Draft of Tax Laws (Fourth) Amendment Bill: Govt plans to abolish several dozen tax exemptions

ISLAMABAD: The government has prepared a draft of Tax Laws (Fourth) Amendment Bill, for abolishing several dozen General Sales Tax (GST) exemptions as standard rate of 17 percent will become applicable on import of mobile phones, computers, silver/gold and different articles of jewellery.

Top official sources confirmed to The News that the FBR had prepared its draft bill and is all set to table before the federal cabinet next week for seeking approval after which the bill will be laid down before the parliament. The government plans to abolish Rs350 billion GST exemptions under the IMF agreement.

The Upper House of Parliament (Senate) will have a time-frame of 14 days after submission of this bill to prepare recommendations and forward before the Lower House of Parliament (National Assembly) for passing this bill. The IMF’s Executive Board is expected to consider Pakistan’s request for completion of the Sixth Review and release of next tranche of over $1 billion under the Extended Fund Facility (EFF). The sales tax on latest mobile phone sets is under consideration to be imposed. The government has assured the IMF that they would advance the reforms to the GST system, underpinned by a unified tax base and within the confines of the current Constitution.

Notably, the government will: (i) eliminate all zero-rated goods (Fifth Schedule), except on export and capital machinery goods and move them to the standard sales tax rate; (ii) remove reduced rates under the Eight Schedule and bring all those goods to the standard sales tax rate; (iii) eliminate exemptions (Sixth Schedule) excluding a small subset of goods (i.e. basic food, medicines, live animals for human consumption, education and health-related goods) and bring all others to the standard rate; and (iv) remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate. These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis. Moreover, the government is also in the process of harmonizing the service sales tax across provincial jurisdictions, with the support of the World Bank. When contacted, renowned tax expert and advocate of Supreme Court of Pakistan Dr. Ikramul Haq on Tuesday said that the government should abolish the second schedule income tax exemptions because if the GST exemptions were withdrawn to the tune of Rs350 billion, it would further fuel inflationary pressures. The increased GST burden, he said, would be shifted on consumers, so the price hike would further hurt the consumers, he added.

The Tax Laws (Fourth) Amendment Bill 2021 proposed retaining of a few exemptions under the Sixth Schedule (Exemption) of the Sales Tax Act 1990 such as import and supply of construction materials, machinery, equipment, and materials to the Gwadar Export Processing Zone’s investors and Export Processing Zone, Gwadar, or other Export Processing Zones. The tax exemptions available to the Chinese companies under the CPEC are also proposed to be retained under the draft bill.

Under the Eighth Schedule (Conditional Sales Tax exemption) of the Sales Tax Act 1990, the sales tax is proposed to be imposed on the LPG; import of re-meltable scrap; silver, in unworked condition; gold, in unworked condition and articles of jewelry, or parts thereof, of precious metal or of metal clad with precious metal; incinerators of disposal of waste management, motorized sweepers and snowplow; plant and machinery not manufactured locally and having no compatible local substitutes; ingredients of poultry feed, cattle feed; re-importation of foreign origin goods which were temporarily exported out of Pakistan; plant, machinery, and equipment used in the production of bio-diesel; secondhand and worn clothing or footwear; agricultural tractors; tillage and seedbed preparation equipment and post-harvest handling and processing and miscellaneous machinery and some other items specified in the Eighth Schedule of the Sales Tax Act 1990.

The GST is proposed on the import of plant, machinery, and production line equipment used for the manufacturing of mobile phones by the local manufacturers of mobile phones; laptop computers, notebooks whether or not incorporating multimedia kit and personal computers; sunflower and canola hybrid seeds meant for sowing and combined harvesters up to five years old.