Pakistan, IMF to discuss single stage tax proposal in Dubai meeting tomorrow

ISLAMABAD: Pakistan and the IMF experts will be meeting in Dubai from Monday (tomorrow) to decide the fate of proposal to introduce single stage tax by scrapping existing 17 percent GST regime.
It is not yet known that how the IMF experts will respond on this proposal. There is one incentive in this proposal that it might end ongoing corrupt practices continued unabated through input adjustment claims. The flying invoices and inflated input adjustments caused billions of rupees loss to the national exchequer.
But some experts fear that the single stage GST might cause decline in revenue collection but those who are favoring it argued that it would double the FBR’s collection.
The single stage single digit GST has been proposed by tax expert Ashfaq
Tola, who is a senior partner at Naveed Zafar Ashfaq
Jaffery chartered accounts firm.
In shape of sales tax collection, the FBR had roughly collected Rs1.1 trillion or 42% in fiscal year 2014-15. More than half of the sales tax is collected at import stage, underscoring that there were more leakages in domestic sales tax collection.
Against the standard rate of 17%, the effective sales tax rate was standing at around 3.7 percent, thanks to rampant leakages in the existing system.
The VAT mode GST, which was introduced during decade of 90s, failed to yield the desired results in Pakistan. This system is based on input tax adjustment, which the FBR is not fully allowing to artificially inflate its revenues. The refunds used to be over 10% of the total sales tax collection, which dropped to about 8% in the last fiscal year.
According to the single stage GST 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.
Those who are supporting the new tax regime say that at 7% rate the FBR would collect more taxes than what it is collecting under the present regime.
The experts from both the sides would meet to review the pros and cons of replacing the present system amid concerns expressed by the biggest stakeholder –the FBR, over the new regime. Last month, the FBR had opposed the proposal to replace the existing regime.
After 18th amendment in the Constitution, the businesses are facing problems of double taxation by both the federal and provincial governments and adjustment of their refund claims.
Introduced in 1990s under the influence of international financial institutions, the value-added based GST system could not achieve desired results after successive governments created many distortions by giving tax exemptions and concessions to influential lobbies.
The main thrust of the existing system is to capture the whole supply chain of goods and services, which has been broken due to sector-specific exemptions.