Under RGST ordinance: FBR may retain ST special procedure, five sectors' zero-rating

The Federal Board of Revenue (FBR) is expected to retain sales tax special procedure for different sectors, and zero-rating facility for the five leading export sectors under the 'reformed general sales tax (RGST) ordinance, to be issued before October 1, 2010.
Sources told Business Recorder here on Saturday that under the federal and provincial value-added tax (VAT) proposal has been made for withdrawal of sales tax special procedure and zero-rating facility for the five major export sectors including textile, leather, surgical, carpets and sports goods.
The sales tax special procedures have been considered as a major distortion in the VAT regime due to different rates of sales tax for iron/steel, retailers and other sectors specified in the Sales Tax Special Procedure Rules. Under the 'ideal' VAT law, there are no fixed rates, reduced tax, enhanced tax, retail price-based tax or special tax schemes.
During drafting of the 'reformed GST', the FBR has noted that the sales tax collection has been substantially increased following introduction of sales tax special procedure for different sector. If the special procedures are abolished, there are apprehensions that the sales tax collection from these sectors may go down. At the same time, the documentation within these sectors may not be improved. Therefore, it is being considered to temporarily retain the sales tax special procedures in the 'reformed GST' (RGST).
The FBR is likely to continue with the sales tax special procedure for collection and payment of sales tax on electricity, natural gas including compressed natural gas (CNG) and liquefied petroleum gas (LPG), oil marketing companies (OMCs), retailers, importers, steel melting, steel re-rolling, ship breaking units, wholesalers-cum-retail outlets, suppliers of electric home appliances, vehicle dealers and special procedure for supply of sugar to Trading Corporation of Pakistan (TCP). The special sales tax rates applicable for these sectors would remain intact under the 'reformed GST'.
The reforms in the sales tax are being introduced based on the fact that measures having serious revenue implications should be avoided under the 'reformed GST'. If any measure would result in major revenue loss, it would not be taken under the 'reformed GST'.
According to sources, there are strong chances that the FBR would retain sales tax zero-rating facility under the 'reformed GST'. The FBR had introduced the zero-rating facility for five leading export sector to check payment of fraudulent and inadmissible sales tax refunds. Due to zero-rating facility, the FBR has managed to control such refunds and the overall volume of sales tax refund filed by the zero-rated sector has been substantially reduced during the last few years. In case the zero-rating facility is abolished for five zero-rated sectors, there are apprehensions that the refund claims of five zero-rated sectors may suddenly witness a major jump in the normal sales tax regime.
Sources said that the standard rate of sales tax of 17 percent would be reduced to 15 percent as announced by the Finance Minister in his budget speech for 2010-11. The 'reformed GST would retain sales tax exemptions on essential food commodities, health and education etc. However, Sixth Schedule of the Sales Tax Act would be totally reviewed to withdraw unnecessary exemptions. It is expected that most of the sales tax exemptions under the Sixth Schedule of the Sales Tax Act would be abolished under the 'reformed GST'.
The FBR is also reviewing the Third Schedule of the Sales Tax Act to decide whether the items chargeable to sales tax on the basis of printed retail price would be brought into the normal sales tax regime. Under the Third Schedule, manufacturers have to pay sales tax on all the stages of value-addition of consumer items having printed retail price. Presently, sales tax has been charged on the basis of printed retail price on supply of fruit juices and vegetable juices, ice cream, aerated waters or beverages, syrups and squashes, cigarettes, toilet soap, detergents, shampoo, toothpaste, shaving cream, perfumery and cosmetics, tea, powder drinks, milky drinks, toilet paper and tissue paper, spices sold in retail packing bearing brand names and trade marks and shoe polish and shoe cream. In case the Third Schedule of the Sales Tax Act has been abolished, the said items would be brought into the normal sales tax regime and dealers, wholesalers and retailers of these items would be required to be documented within the supply chain. Secondly, the manufacturers will have to make supply of these items on ex-factory price and not on the basis of printed retail price. The wholesalers and retailers would have to pay tax of each stage under the 'reformed GST'.
Sources said that the FBR may enhance the sales tax registration threshold from Rs 5 million to Rs 7.5 million under the reformed GST. The registration threshold of Rs 7.5 million is likely to be proposed to ensure that the cost of documentation should not be more for the small and medium size business entities. The units operating below the registration threshold should not be required to bear extra cost of documentation.
Sources said that the FBR is also examining the Table-II of the First Schedule of the Federal Excise Act to transfer powers of collection of sales tax on services from the Board to provinces. The Table-II of the First Schedule of the Federal Excise Act contains list of excisable services on which the FBR is legally empowered to collect excise duty in VAT mode. The Table-II of the First Schedule of the Federal Excise Act covering excisable services needs to be revised to transfer powers of collection of sales tax from the FBR to the provinces in certain cases.