Strongly defending the Federal Board of Revenue policy decision to revamp sales tax zero-rating regime of five export sector through SRO.283(I)/2011, Additional Secretary Revenue Division Asrar Raouf on Monday outrightly rejected the analysis of VAT expert Dr Ehtisham Ahmad that the SRO.283(I)/2011 is just like an 'April fool' gift to the nation.
During a seminar on the 'Urgency of Tax Reforms - The challenge to the Macro-economic Situation and Development," organised by Institute of Development and Economics Alternatives (IDEAS) and the National Press Club, Asrar Raouf and FBR Member Customs Mumtaz Haider Rizvi disagreed with the negative picture portrayed by Ahmad covering some areas of SRO.283 (I)/2011 (revised zero-rating regime), tax administration reforms, withdrawal of exemptions and Value Added Tax (VAT).
Dr Ehtisham levelled three major allegations against the FBR ie no progress under the Tax Administration Reform Project (TARP), further distortions in the VAT due to SRO.283(I)/2011, persistent failure of the FBR to end corruption and lastly the department must replaced with a new tax administration agency. There was a clear difference of opinion between the viewpoint of Asrar Raouf and Dr Ehtisham.
Responding, tax managers of the FBR presented a complete data analysis of the last five years during which reforms in the tax administrations have been made4 under the TARP, reflecting major increase in revenue collection and number of return filers.
Dr Ehtisham informed the participants that the issuance of SRO.283 (I)/2011 is an April fool gift to the nation. This SRO is very confusing and complex which has mixed the final and intermediary goods. After notifying the SRO, making arm's length administration is almost impossible. The consumers and producers of luxury goods have been facilitated. The SRO has further distorted the entire chain of zero-rated sectors and further confused the whole taxation system in the zero-rated sectors.
He also criticised the drafter of the SRO.283 (I)/2011 with the comments that the "SRO.283 (I)/2011 is a nonsense and against the VAT. It would create a lot of distortions in the VAT regime," the VAT expert added. Taking exception of making fun comparing the SRO with the April fool, Asrar Raouf made it clear that all the government departments were working as usual on April 1, 2011 and therefore comparing of SRO with April fool gift is not justified.
Tax managers were surprised when Dr Ehtisham openly started making allegations against the FBR that they have done nothing during the last 20 years and even Tax Administration Reform Project (TARP) has failed to raise the Tax-to-GDP ratio. The FBR should be closed and a new agency should be created for tax administrations in view of repeated failure of the FBR to reform general sales tax (GST). How many more chances FBR need to introduce reforms? The FBR should be closed down and a new department be created to administer donors funded tax reforms.
Dr Ehtisham Ahmed asked the present regime to abandon the Federal Board of Revenue (FBR) because of its repeated failure time and again to fix the problem and for extending resistance within the tax machinery to pursue reforms. He suggested the government to come up with new tax collection agency on the pattern of Peru where central bank team was assigned to place a fair tax system.
After hearing this horrifying perception of VAT expert, Additional Secretary Revenue Division Asrar Raouf patiently responded that he wanted to make some clarifications on the statement made by Dr Ehtisham. When the Presidential Ordinance were promulgated to impose surcharge/enhance special excise duty with withdrawal of exemptions through SROs, there were countrywide strikes and agitation. All business cities like Karachi, Faisalabad, Sialkot and others remained closed due to imposition of 17 percent sales tax on the local supplies of five zero-rated sectors. The government had immediately started consultative process with All Pakistan Textile Mills Association (Aptma), trade bodies, chambers and federations on the issue of the SRO.283(I)/2011. In consultation with all stakeholders, the FBR has made a major break through and introduced 4 and 6 percent sales tax on the local supplies which would enable the tax authorities to collect 10 percent sales tax on domestic supplies of five zero-rated sectors.
Asrar Raouf stated that the tax reforms do not mean to take measures, which would result in closure of economic activities. There is no relevance of such tax reforms, which would close the economic activities in the country. As a result of this consultative process, 10 percent sales tax would be collected from the sectors which were paying nothing in the past and there is no facility of input tax adjustment or refund.
Responding to FBR's failure to get results through TARP, Additional Secretary Revenue Division stated that the FBR has shown remarkable improvement in its performance since implementation of the TARP. In 2005-2006, the number of return filers was 1,102,151 and FBR collection was Rs 713.4 billion. In 2006-2007, return filers were 1,387,651 and collection jumped to Rs 847.2 billion. The number of return filers was 1,444,389 in 2007-2008 and revenue collection surpassed Rs 1,008.1 billion. During 2008-2009, the number of return filers increased to 1,797,329 and FBR collection was Rs 1,161 billion. In 2009-10, the number of return filers was 2,313,606 and revenue collection amassed Rs 1,327.4 billion. As a result of reforms including TARP, there is an increase of 210 percent in the number of income tax return filers during 2009-10 when compared with 2005-2006. There is a major jump in revenue collection of 186 percent during the last five years, reflecting results of reforms.
Asrar Raouf further informed the audience that reforms have shown enormous increase in revenue collation during the last five years. The collection of direct taxes showed an increase of 234 percent during the last five years. A comparison of collection during 2005-06 and 2009-10 showed that the sales tax collection showed an improvement of 175 percent, federal excise duty (FED) 225 percent, customs duty 116 percent and total revenue collection of the FBR showed a remarkable increase of 186 percent during the last five years. This also shows the results of the ongoing reforms in the tax administration. These figures and data clearly negate the impression created that reforms in the tax administration has not achieved the desired results, he added.
Asrar Raouf further highlighted that Dr Ehtisham remained with the government during negotiations with the IMF on reforms and VAT during period of 2008. He made further clarification that it is totally incorrect to say that the reforms have not shown any result during the past years. The number of return filers and revenue collection has shown exceptional improvement during the last five years when TARP is under way.
About the inflationary impact of the reformed GST, Dr Ehtisham stated that the introduction of the VAT would actually decrease the prices. The RGST or VAT would not have inflationary impact on the poor. Contrary to this, if the government would print trillions of rupees without introducing RGST, the inflationary impact would be much more as compared to the impact of the RGST. The printing of notes would result in much higher inflation as compared to the reforms in the GST regime. It is a total misconception that the RGST will hurt poor people, but printing notes will result in inflation, he added.
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