KARACHI, May 25: The government is expected to bring far-reaching changes in the Sales Tax regime, which may include the abolition of three per cent additional tax and removal of sales tax on raw materials at import stage
, in the budget for 2004-05.
However, the most redeeming factor will be a 2.5 per cent cut in the general sales tax rate in order to provide relief to the consumers, and removal of 20 per cent sales tax on import of raw materials.
Sources close to the budget-making exercise told Dawn that all-out efforts were being made to make the budget investment- as well as people-friendly by giving some relief to the consumers and allowing certain concessions and incentives to the trade and industry.
The present government is confronted with two major issues - high rate of unemployment and rapidly rising poverty - which is more pronounced in the rural areas. The Indian election results are being taken as a "warning" in the corridors of power.
The authorities feel that the situation may suddenly turn as was the case with the BJP in India because of the similarity between the two situations," the sources said.
Consequently, all measures will be taken to boost investment and industralization for generating employment and reducing burden of taxes on consumers rather than giving any "relief scheme" which may open up the floodgates of corruption.
The abolition of 20 per cent sales tax on import of raw materials will encourage investment as the industry will become more competitive in the world market.
The sources conceded that the current rate of 15 per cent GST was very high compared to other countries where maximum rate was up to eight per cent. "It needs to be gradually reduced to 10 per cent in next two years with equal instalments."
A cut in GST by 2.5 per cent in the budget will also resolve the octroi issue. At present octroi is a contentious issue between the provinces and the federation. After the abolition of octroi, the federal government in 1998 increased the GST rate from 12.5 per cent to 15 per cent as a compensation for the revenue loss to the provinces on the basis of audit reports of octroi collection.
"However, once the GST rate is reduced to 12.5 per cent the question of compensation will die out. It will also directly benefit the consumers who have to pay GST on almost all goods except for medicine and food (other than manufactured)," the sources added.
It is believed that the government is going to expand the ambit of sales tax on services, and around 50 more service-oriented industries have been identified. The ST on services is more than a trickier issue for being a provincial tax.
At present it is being collected by the federal government for its onward distribution to the provinces. "The entire exercise of collecting ST on services is very strange because its input is naturalized after adjustment. Therefore, at the end of the day the government is not getting any revenue in its coffer," the sources said.
In many countries both the taxes - GST and ST on services - are collected by the centre and thereafter distributed these among the provinces or states. This is mainly done to remove distortion from the system.
Syed Shabbar Zaidi, a leading tax advisor, told Dawn that currently the GST system was working fairly normal, however, some improvement was required wherein a mechanism could be set up to streamline its collection and refund.
He said that under the 1973 Constitution, ST on services was a provincial subject and GST a federal, but the question is as to how services could be separated from goods. He suggested that both the taxes be collected by the federal government, and the present system of collection and distribution be consolidated after removing irritants.
Similarly, Mr Zaidi said tax on agriculture income was misnomer as most of the land-holdings in the country were not more than 12 acres. "Big land-holdings are few, therefore, there was no sense on imposing tax on agriculture income. This could be verified from the fact that there is no rise in its collection in Punjab, which is stagnant at Rs1.2 billion since 1997."
Mr Zaidi suggested that it should also be collected by the federal government. He said that as far as the budget-making was concerned the income tax was now no more an issue and added the revenue collection from income tax would remain more or less the same.
