The three ordinances and refunds scheme

The three presidential ordinances that imposed a number of taxes, that were tabled in parliament in November 2010, but could not come up for passage due to sustained rhetorical opposition by not only the PML (N), but also the coalition partners, particularly the MQM, are regarded as critical by the country's economists if the government is to succeed in reactivating the stalled Stand-By Arrangement (SBA) with the International Monetary Fund (IMF).
That the early receipt of the IMF's penultimate tranche of 1.7 billion dollars is necessary to bring the budget deficit to a sustainable level of 5.3 percent, rather than the 8.4 percent feared earlier, cannot be denied. Or, in other words, the government was between the devil and the deep blue sea with the devil clearly the conditions of the IMF that would have a short-term inflationary impact and the deep blue sea defined as the public that may not vote for the PPP in the next elections. Given that elections are not scheduled for another year and half, the importance of the IMF conditions are obviously of a more immediate concern.
Much has been written about the fact that the presidential ordinances seek to impose heavier taxes on the already taxed and this is evident from the fact that the salaried persons, whose tax is deducted at the source, would now be made to pay an additional 15 percent flood surcharge. That this is patently unfair is not in debate. And there is general discontent that the rich landlords, the largest single socio-income group in the country's national and provincial assemblies, continue to successfully derail any attempt to tax their income.
However, what has been mulled over is the fact that domestic suppliers of five zero-rated sectors, namely textiles, leather, surgical goods, sports, and carpets, will now be liable to sales tax at 17 percent - sectors that were previously exempt. This will reactivate the system of refunds, which has brought trade and industry, two distinct groups that have not seen eye to eye on many government tax proposals, on one platform: that the system of refunds, as in the past, is neither timely nor effective.
It was not timely and delays in payment of refunds led to serious cash flow problems for many an industrialist/trader and it was not effective from the government point of view either because for several years, the refunds were greater than the total revenue collected due to frivolous and bogus refund claims. In other words, there is a real danger that the decision to introduce sales tax on domestic zero-rated sectors, as incorporated in the recently issued ordinance, may well lead to the re-emergence of all the negatives associated with the refund schemes in this country.
In addition the ordinance, as is well known, is effective on the very day it is promulgated. Thus 15 March, the day of the promulgation, implies that the measures would become effective from that day. The question that remains unanswered is what about the transactions that took place on the day of the ordinance's promulgation. Transactions were already charged federal excise duty and it is impossible for the payee in this case to go back to the client and recover further tax. There is therefore an urgent need for the government to issue an amendment to the ordinance that would ensure that its provisions would come into effect from 16th March.
By and large, economists are agreed that the federal government had no choice in the matter but to promulgate the ordinances. It is also, by now, obvious that the federal government is committed to the implementation of the Reformed General Sales Tax (RGST), not a component of the three ordinances, though the President in his address to the joint session of the parliament on the 22nd of March jumped the gun when he stated that "tax reforms have to be introduced to mobilise resources. The tax net is being expanded through the introduction of the RGST." There is little doubt about the government's commitment to implement the RGST. However, it is clear that all stakeholders are not on board. The traders are the most violently opposed to this tax, though the industrialists are, by and large, supportive, and a few of the government's coalition partners are supportive.