Nov 14, 2010

They mean business

The imposition of tough taxation measures will help the government mustering the required support at Pakistan Development Forum

By Mehtab Haider

The government has taken the decision to move towards the implementation on Reformed General Sales Tax (RGST) by abolishing tax exemption over 100 items from January 1, 2011 after getting approval of the Parliament under the IMF's conditionalities.

The government's decision to impose RGST and flood surcharge on tax liabilities of annual income exceeding Rs300,000 and increasing excise duty will yield an additional Rs69 billion into the national kitty in the second half (Jan-June) period of 2010-11.The FBR wants to achieve Rs1,655 billion revenue collection target in 2010-11 in a bid to keep fiscal deficit target at the desired level of 4.7 percent of GDP.

The imposition of tough taxation measures will help the government mustering the required support at Pakistan Development Forum (PDF) comprising high-powered delegation of multilateral and bilateral creditors which was holding its meeting in Islamabad on November 14 and 15 for obtaining foreign inflows to help over 20million flood-affected people.

The government will present its roadmap before the donors in a bid to restore their shattered confidence that Pakistan's economic managers can perform to get the desired results.

The RGST on services is the domain of the provinces in accordance with 1973 Constitution as well as 7th NFC Award in which it was again reiterated that it was the right of the provinces to impose as well as collect tax on services. The provinces can allow FBR to collect tax on services if they desire so. Pakistan is committed with the IMF under Standby Arrangement (SBA) programme of $11.3 billion bailout package in November 2008 to impose Value Added Tax (VAT).

"The main condition of the IMF programme was implementation on RGST which took two years to get approval of the Cabinet and subsequently laying down the bill into the Parliament," says Federal Secretary Finance, Salman Siddiq, talking to The News on Sunday.

Siddiq says the RGST bills on services would be submitted to the four provincial assemblies till November 25 or 26 that would help complete the fifth review and release of sixth tranche of $1.7 billion under Standby Arrangement (SBA) programme." Answering a query about power sector reforms, he adds, "The plan has been prepared and is under review in a bid to proceed in the right direction."

RGST is considered quite crucial because the IMF wants to end the ongoing SBA programme on a successful note that will pave the way for getting another IMF's loan package by start of next calendar year 2011.

The second area of concern for the IMF and other multilateral creditors is the power sector reforms. The government had increased electricity tariff to unprecedented level. It will have to increase the tariff by 17 to 20 percent over the next one year.

According to official documents available with The News on Sunday, the government increased electricity tariffs by some 70 percent since January 2009 to rationalise electricity sector prices.

While tariff increases are steps in the right direction, additional work is needed in the current fiscal year to eliminate subsidies and implement market-based prices. Efficiency measures, lower cost fuel sources, conservation measures, and tariff increases are all tools that need to be employed to contain subsidies in the current fiscal year.

Power Sector Reforms have been initiated. Based on a model of autonomy to the power sector companies, PEPCO is being dissolved and a transition team has already started work on the unbundling process. Corporate Governance of distribution companies (DISCOS) and generation companies (GENCOS) would be strengthened through new autonomous Boards of Directors and professional management.

The resolution of circular debt, which was again piling up, would be accomplished through a financial road map for power sector. Although the government will be able to keep foreign inflows intact with the smooth approval of RGST but the miseries of inflation stricken masses will be further aggravated.

The prices of over one hundred crucial products will further increase with the implementation of RGST from Jan 1, 2011 as the PPP led regime is forced under its commitments with the International Monetary Fund (IMF) and World Bank to withdraw a major chunk of existing sales tax exemptions on goods under RGST regime "Pakistan and the IMF have evolved consensus that the quantitative targets under Standby Arrangement (SBA) program will be relaxed provided Islamabad moves ahead towards implementing structural reforms on taxation side and power sector," says Siddiq.

The RGST on goods, by withdrawing exemption, will show to the IMF that the government seems serious in undertaking crucial and tough reforms. Third condition from the IMF is ensuring zero borrowing from the State Bank of Pakistan by end of every quarter and the government also approved SBP act from the National Assembly recently.

The official says withdrawal of sales tax exemptions such as on tractors, fertilizers, sugar and other sector would yield substantial revenues in the remaining months of the current fiscal year. There are 71 categories under sixth schedule of Sales Tax Act which were exempted from paying 17 percent tax right now. The government will consider all items and products and a major chunk of exemption will be withdrawn on goods. The food items such as floor, pulses and vegetables will remain exempt under the RGST but all other major items will be considered for bringing into the tax net.

The tax exemption can be withdrawn on products like live animals and poultry, meat of animals, fish and crustaceans, live plants, including bulbs and roots, etc. Similarly, agricultural and livestock products that were exempt from GST but would be subject to RGST included seeds and fruits from sowing, cinchona bark, sugar beat, sugarcane, milk preparations, poultry and cattle feed, tractors, bulldozers and harvesters, etc.

The zero rating on following foods items would be removed -- oil cake and other residues, uncooked poultry meat, milk, flavoured milk, cream, milk and cream concentrated, yoghurt, whey, butter, desi ghee, cheese, processed cheese, sausage and similar products of poultry meat or meat offal, frozen or preserved meat offal including poultry and fish, preparations for infant use.

The withdrawal of exemptions on major sectors like fertilizers, pesticides, pharmaceutical, tractors, carpets, leather, sports goods and surgical goods along with 145 raw materials used in these sectors under the RGST regime would fetch additional revenues.

The following zero-rated items under GST would also be subject to RGST:-exports, supply, repair and maintenance of ships and aircraft (above 8000 kg), machinery for air navigation services, supplies to duty free shops, international tenders, and raw material, etc.

The zero rating would also be abolished on cotton seeds, soybean meal, petroleum crude oil, colour sets for writing and drawing, inks, erasers, exercise books, pencils, sharpeners, drawing and mathematical calculating instruments, pens and ballpoint, among other. In cottage industry, exemptions for glass bangles, bricks and building cement block would also go under the new scheme.

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