IMF to help Pakistan gauge impact of abolishing refunds mechanism

ISLAMABAD: Amid growing numbers of flying invoices and fake refunds that cost billions of rupees to national kitty, the International Monetary Fund (IMF) has agreed to provide technical assistance to Pakistan to assess the exact impact of introducing single stage or non-adjustable sales tax in the coming budget, aiming at abolishing the refunds mechanism.
“There is a need to analyse the exact impact of the proposed single stage GST (general sales tax) and the IMF’s experts will conduct a detailed study to come up with their policy recommendations on this complex subject,” an official confirmed with The News on Wednesday.
Some fear that it might result in falling tax collection, while others opine that it will end corruption in the tax departments and consequently, revenues will increase.
The recommendations finalised by the Tax Reform Commission (TRC) said the proposal of non-adjustable sales tax is still being discussed with different stakeholders. So far, presentations have been given to the tax committee of Institute of Chartered Accountants of Pakistan and Large Taxpayers Unit (LTU), Karachi, Overseas Investors’ Chamber of Commerce and Industry, Pakistan Business Council and LTU Lahore and Islamabad for their inputs. Besides, interactive presentations are also to be given to various trade bodies. Latest data was requested on December 17 last year to update the study; however, the complete data is still not available, which may cause delay. Since the deliberations are still in progress and the updating process is yet to be completed, the proposal was not covered in the TRC report.
The TRC said the tax collection efficiency will rise to 124.4 percent if a uniform rate is fixed at five percent and 88 percent with the sales tax rate of seven percent.
Tax collection improves with the reduction in the tax rate. However, this efficiency is not remarkable in case of Thailand (113.7 percent at 7 percent sales tax).
Under the proposed system of single stage GST, the entire documentation trail will be scraped. It is important to mention that the existing system of invoicing will continue with zero input adjustments and no refunds. The proposed system was tested for the zero rating in 2005; hence, the activity will have a complete trail. Furthermore, the proposed system will identify and eliminate flying invoices and fake entities in addition to curb corruption.
Under the proposed system, tax collection of Rs882 billion will remain unhindered with five percent sales tax, Rs1,059 billion with six percent and Rs1,235 billion with seven percent. Sensitivity at six percent tax rate will fetch Rs1,059 billion and seven percent tax will yield Rs1,235 billion in the safe zone.
Presently, registration above the threshold of Rs5 million is embedded in the system, yet it is totally ineffective and grossly misused.
The new system will expand the tax net. In the single stage method, the effect of cascading has been included.
These cascading impacts have been taken from Input-Output Matrix prepared by a US University under the Tax Administration Reforms Program.