Reformed General Sales Tax (RGST)

The distortions in the Sales Tax Act, 1990 such as concessions and waivers on domestic and imported supplies and exclusion of the services sector are the prime reasons for low tax to GDP ratio and narrow-base. This provides convincing justification for reforms and thorough revamping of the existing sales tax system to make it suitable for economic needs of the country.The proper documentation of the economy will take place at faster pace which is essential for enhancing the tax revenues and increasing tax net and bring it close to international standards. The RGST system is expected to bring long-awaited changes in the tax machinery and the public mindset to strengthen government’s efforts to inculcate the tax culture in the country. This will help in developing an effective tax policy regime to cater the needs of the growing economic needs.

In the current taxation system, the Federal government is empowered to impose taxes on the sales and purchases of all sorts of goods whether these are produced and consumed locally, imported or exported. Excise duty is imposed on the services by the Federal government. These include insurance services (other than life insurance), communication services, advertisement services, banking services, services provided by stockbrokers, property developers/promoters, and port/terminal operators.

The provinces charge sales tax on hotels, clubs, caterers, custom agents, ship chandlers and stevedores, courier services and advertisements on TV and radio. The taxes on these services are collected under GST mode with inter-tax adjustments. Under the new legislation (the 18th Amendment) and the National Finance Commission (NFC) Award, the provinces are now empowered to tax service sectors. The Federal Government will continue collecting the tax on goods.The basic food items including cereals (wheat and rice), pulses, live animals, poultry and meat, edible oil, vegetables and fruits, books, life saving drugs, newspapers, periodicals and other printed materials will be exempted under RGST. The educational, health, and charitable services, scientific research grants under international agreements will also continue enjoying exemptions.

At the same time, local consumption of sectors like textile (including carpets), leather, surgical and sports goods, defense stores, stationary items, dairy products, pharmaceuticals (other than lifesaving), agricultural inputs, agricultural machinery and implements, aviation/navigation equipments, including ships and aircraft, etc goods are brought under the tax net. The RGST will be chargeable only on value added component of each stage of the supply chain and the net tax will remain as single stage levy. The mechanism is going to help document the economy.

The RGST is an economic issue and needs to be seen from that angle rather than the political one. The understanding of this tax among general public is low and many political parties are exploiting the situation by misguiding people for gaining political grounds. It is partly the failure of the economic managers, who could not convince the public for the tax.

There is a general perception in the minds of public that it is a new tax whereas the fact is contrary to it. The economic team has to properly disseminate this information and make people realise that RGST is not a new tax rather it has been there since 1990. The purpose is to expand its coverage to other sectors of the economy through value-added mode of operation.

Currently a small number of tax payers, only 2.5 million, are in the tax net and majority of them is the public sector employees, who could not escape the levy like the private sector employees. With the value-added mode, the tax base can increase many folds by brining all the value added sectors in the net. The political debate centres its argument on the role of International Monetary Fund (IMF) in pushing Pakistan for its implementation. This argument wins the favours of public due to the negative perception of IMF in Pakistan and blamed for all the ills of the economy.

In fact, it is the Pakistan government which gave this plan to the IMF for enhancing tax revenue. The commitment made by Pakistan to follow a time schedule in the implementation of the RGST is the only request of the IMF in this regard and making a big argument out of it is just a political gimmick.

The other argument against RGST is its impact on the prices. The opponents of the RGST argue that it will have a big impact on the prices and everything will become expensive. This argument may have some weight but it is unsubstantiated by any serious analysis. The RGST is going to reduce the rate on the already taxed items. It will, however, bring services sector and activities under its ambit exempted so far.

The rate of the tax is going to be reduced from variable rate of 17-25 percent to uniform 15 percent and that may bring prices down if the reduction in the rate is passed on to consumers by the businesses. This is, however, highly unlikely in case of Pakistan where the past experience clearly shows that prices can only go up and not down.

So the reduction in the prices can easily be ruled out but inclusion of other sectors in the tax net which were excluded in the past can definitely increase the general price level. How much will be the impact of this inclusion of other items in the tax net is an area of research and there is a need to study it properly before giving any estimates.

A few think-tanks like Pakistan Institute of Development Economics (PIDE) have initiated the exercise to gauge the impact but it will be some time to bring out the results. The good thing is that RGST exempt the basic foods and medicines to protect poor and spares small businesses to continue their operation.