IMF not buying government narrative on RGST

The International Monetary Fund (IMF) is unlikely to be satisfied with any further delay (beyond fiscal year 2011-12) in the implementation of the Reformed General Sales tax (RGST) contrary to the claim of the Ministry of Finance, it was reliably learnt.
Well-placed sources told Business Recorder here on Thursday that IMF and Ministry of Finance were not on the same page and no understanding was reached on delaying the implementation of RGST in favour of withdrawal of exemptions/zero rating in the next budget. "IMF continues to think that Reformed General Sales Tax (RGST) is needed and should be implemented", sources disclosed.
The Ministry of Finance had expressed optimism that implementation of RGST would no longer be a condition for the fifth review of the Stand By Arrangement (SBA) thereby paving the way for the release of the penultimate tranche. A participant in the recently concluded talks between the Fund team and Pakistan's economic review revealed to Business Recorder that RGST remained one of the major conditions under the stalled SBA. Withdrawal of exemption and zero rating was not regarded as an alternate to RGST as RGST was designed to bring the entire economy into the tax net, the source added.
It was further revealed that the IMF also differed on the fiscal deficit target for the next fiscal year and insisted that it should be below 4 per cent of GDP. The stalled IMF programme is centered on the growing fiscal deficit, as stated in the second quarterly report 2010-11 of the State Bank of Pakistan. Lack of fairness in the tax system is one of the major reasons for prevailing low tax to GDP ratio in Pakistan.
Analysts stated that the Federal Board of Revenue (FBR) may opt to exercise its powers under section 3 (1) (d) of the Federal Excise Act 2005 to impose Federal Excise Duty in Value Added Tax (VAT) mode on new services from next fiscal year. The Board is legally empowered to collect GST on new service providers using powers of the Federal Excise Act 2005 to impose the FED in VAT mode on service providers.
The FBR is already taxing a number of services by imposing FED in VAT mode under the Federal Excise Act. In case RGST is not implemented in 2011-2012 the FBR would continue to collect FED on VAT mode by adding new services in the relevant schedule of the Federal Excise Act. If the RGST is implemented, FBR can collect sales tax on services on behalf of provinces. The FBR will deduct the collection charges and transfer the remaining amount to the provinces under the formula agreed between the federation and the provinces on GST collection on services.
Presently, section 3 (1) (d) of the Federal Excise Act stipulates that subject to the provisions of this Act and rules made thereunder, there shall be levied and collected in such manner as may be prescribed duties of excise on goods produced or manufactured in Pakistan; goods imported into Pakistan; such goods as the Federal Government may, by notification in the official Gazette, specify, as are produced or manufactured in the non-tariff areas and are brought to the tariff areas for sale or consumption therein and services provided in Pakistan including the services originated outside but rendered in Pakistan. Through this provision, the FBR had expanded the First Schedule Table-II (Excisable Services) of the Federal Excise Act to impose FED on VAT mode on services, they added.
In budget (2009-2010), the FBR had imposed FED in VAT mode on advertisement, hoarding boards, pole signs, sign boards and shop boards through amendment in Table II of First Schedule to the Federal Excise Act, 2005. The Board had also imposed FED on insurance services, non-fund services provided by banking companies and non-banking financial companies and services of port and terminal operators and services provided by stock brokers. Also imposed was FED in VAT mode on a number of service providers under the Federal Excise Act.
IMF in its statement of May 17 said, "Reducing the budget deficit will require higher revenue through tax reform to broaden the tax base, including steps to implement reforms in the general sales tax.......Continued efforts are needed to reduce the budget deficit to take the pressure off monetary policy and create space for more credit to the private sector. In addition, as government debt has increased, debt management needs to be improved. Moreover, careful monitoring of the financial sector is needed to assure continuing financial stability".
Sources emphasised, "IMF still wants the imposition of RGST. As the IMF team intends to visit Pakistan in July most probably for the fifth review under the Stand- By Arrangement, so if the government wants the release of its delayed amount worth $1.7 billion, then it requires macroeconomic stability by imposing tax measures".