Secretary, Ministry of Finance, Dr Waqar Masood, said here on Tuesday that if the reformed general sales tax (RGST) was introduced in the current form, it would augur well for direct taxes collection. He informed the Senate standing committee on finance that if the proposed RGST law was implemented in its true spirit, it would no more remain an indirect tax, but it would become direct tax for the purpose of documentation.
The status of RGST would be of a direct tax, following its enforcement in the current form. The RGST is a value-added tax and its imposition in letter and spirit would bring it into the category of direct taxes, he added. He said that Pakistan is not the only country where the government is planning to introduce the value-added tax, or RGST. In best tax administrations around the globe, there are only two major sources of revenue collection ie income tax and VAT. Similarly, in Pakistan, there would be only two taxes in future--VAT and income tax.
About a query on the capital gains tax on real estate sector, Secretary Finance said that implementation of the CGT is the beginning to bring the sector into the net. He said that the FBR has faced revenue shortfall during 2010-11. Due to economic recession and other factors, the projected revenue collection curtailed. Keeping this in view, the revenue collection target has now been fixed at Rs 1650 billion.
The tax-to-GDP ratio has been deteriorating for the last three years. However, there has been growth of 21-22 percent in the revenue collection of the Federal Board of Revenue (FBR), he added. Minister of State for Finance Hina Rabbani Khar informed the committee that the RGST would move towards a system where direct taxes collection would ultimately increase. The interest of the donor agencies in implementation of the RGST is to improve documentation of the economy. The collection of direct taxes would improve substantially following imposition of the RGST.
Senator Sughran Imam asked the Ministry of Finance to explain the rationale of wealth tax abolition. Strongly supporting the RGST, she said that RGST would improve documentation and end the tax evasion. The basic advantage of the RGST is that it would bring people into documentation which would discourage tax evasion in the country.
Haroon Akhtar of PML (Q) said that politically, RGST was a failure. If the government had properly presented its case of the RGST before the stakeholders, the situation could have been different. If the government were able to convince the stakeholders and political parities that the RGST would have impact on rich people, the tax might be accepted by the political parties. It was announced in the budget that the government would reduce the rate of the sales tax from 17 to 15 percent in October 2010 following introduction of the RGST. Similarly, the rate of special excise duty was also required to be abolished. Despite the fact that the RGST has not been imposed, the government has retained the enhanced rate of 17 percent sales tax. Therefore, the component of the RGST is still visible in the form of increased rate of 17 percent sales tax and the SED.
The government can adopt taxation measures to tax the rich people for winning the confidence of the general public. The government can restore the wealth tax, impose capital gains tax on retail estate and bring agricultural income into the tax net.
Ishaq Dar of PLM (N) said that the ratio of direct taxes and indirect taxes has been distorted. There is a need to balance the ratio of direct and indirect taxes. The RGST is an indirect tax and it cannot be termed as a direct tax.
Khurshid Ahmad said that India had taken several years to develop consensuses for imposition of the VAT. "On the other hand, we are trying to impose RGST in minimum time without taking the stakeholders into confidence". Chairman of the committee, Ahmad Ali, suggested that it was the high time for imposition of tax on agricultural sector. The government should bring the 20th amendment to introduce tax on agriculture sector.