RGST to hurt or to benefit

New taxation measures of around Rs. 70 billion through reforming allegedly an

outdated sales tax regime, increasing regulatory duty on imports and announcing
to impose one-time surcharge to rebuild flood-devastated areas. The government
insisted the new system known as RGST would not impact the lives of
impoverished segments of society already facing hard times due to an
unprecedented price hike.

But other political parties – allies of the government and its opponents – do not
buy this argument. They believe the taxation would make it hard for low-income
groups to continue their everyday battle for survival.

“It is criminal to support this (RGST),” Opposition Leader in the National

Assembly Chaudhry Nisar Ali Khan.

Voices were also heard from the allies of the government – Awami National Party
(ANP) and Jamiat Ulema-i-Islam-Fazl (JUI-F) – which called it a move that would
further compound the problems of the poor.

But the loudest objection to both the RGST and the proposed flood surcharge
came from the Muttahida Qaumi Movement (MQM).

The party’s parliamentary leader in the National Assembly Dr Farooq Sattar told
media at a hurriedly-called news conference in the evening that the group would
not support the legislation at any cost.

The business community, except the Pakistan Business Council, opposed the
GST bill in its present form as the “Federal Board of Revenue (FBR) does not
have the capacity to collect taxes and timely give refunds,”

The most frequently used words in the presentations of all associations were
“refunds” and “corruption in FBR”. Businessmen fear that the new tax regime will
generate billions of rupees of refunds that will open new “doors for corruption”.
The FBR chairman admitted there was corruption, but insisted refunds would not
be blocked this time around.

The Pakistan Business Council, a group representing top 30 businesses of the

country, supported the implementation of GST bill. “The main reason of the
opposition is documentation of gray market,” said Kamran Yusuf Mirza, the
PBC’s Chief Executive Officer.

The Federation of Pakistan Chambers of Commerce and Industry President

Sultan Chawla said the GST will not directly affect their businesses as they will
collect the tax from consumers.

Pakistan Cotton Ginners Association representative Haroon Rashid said the

FBR’s refund system is faulty, which will result in a blockage of refunds. “We
used to pay 15 per cent of the refund amount as bribe to the FBR officials to get
our refunds,” said Haroon and the FBR Chairman Sohail Ahmad did not contest
his statement.

Rashid Haroon said that in the year 1996-97, the government taxed the ginning
mills, collected Rs50 billion but returned Rs70 billion in refunds.

Representatives of the five sectors including value-added textiles, sports goods,

surgical items, leather goods and carpets – asked the government not to
withdraw the 2005 sales tax regime.

They stressed that they are not against RGST but the main concern is the
refunds system that the Federal Board of Revenue (FBR) wants to bring with the
new tax structure.

“It is our opinion that the government will not be successful in releasing refunds
to industries under the new system. How can they refund billions of rupees when
they have been unsuccessful in the present system with fewer funds to refund?”
asked Zubair Motiwala, Chairman of the Council of All Pakistan Textile
Associations.

These sectors account for more than 80 per cent of the country’s exports, which
will be hurt as small exporters will disappear from the scene. Under the RGST,
more money of exporters will get stuck for months in refunds which will
eventually reduce exports, they argued.

Motiwala said the benefits of the new textile policy, which is a big achievement of
the government, will be nullified if the RGST is imposed on the zero-rated
sectors. Bureaucrats will also mint money in different cases like flying invoices,
over-invoicing, fraudulent companies and mis-declaration, they alleged.

Syed Usman Ali, Chairman Towel Manufacturers Association of Pakistan, said

“we will protest if the RGST is imposed on us.”

Fawad Ejaz Khan, Chairman Pakistan Leather Garments Manufacturers and

Exporters Association, said the government cannot successfully run with the
RGST for more than three to four months because of fears that a number of
fraud cases will occur and billions of rupees will get stuck in refunds. However,
the government insists it will refund money in weeks.

Jawed Chinoy, Chairman Pakistan Readymade Garments Manufacturers and

Exporters Association (PRGMEA), said the RGST will increase friction between
taxpayers and tax collectors.

Khwaja Usman, Chairman Pakistan Cotton Fashion Apparel Manufacturers and

Exporters Association, said the RGST will directly hurt exports because 22 per
cent money of exporters will be stuck with the government.

Sohail Yaqoob, Chairman Pakistan Sports Goods Manufacturers and Exporters

Association, said the sport goods industry also disapproved of the RGST which is
against exports. “The government should consult businessmen on the new tax
structure,”

CURRENT STATUS of the Bill

The government managed to get the recommendations of the standing

committee on proposed reformed General Sales Tax (GST) Bill passed by the
Senate, forwarding them to the National Assembly for final approval. Senator
Ahmed Ali of MQM, who heads the Senate standing committee on finance and
economic affairs, presented two reports of the committee on the GST bill 2010
and the Finance (amendment) bill 2010. The committee made 15
recommendations relating to GST bill and four recommendations for the Finance
(amendment) bill. The recommendations have been sent to the National
Assembly for consideration and inclusion in the respective bills.

The committee has recommended that food items, stationery and medicines
should be exempted from the sales tax and that flood tax should be imposed on
taxpayers having annual income above Rs500,000, instead of every taxpayer.

The Senate can only make recommendations to a monetary bill and is not
empowered to approve or reject it, and it is now with the National Assembly’s
Standing Committee on Finance, Revenue & Planning and Development. The Bill
will be presented on the 20th December before the National Assembly for the
voting.

In the 17-member committee, the PPP has five members, all of whom are from
the President’s circle. Two votes of the ANP and JUI-F are likely to be in favour
of the bill, said PPP officials.

The PML-N also has five members. Its four members will vote against the bill, but
the fifth one is conditional to Jamil Malik’s timely arrival from abroad.
The MQM’s vote will either go against the bill or it may prefer to abstain. The
Fata member opposed the bill in its one meeting on the ground that the NA
cannot legislate on a Fata subject. The PPP members said their concerns will be
addressed before the voting, as the reformed GST will be implemented in Fata
through a presidential order.

The PML-Q has three members in the committee. Background interviews with
two of them revealed that Riaz Fatyana is likely to cast his vote in favour of the
bill, giving the PPP the needed 9th vote. Kashmala Tariq may abstain from
voting, while Faisal Saleh Hayat may be the only member of the party voting
against the bill.