ISLAMABAD: Removing general sales tax exemptions on 100 items will increase inflationary pressures by up to 1% at a time when CPI-based inflation had already reached 11.53% for November 2021.
The federal cabinet will consider the approval of the (fourth) tax law amendment bill on Tuesday (today) under the chairmanship of Prime Minister Imran Khan, high-level official sources have revealed in a conversation with The News here Monday.
However, the Federal Board of Revenue (FBR) has not done any research to assess the impact of removing GST exemptions on rising inflationary pressures based on the Consumer Price Index (CPI).
“When the cabinet passes the approval to withdraw tax exemptions to the tune of Rs 350 billion for applying the standard rate of 17 GST on 100 imported and locally produced items, then there should be an accurate assessment of the amount Inflation based on the CPI, ”said the official and added that the cabinet must make an informed decision after analyzing all its pros and cons.
There are a total of 460 items entering the CPI based inflation basket list and most of the items for which the removal of exemptions is on cards such as cellphones, computers, agricultural products. , packaged food, stationery, drug raw materials, all kinds of machinery and many other items, especially at the import stage, so that CPI based inflation will certainly increase when the standard rate 17% GST will be imposed.
It is relevant to mention here that during the last mandate of the government led by PPP in 2010-11, the IMF had demanded the imposition of a reformed general sales tax (RGST) as part of a program of 11 , $ 3 billion, but the government had not implemented the RGST due to which the IMF program was suspended. At the time of the RGST, the government estimated that if the RGST were implemented, it would increase inflationary pressures by 0.6% on an annual basis.
When this scribe contacted various renowned economic experts to determine the impact of the removal of GST exemptions on the increase in CPI-based inflation, they were of the opinion that it would certainly increase the inflationary pressures of the country. around 0.6% to 1% on an annual basis. .
When contacted, famous economist Nadeem Ul Haq said there would be a one-off impact if GST exemptions were removed within a range of increasing inflation from 0.6% to 1% on an immediate basis, but would decrease after making adjustments. The removal of GST exemptions will become painful once due to rising inflation, but then it will be adjusted and passed on to consumers, he added.
Former economic adviser Dr Ashfaque Hassan Khan said abolishing GST exemptions would increase inflation by definition and this was agreed with the IMF as there were no other easy options available. decision-makers. He said that imposing the super tax could become a source of income, but under the IMF’s program it was not the goal of increasing income but of broadening the tax base through the removal of GST exemptions. He said this regressive taxation would certainly fuel inflationary pressures.
Renowned economist and GST expert Dr Ehtisham Ahmad, who had also worked for the IMF in the past, said efforts by Mexico and China to remove the exemptions (in 2013 and 2015 respectively) were driven by the need reduce the costs of doing business. . China in particular has integrated the provincial / local business tax on services with the nationally administered VAT on goods. The reduction in production costs with the integration of the VAT base allowed China to compensate for the increase in labor costs and the appreciation of the exchange rate after 2015, without harming the export potential. He said it is evident that the income gain will not be equivalent to the magnitude of exemptions removed due to additional input offsets / refunds that become due. In both China and Mexico, the bulk of the additional revenue has resulted from overall improvements in overall VAT efficiency and from the fact that comprehensive value-added information has significantly reduced fraud in other taxes, by in particular taxes on income, wages and excise duties. Indeed, comprehensive information on value added (wages and profits) and value chain coverage has made it more difficult for companies to hide transactions and profits, and this is where the main increases in income are. are produced.
This increase in income did not happen in Pakistan due to the division of the GST base (thank you geniuses who put it in the 18th Amendment) as well as the severely flawed income tax – inherited of the Indian Colonial Government Act 1935. This is where political economy comes in. He said he had given this issue a lot of thought in many contexts (he has been involved in the Chinese reforms since 1993, and the Mexican reforms of 2013/4). But it is a huge subject and he would digress to start putting in solutions (it would really be necessary to go to the NFC and the CCI).
He said that in principle, if the Chinese or Mexican models were followed, there would be a downward push on costs and prices. This relative price adjustment is different from inflation which, as you know, is a largely monetary phenomenon. However, efficiencies and cost reductions for businesses will not occur due to the division of bases, and simply removing exemptions will not reduce incentives or the ability to cheat.
Indeed, with the imperfections of the market, he would guess that some companies will be tempted to increase prices and profits under the pretext that the process is inflationary. In other cases, having to compete with businesses completely outside the VAT net (for example, in several parts of the textile sector), will cause “formal” businesses to close their doors or exit the formal tax net – with a loss. corresponding tax base.
The interactions between prices, tax bases and profitability must be considered and reforms carefully designed. “I fear that Hafiz Shaikh did not understand these problems and I suspect that some of the other experts helping the administration do not understand it either. I am afraid that the simple removal of the exemptions will not have the desired effects,” he said. he added.
When contacted, Dr Khaqan Najeeb, former advisor to the Ministry of Finance, explained that the real structural reform to broaden the tax base, increase revenue and also help document the economy is a value added tax (VAT). Pakistan attempted to pass such a reform under the RGST in 2010. He said VAT is a tax system that functions as a multi-point, multi-stage indirect tax that is applied at every stage of the process. added value in the production process on taxable taxes. some products. He stressed that the whole value chain must be integrated into the tax net, everyone from suppliers to intermediaries in small and large companies. Dr Khaqan said it is the reform that will make tax evasion impossible since everyone will be documented.
He said that the operational readiness of the tax administration and technological advancements are essential to make such a reform a reality. For decades, Pakistan has failed to have a functioning reimbursement system that is fast and free from thefts and bogus invoices causing corruption and leaks. This is the real task at hand.
He felt that the timing of raising the GST in an already inflationary environment could have been reconsidered. Dr Khaqan concluded by saying that the current increase in the sales tax rate to the standard of 17% will of course have an inflationary impact, but will not have much impact. The inflationary impact of increasing the GST, of course, depends on how well monetary policy is coordinated with fiscal policy.