From international lenders and multilateral agencies to domestic economists and think tanks; all agree that Pakistan’s abysmal tax-to-GDP ratio has kept a chokehold on the government’s ability to discharge its duties.
Each year, the country’s tax sleuths make last ditch efforts to meet revenue targets as the fiscal year draws to a close. But, their focus has never been on documenting the economy and promoting an equitable taxation system, despite the alarm bells sounded by all and sundry.
Even after pledging economic reforms to the public and to the IMF in return of a bailout, status quo persists at FBR and the Ministry of Finance. Whatever little was announced to rein in tax dodgers in the Federal Budget, has been taken back piecemeal in subsequent weeks.
Now the FBR seems to be formulating yet another change in the rules of the game, aimed at boosting revenue collection without breaking a sweat. Here’s how:
When the Third Schedule was added to the Sales Tax Act of 1990, its purpose was to highlight a list of consumer goods whose producers would print retail prices to be charged from consumers and would submit the total GST as calculated on this price to FBR.
While the introduction of this schedule helped boost tax collection, the move was only an easy way, a kind of a short-cut around the problem. The FBR was criticised by experts and industry alike as it allowed the unregistered distributors, wholesalers and retailers to stay out of the tax net, given that their would-be contributions in GST were paid by the manufacturers.
Now the FBR has moved to remove many items, including household electronics (air conditioners, refrigerators, deep freezers, televisions, etc), foam or spring mattresses, auto parts and accessories, biscuits and confectionary, among them, from this list.
But don’t be fooled into assuming that the removal of these items from the Third Schedule will lead to documentation of the erstwhile tax dodging distribution channel players. That possibility has been wiped out by the decision that the responsibility of GST collection will continue to lie with the manufacturers of these products.
What purpose then is served by the removal of a host of items from this list? The rate of tax applicable on these items has been raised by two percent points, on top of the one percentage point hike in GST already announced in Finance Bill 2013.
Also, now that these items are not featured in the Third Schedule, manufacturers are not mandated to print their respective retail prices. So far no SRO has been issued to inform the public of this change, which was decided upon in a meeting chaired by Finance Minister Ishaq Dar on Saturday.
Speculating on the changes in the tax collection, renowned tax expert Adnan Mufti stated that it is possible that the enhanced rate will be applied to the trade price instead of the retail price. Mufti, who also serves as an advisor on GST to the Karachi Chamber of Commerce and Industry, opined that the move represents another step in “government’s focus on revenue generation instead of documentation”.
In a recent interview with BR Research, former SBP governor Dr. Ishrat Husain stressed that reliance on indirect taxation breeds inequitable distribution of wealth in society. Adnan Mufti goes further, terming the enhanced GST on packaged items as “unjust and discriminatory”.
Incidentally, the decision to reduce the withholding sales tax rate on purchases from 17 percent to one percent was also taken at the same meeting. Registered businesses had been delivered a shocker earlier when they were mandated to pay 17 percent sales tax on behalf of their unregistered suppliers. The din raised by the affected businesses convinced the FBR and Ministry of Finance to cut that rate down to one percent.
That leaves one wondering whether milking consumers through an enhanced rate of 19 percent GST on packaged consumer products will be pulled back too, if only average consumers can also form a powerful lobby with access to the corridors frequented by the ‘babus’.
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