Budget proposals: ICAP for cutting sales tax rate to 12 percent

The Institute of Chartered Accountants of Pakistan (ICAP) has proposed that the sales tax should be brought down to 12.5 per cent from the existing 17 per cent. In its budget proposals for the year 2011-12, the ICAP noted that sales tax rate was quite high which is exacerbating inflation.
The current sales tax at the rate of 17 per cent besides 2.5 per cent special excise duty (SED) is resulting in an effective incidence of 19.5 per cent indirect tax being passed on to the consumers. It said that in line with the amendments brought in vide Sales Tax Amendment Ordinance 2011, the rate of sales tax on supply of sugar should be restored at 17 per cent instead of 8 per cent.
The scheme of Turnover Tax for retailers announced in 2006 has failed to achieve its desired objectives despite a very low rate of tax and very simplified procedure. The number of retailers registered under the scheme, are in hundreds which speak volume about the ability, resources and political will to implement VAT in its classical form in this country. It noted that sale tax cannot be effectively implemented without extending the same to the retail sector. Therefore, there is an urgent need to review the above scheme.
ICAP is of the view that in an ideal VAT mode the same cannot continue and should be withdrawn and retailers may be taxed under the normal tax regime. "Unlike all the developing countries of the world, Pakistan does not offer any substantial protection to its manufacturing/ industrial sector. Consequently, generally businesses prefer to operate as traders and enjoy associated tax/duty benefits," it noted.
To address the growing inflation, unemployment and shrinking business environment, not only the rate of indirect taxes needs to be reviewed but also indigenously manufactured goods should be made competitive against imported goods, the ICAP underlined in its budget proposals. Pakistan is the only country in the world where whitening of black money is possible with a minimal cost equal to the presumptive tax. The negative effect of this system is a major handicap in development of tax base and documentation. This has been explained as under:
Under and over invoicing has become a very serious issue, which is badly affecting the collection of taxes at import stage. Under invoicing also promotes outflow of differential proceeds via Hundi/Hawala, which is detrimental to the economy. In view of value addition tax scheme offered to commercial imports coupled with immunity from audit, there is effectively a ceiling on the genuine value addition as very few businesses declare actual value addition which leads to serious distortion. Implied whitening of income by way of paying 6 per cent income tax and 18 per cent sales tax and declaring any sale price which is final liability for Income tax purposes is another aspect which needs to be addressed on war footings.