World Bank asks CBR to improve zero-rated sales tax regime

The World Bank (WB) has asked the Central Board of Revenue (CBR) to bring about significant improvement in sales tax zero-rated regime, e-filing of returns, refund payment mechanism for the small and newly registered exporters and tax incentives for the small and medium enterprises (SMEs) and their registration.
Sources told Business Recorder on Saturday that the World Bank (WB) had conducted a study on the 'growth and export competitiveness' for creating a business-friendly environment for the investors. The study would be made part of WB report identifying key factors affecting productivity, competitiveness and overall growth in Pakistan.
The CBR is examining WB recommendations for improving GST refund system, zero-rating regime, e-filing and measures to expand the tax base.
The WB has recommended improvement in the sales tax zero-rating scheme for export-oriented sector by expanding the list of inputs/raw materials consumed by non-traditional export sectors. The decision would benefit the small and new exporters who face more difficulties in claiming sales tax refund as compared to better established ones.
The major exporters, who qualify for the gold/silver categories were given priority in claiming sales tax refund as compared to small exporters.
The WB has also raised some concerns about the facility of zero-rating on domestic sale of the products of five major export sectors (textile, leather, carpets, sports and surgical products).
The primary objective of zero-rating was to encourage exports of zero-rated sectors through speedy refund payment. Since 60 percent of the output of these sectors is being exported, three percent 'retail tax' was introduced on domestic sales to compensate potential revenue loss.
The CBR should preferably rely on enhanced efficiency of the sales tax refund system instead of zero-rating the domestic sale of products, WB observed.
The Bank pointed out that incorrect declarations made by taxpayers on the electronic format of sales tax returns was the major reason of delay in processing claims filed by smaller/new exporters.
In this regard, the board has conducted many training sessions on electronic filing of refund claims in Karachi, Lahore, Islamabad, Faisalabad and Multan. However, the issue of limited IT skill/capacity for correctly filing the electronic claims need to be addressed more vigorously.
The WB pinpointed that registered SMEs were facing problems in obtaining sales tax refunds. This was mostly in cases where the concerned vendor is not registered with the sales tax department. It is necessary to expand the list of sales tax payers to check the blockage of refund claims filed by the SMEs.
The WB noted that the problem of non-registered taxpayers is partly due to high failure rate of small businesses, seasonal nature of a variety of export-related vendors, and a large unregulated private sector.