GST at standard rate of 17pc: ‘Unpopular’ and ‘politically tough’ decisions taken, says FBR

ISLAMABAD: Federal Board of Revenue (FBR) Chairman Dr Muhammad Ashfaq Ahmed said Friday that the government took “unpopular” and “politically tough” decisions to remove distortion in the taxation system by placing a standard rate of 17 percent sales tax.

Addressing a press conference here at the FBR Headquarters on Friday, he termed it as the most significant reform ever introduced in the country’s history.

“These ‘unpopular’ decisions for bringing GST at the standard rate will have political cost but the government preferred to take such bold decisions,” the chairman FBR said while briefing reporters about the salient features of the Supplementary Finance Bill 2021 submitted before the Parliament.

He said that the impact of removal of the GST exemptions and other taxation measures would be materialised after six months but later on confided that the FBR’s annual tax collection would touch Rs6 trillion till the end of the current fiscal year.

The chairman stated that the IMF had demanded Rs700 billion of tax, personal income tax reforms, and imposition of 17 percent sales tax across the board.

However, the FBR managed to negotiate tax exemptions worth Rs343 billion, restricted the reforms to the sales tax, and defended the productive and marginalised sectors of the society.

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The IMF has demanded 17 percent sales tax across the board and if any sector needs facilitation it may be done through subsidy, he said.

“The focus on the FBR was the removal of distortions and not on imposition of new taxes, but whenever exemption is withdrawn there is a definitely some revenue impact of the said withdrawal,” the FBR chairman said.

He said that it is a reality that the pressure groups have always been managed to obtain tax exemptions by making amendments in the laws from time to time. In all IMF programs, it was always the demand of the FBR to correct its tax system and increase revenue to emerge as a self-sustaining country.

Every time, the governments impose new taxes on the demand of the IMF, but never withdraw sales tax exemptions as it is a politically unpopular decision.

He said that the FBR proposed to increase withholding tax on the telecom sector from 10 to 15 percent and it was resisted by some cabinet ministers but finally it was unanimously decided that this tax would be increased to compensate the losses incurred to the FBR in the aftermath of courts’ order not to collect the tax from the telecom sector taken on the eve of the last budget.

He said that the IMF made a rule of thumb that there should be a standard rate of 17 percent across the board in order to generate the desired revenues for running the government without borrowing any amount and then the government would be able to implement its manifesto.

“In most of the cases, he tends to agree to the IMF as it was difficult to defend some exemptions because most of them were obtained by vested groups by exerting pressures in the past.” The IMF argued that if all exemptions were taken into account then Pakistan should have the most industrialised country but it was not the case because these were the incentives given to powerful lobbies.

He said that in the past whenever the IMF demanded for removal of tax exemptions the FBR used to impose new taxes. However, this time, the IMF made a point that without removing distortions in the tax system, the dream of achieving documentation of economy could not be materialised.

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To a question on the World Trade Organization restrictions on imposing import taxes, he stated that we will take care of the WTO issues.

He also repeated the claim that the removal of GST exemptions would have an impact of Rs2 billion on the lives of common citizen as the standard rate of 17 percent GST on match box, energy saver, and mustered oil and it would have very limited impact on price increase or inflationary pressures out of total 53 items of the Sensitive Price Index (SPI).

The FBR chairman conceded that the study should analyse impact of removal of GST exemptions on public finances and tax-to-GDP ratio. He said that the government moved towards Value Added Tax (VAT) after removing these exemptions and in the future roadmap the standard rate of GST would be brought down from 17 to 16 or even 15 percent. Yes, the existing rate of 17 percent GST is on higher side, he added.

He said that the documentation drive would help the FBR to raise revenue on the income tax side without bringing whole supply chains in the tax net, the FBR could not achieve the objective of broadening of tax base.

Dr Ahmed has said that the FBR has identified items for targeted subsidy of Rs33 billion to protect any segment of population which may get affected by the withdrawal of sales tax exemptions.

The FBR chairman said that out of Rs33 billion proposed subsidy, domestic subsidy has been proposed at Rs19 billion and import subsidy of Rs14billion.

The impact of the withdrawal of the sales tax exemption on the common man would be only Rs2 billion.

The items are personal computers, sewing machines, match boxes, iodised salt, red chili, and contraceptives.

Only a meagre amount of Rs2 billion is related to goods, which may affect common man for an elaborate targeted subsidy plan of Rs33 billion has been proposed to protect common people, which may get affected even indirectly by the withdrawal of some exemptions etc.

He said that subsidy has been proposed on seed, fruit and spores; high efficiency irrigation equipment; fish feed; preparation for animal feed; ingredients of poultry and cattle feed and oil cake and other items.

Copyright Business Recorder, 2022