It is with a feeling of doom that I learned that the Finance Minister has withdrawn the exemption on sales tax available to industrial importers of capital machinery and goods through SRO 575(I) 2006. He did this on May 22nd to harmonise with an earlier SRO issued in March 2011 (SRO 230(I) 2011) which basically withdrew the zero-rated sales tax facility on these items.
In the same breath, the Finance Minister said he would do all possible to assist the growth of the private sector and would not burden the documented taxpayer any further. Any economy that is trying to encourage investment and employment (and Pakistan needs both these desperately) offers incentives to industrialists investing in capital goods. SRO 575 was introduced to meet the needs of the steel engineering industry many of which are on a fixed value sales tax system which does not allow them to adjust the sales tax input against the sales tax payable. In other words, any sales tax paid on import of capital machinery will not be adjustable for these industries and will become a final cost to the new project. In one fell sweep, therefore the cost of all investment for such industries will go up by 17% permanently.
In this way the SRO 575 catered to a different segment of taxpayer than the SRO 230 although most likely the FBR did not apprise the minister of this important difference between the two SROs. I believe the purpose would have been served better if the SRO 575(I) 2006 had been merely amended to apply to only those industrial importers (not commercial) who were not allowed to claim input sales tax adjustment for whatever reason.
I would dearly like Hafeez Sheikh to explain how the above measure will assist the growth of the private and documented industrial sector of the economy. To me it looks like he is just going to the same overburdened sector to scrape up more tax revenue without having the courage to tackle those sectors which are traditionally avoiding tax.