The Ministry of Finance and Federal Board of Revenue (FBR) are contradicting each other over the possible inflationary impact of the proposed reformed general sales tax (RGST), as the former lends credence to a ''sympathetic response'' to prices in the wider economy, and the latter calculates a rise of one percent in inflation.
A report of the Ministry of Finance about the potential impact of RGST on inflation shows that sympathetic response of prices in the wider economy can not be ruled out due to the introduction of the RGST. In addition, 20 items (goods and services) in the CPI basket would be included in the ambit of RGST with the combined weight of 13.6 percent.
An official of the Ministry of Finance said that although, on paper, most of the large weight items in the consumer basket, such as fresh milk, wheat flour, vegetable ghee and cooking oil, would continue to be exempted, the prices of exempted commodities will also increase as a result of sympathetic response.
The Finance Ministry also anticipates a problem with GST compliance even by registered retail chains until and unless there are reforms within FBR. This concern is validated by the compliance rate of existing GST where some big outlets and stores'' average daily sales may be in millions of rupees but they continue to declare below the annual sales tax registration threshold of Rs 5 million under the Sales Tax Act 1990.
According to the Ministry of Finance report, the GST current compliance rate is around 40 percent. This implies that in around 60 percent of the cases the establishment (retailer/store) is not charging GST, whereas in actual fact GST is being collected from final consumers in a large number of cases but is not being deposited to the treasury.
On the other hand, an FBR study on the inflationary impact of RGST argues that because the tax rate would be lowered--from 17 percent to 15 percent--the prices of 43 items will decrease, consisting of 30.51 percent weight in consumer price index (CPI) basket.
However, the FBR study maintains that the impact of inflation due to implementation of RGST may be nearly one percent. The major inflationary impact will come from imposition of RGST on goods, which are currently exempt from GST.
Analysis by experts shows that out of 92 categories of commodities 29 broader categories, with a 55.9 percent weight in CPI basket, will continue to remain exempt in the proposed RGST regime. Only 13 categories, with 8.29 percent weight in CPI basket, will be taxed under RGST, while 7 categories with 5.28 percent weight will be taxed under proposed provincial RGST law. The reduced RGST rate of 15 percent from 17 percent will benefit 43 categories of items with 30.51 percent weight in CPI basket. As a whole, average prices will decline by 0.58 percentage points.
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