ISLAMABAD: The government is expected to abolish reduced rate of 4-6 percent sale tax on the local supplies made to the unregistered persons of five zero-rated sectors for restoration of standard rate of 17 percent sales tax on these sectors from 2011-12.
Sources told Business Recorder here on Monday that the reduced rate of 4-6 percent sales tax has created discrimination in the local supply chain of five zero-rated sectors including textile, leather, surgical, carpets and sports goods. It has been proposed to withdraw the reduced rate of 4-6 percent and impose 17 percent standard rate of sales tax on local supplies of five zero-rated sectors. It is the biggest measure to generate approximately Rs 28-30 billion during 2011-12.
According to sources, the government is planning to increase the rate of sales tax from existing 17 to 30 percent on electricity and natural gas supplied to unregistered manufacturers, retailers and restaurants to encourage documentation and increase revenue collection during 2011-12.
Sources said that the RAC has reportedly agreed to a key budget proposal of the Federal Board of Revenue (FBR) to increase sales tax from 17 to 30 percent on electricity and natural gas supplied to unregistered manufacturers, retailers and wholesalers to bring the un-registered persons into the documented regime. In case the government approves the proposal, the revenue impact would be around Rs 4-6 billion during 2011-12.
A large number of manufacturers, retailers, dealers and wholesalers are not ready to operate under the sales tax net. The restaurants, retailers and manufacturers would be asked to provide their Sales Tax Registration Numbers (STRNs) if they want to be charged with the rate of 17 percent sales tax. In case they do not provide the STRN, they would be charged with higher rate of 30 percent sales tax on utilities like electricity and gas. This would encourage the un-registered persons to come into the tax regime of both sales tax and income tax. It is a positive step towards documentation of economy, increase in revenue and broadening the tax-base.
It has been further learnt that the FBR has decided to amend the Sixth Schedule of the Sales Tax Act to withdraw sales tax exemption on bricks, concrete blocks and ready mix blocks. It has also been proposed to impose reduced rate of sales tax on poultry and cattle feed.
During the meeting, it was also proposed to increase the income tax threshold of rupees 300, 000 to 350,000 for salaried individuals. However some members of RAC objected that instead of increasing minimum income tax threshold, there should be more income tax slabs to facilitate the salaried class. Sources said that the RAC has proposed 'deemed credit' to the companies and ventures, which would make investment on the basis of 100 percent equity as an incentive to encourage investment.
Sources stated that the RAC has convened a meeting at the FBR Headquarters to finalise the budget proposals for 2011-12. It has been proposed that if an investment is made on 100 percent equity basis, then the tax credit of 'deemed markup expense' may be given to the companies including ventures. According to sources, it has also been proposed that the companies, which will distribute 50 percent of their profits as dividends, should be given credit of 2 or 2.5 percent. This would encourage investment in companies listed at the stock exchanges.
The RAC has opposed imposition of the capital value tax (CVT) on the immovable property within the jurisdiction of capital territory. The RAC has agreed to introduce three rates of sales tax ie 0 percent, 5 percent and 17 percent. It was also discussed to impose a low rate of sales tax on medicines excluding life saving drugs. Any kind of new food items to be brought into the sales tax regime would be subject to lower rate of 4-5 percent sales tax. However, plant, machinery and equipment, on which 17 sales tax has been imposed, would become zero-rated in the coming budget.
The RAC and the FBR also discussed the proposal to substantially enhance withholding tax for the industrial and commercial consumers to discourage those operating out of the tax net. The registered persons would be able to obtain the adjustment whereas unregistered commercial and industrial consumers would have to give the higher rate of withholding tax on power consumption.