 NA 10
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*Net excluding development grants to provinces ** Till March 2011
Source: Pakistan Fiscal Operations, Federal Budgets (FY09, FY10 & FY11),
Ministry of Finance
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