The continuation of sales tax zero-rating on the imports and local supply stages for textile sector is against the government policy to fully implement value-added tax (VAT) at the retailer stage. Experts told Business Recorder here on Saturday that it was necessary to remove distortions in the sales tax regime by abolishing zero-rating facility and special rules/procedure in the ST Act for full implementation of the broad-based VAT.
Federal Minister for Textile Industry Rana M. Farooq Khan had reportedly said that textile sector would continue to enjoy zero-rating of sales tax, as it had not been abolished in the new textile policy. On the other hand, Finance Minister Shaukat Tarin had argued in favour of the imposition of VAT at the retail stage with removal of distortions, including withdrawal of zero-rating facility.
"It is necessary to take away zero-rating facility for effective implementation of value-added tax (VAT)," Tarin asserted. The government committed to the International Monetary Fund (IMF) to implement the VAT by 2010 for which all kinds of exemptions, zero-rating and distortions would be removed.
Recently, Shaukat Tarin informed the international VAT conference that removing zero-rating and tax exemptions could enhance the tax-to-GDP ratio in Pakistan. However, tax exemptions would continue for food items and medicines. He was of the view that once implemented properly, the VAT mode of taxation could generate additional amount of Rs 600 billion for the country.
Tarin said that Pakistan was facing budget deficit of Rs 722 billion and revamping taxation system and removing distortions in the taxation system could lower this. On the other hand, the Ministry of Textile Industry has reportedly approached the Federal Board of Revenue (FBR) for issuance of necessary statutory regulatory order (SRO) to withdraw customs duty on the import of textile machinery and equipment falling under the head of Pakistan Customs Tariff (PCT). In the new textile policy, it was announced that import of all textile machinery would be zero-rated to attract investments. It appears that the FBR and the Ministry of Textile are not on the same page with respect to tax policies.