ISLAMABAD: Pakistan has deferred a proposal to introduce a new single-stage sales tax regime, which would have lowered the standard sales tax rate to 7%, after reservations expressed by the International Monetary Fund over its implications on revenue and businesses.
The decision to postpone the implementation of the new regime by winding up the existing value-added-based sytem was taken after almost week-long technical discussions with the IMF in Dubai this week, said a top government official.
As a result, the idea to implement the new sales tax regime from fiscal year 2016-17, beginning from July next year, has been shelved.
The IMF acknowledged the problems Pakistan was facing due to the value-added-based sales tax but termed these “administrative in nature” that can be solved without taking a legal course, said an official of the Federal Board of Revenue who attended the IMF parleys.
However, he said the IMF has not outright rejected the proposed single-stage sales tax. The international creditor appreciated many aspects that are covered in the single stage study, carried by the country’s renowned tax expert, Asfhaq Tola.
The IMF also appreciated the Tax Reforms Commission (TRC). Tola is also a member of the TRC that completed the study despite hurdles created by the FBR.
The IMF sought a detailed review of some aspects of the proposed new regime, which the study could not undertake due to FBR’s reluctance to provide requisite data.
“IMF was given a conceptual presentation as the FBR gave fiscal year 2014-15 data hardly three weeks ago”, said Masoud Naqvi, chairman of the TRC, who also visited Dubai. There are two groups in FBR – one is in favour and the other, which is in majority, opposed to the single stage idea, he added.
The IMF was also reluctant to allow implementation of new sales tax regime, as it feared that other countries that are not happy with the value-added based regime may also seek a similar concession.
The standard GST rate in Pakistan is 17% but the government was implementing many rates, taking it up to 45.5%. There are also many sectors paying less than 17%. The effective sales tax rate is 4% less because of exemptions and deep-rooted corruption in the FBR.
“The government cannot take a major risk until it is fully confident that the new sales tax regime will not affect revenue collection,” said Finance Minister Ishaq Dar while talking to The Banker Pakistan. “The government has not completely abandoned the idea of introducing a new regime and it will carry out further studies.”
The single-stage tax, which is proposed to be levied on the total value of the good instead of on value addition, has been pushed as an alternate to the present system. According to the proposal, the tax collected will be full and final liability and the refunds would not be allowed.
If new regime is implemented, the sales tax rate could be in the range of 7% to 8% due to absence of input adjustment.