Pakistan's Cabinet Approves Reformed Sales, Flood Taxes

by Mary Swire, Tax-News.com, Hong Kong

12 November 2010

Pakistan’s Finance Minister, Abdul Hafeez Shaikh, has disclosed that the government has approved, for placing before parliament, of the reformed general sales tax (RGST), together with a flood tax to be imposed on those with higher incomes.

The so-called “Flood Relief Surcharge”, which has been pushed for particularly by the US government in order to pay, at least in part, for reconstruction after the recent floods, would entail a 10% additional income tax payment for six months by individual Pakistani taxpayers earning not less than PKR300,000 (USD3,490) a year.

There would also be an increase from 1% to 2% in the special excise duty on non-essential goods, which is levied on such items as air conditioners and deep freezers, drinks, cigarettes, cosmetics and motor cars, either manufactured in Pakistan or imported.

These two measures will be introduced for a six month period to end-June 2011, after parliamentary approval, and, it was said, should mean additional tax revenues for the federal government from the more affluent Pakistanis of some PKR40bn in total.

The government also approved the terms of the RGST to be submitted to parliament for approval. The RGST extends the scope of the existing general sales tax (GST) by abolishing certain of its exemptions, while replacing the current multiple rates of between 17% and 25% with a new flat rate of 15%.

Shaikh confirmed that the RGST has been structured so as to provide the necessary broadening to the country’s tax base, but not so as to place any additional tax burden on ordinary people. The retailers’ threshold for inclusion in the new tax has been raised from PKR5m to PKR7.5m and the existing exemptions for basic food items have been kept.

One of the major points of discussion between the federal and provincial governments about the structuring of the RGST has been around its collection in the services sector, the taxation of which is restricted to the provinces. Shaikh was therefore careful to specify that the RGST will only be collected on those services that have been authorized by the provinces, and that they will be the sole beneficiary of those collections.

It was reported that, due to the increased retailers’ threshold and the reduced flat rate of 15%, the additional tax collected from introduction of the RGST will be restricted to not more than PKR30bn in the remainder of this fiscal year to end-June 2011. However, it is hoped that the RGST’s effect on broadening the tax base and increasing tax compliance by modernising and simplifying consumption taxes in Pakistan will increase the country’s tax-to-gross domestic product ratio from the present low of 9% to more than 12% in the next three to four years.

It had been said that the federal government was racing against the clock to prove that it was taking action on its tax reform proposals. Its intention to place the above measures before the federal parliament on November 12 is just in time before planned meetings with the International Monetary Fund (IMF) to discuss a further drawing on Pakistan’s stand-by arrangements, and with other governments and aid organisations on further restructuring and development finance.

Pakistan has operated under a commitment to the IMF to broaden the country’s tax base, which was, originally, to have been fulfilled by the introduction of a value added tax (VAT), by the beginning of the 2010-11 financial year in July. Following the government’s failure to implement a VAT, it was proposed instead to expand the base of the existing GST.

However, until now, deadlines in reforming the GST have also been missed, largely because of the above-mentioned discussions between the federal and provincial governments over the services sector, and consequent delays to implementing legislation.

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