The proposal of the Federal Board of Revenue (FBR) to increase one percent special excise duty (SED) to two percent and reduction of sales tax rate from 17 to 15 percent under the reformed general sales tax (RGST) is just an eyewash as the accumulative impact of GST/SED would be 16 percent on business/trade, import and manufacturing sector.
Sources told Business Recorder here on Wednesday that the government has proposed reduction in sales tax from 17 to 15 percent. At the same time, the rate of the SED has been proposed to be revised upward from 1 to 2 percent through a proposed amendment in the Federal Excise Act 2005.
This would have direct impact of 16 percent sales tax/excise duty on the business community as compared to 15 percent as claimed by the government. The proposed change in indirect taxation under the RGST is a sugar coated bill that would not result in benefit of 2 percent sales tax to the business community. The revenue loss from 2 percent decrease in sales tax under the RGST would be compensated with the increase of the SED from one percent to two percent. Therefore, the benefit of only one percent sales tax would be passed on to the consumers.
According to sources, the government has not decreased sales tax from 17 to 15 percent under the RGST by using the technique to increase the SED from one to two percent. The government took this course to divert the attention of the business community from actual impact of sales tax on RGST.
In this way, the tax managers have proposed to decrease the sales tax from 17 to 15 percent just to show that the government is very much serious in introducing the reforms in the sales tax by reducing rates. However, the proposed increase of the SED from one to 2 percent shows that the government would cover the revenue loss of Rs 30-35 billion by increasing one percent SED.
On average basis, the FBR will suffer revenue loss of approximately Rs 65-70 billion following reduction of 2 percent sales tax under the RGST. The impact of increase of one percent SED would be over and above Rs 14-15 billion. However, this loss would be compensated by proposing increase of one to 2 percent in the rate of the SED.
During the budget preparation exercise for 2010-11, the FBR had considered increase in the rate of the SED from one to two percent in budget to generate an additional amount of Rs 14-15 billion in 2010-11. The doubling of the SED from 1 to 2 percent was proposed to generate additional revenue to meet the target of indirect taxes for next fiscal year.
When asked whether the increase in SED from 1 to 2 percent would offset the decrease in rate of RGST from 17 to 15 percent, an official said that the SED has limited scope as compared to the RGST. The SED has been imposed on limited items at the import stage whereas the RGST would be levied across the board. Therefore, any increase in the SED could not be compared with the decrease of RGST rate from 17 to 15 percent.
During current fiscal year, the FBR tried to raise the rate of the SED from 1 to 5 percent, but it was not possible due to legal issues. In case of SED, the special excise duty was imposed through a statutory regulatory order (SRO). At the same time, the Federal Excise Act only allows to impose one percent SED. The raise in the SED could only be done through a presidential ordinance or through Parliament's approval. The raise in the SED could not be done through an SRO due to limitations specified in the Federal Excise Act. Therefore, if the government agrees with the FBR proposal, the SED rate would be increased from 1 to 2 percent through 'Reformed GST Bill, 2010'.