IMF rejects proposal to introduce single stage GST

 ISLAMABAD: The International Monetary Fund (IMF) has rejected a proposal to introduce single stage General Sales Tax (GST) at reduced rate arguing that it would have a far-reaching negative impact on the revenue mobilisation efforts of the Federal Board of Revenue (FBR).

“Yes, the IMF staff has sternly opposed the proposal of single stage, single digit GST on the pretext that the existing GST mode is collected on the basis of value addition at every stage which is currently under implementation in over 150 countries of the world,” top official sources told The News here on Friday after returning from Dubai after holding talks with the IMF experts.

When contacted, a member of the Pakistan team that held talks with the IMF said that they had a very productive brainstorming session with the IMF experts who conceptually opposed the single stage GST, but the FBR team had not gone there to seek their permission.

“In the US, there is a single stage GST at the retail level,” he said and added that in Bangladesh and India there was fragmented GST by having mixture of VAT and single stage GST. “In Pakistan, the VAT in its complete shape can never be developed as it took the UK 20 years for developing a complete chain to place an effective GST in the VAT mode,” he added.

Under the proposal finalised by the Tax Reforms Commission (TRC), they recommended to go ahead with a single stage GST at a maximum rate of 7 to 8 percent as final tax by scrapping the existing GST rate of 17 percent at every stage of value addition.

Pakistan had introduced GST in the shape of Value Added Tax (VAT) mode during the decade of the 1990s which was collected on the basis of value addition at different stages.  Although, Pakistan could not implement the VAT mode of GST in its true form mainly because of the undocumented economy, yet largely it could still be termed as a GST in the VAT mode despite creating distortions in the past.

The input adjustments resulted into flying invoices and fake refunds worth billions of rupees so there is a need to find viable solutions to the problem instead of scrapping the existing GST mechanism that raised revenues up to the country’s desired requirements, said the IMF officials.

The tax experts had calculated that the effective GST collection stood at 4.5 to 5 percent against the existing rate of 17 percent as rampant leakages and different kinds of exemptions caused massive revenue loss to the national exchequer.

But the IMF staff did not buy this argument on the pretext that the GST’s collection was done on the basis of value addition instead of total production of any factory so single stage GST was against the very spirit of the VAT mode of taxation.

Pakistan’s delegation, led by Adviser to the PM on Revenue Haroon Akhtar and comprising Chairman of FBR Nisar Muhammad Khan, Inland Revenue Service (IRS) officer Dr Iqbal, Chairman of Tax Reform Commission Masood Naqvi and author of a study done on the single stage GST, Ashfaque Tola, held talks with the IMF’s fiscal experts during the week.

After identification of gaps clearly mentioned by the IMF team, the top official said that now the government would fine-tune its proposal for a single stage GST before the upcoming budget 2016-17.

The single stage tax, which was proposed on the total value of the goods instead of on the basis of the value addition, was pushed as an alternative to the present system of GST. According to the proposal, the tax collected was full and final liability and the refunds would not be allowed.

The FBR used to collect around Rs1,100 billion or 42 percent of the total taxes on account of Sales Tax in the fiscal year 2014-15. More than half of the sales tax is collected at the import stage, underscoring that there were more leakages in the domestic Sales Tax collection.The VAT-based Sales Tax system was introduced in 1990 but to-date the FBR has registered fewer businessmen as only 117,000 filed Sales Tax returns.