The third meeting of the Tax Reform Coordination Group (TRCG) will be convened in the Ministry of Finance on January 5, 2010. It will be presided over by Finance Minister Dr Hafeez Shaikh. Sources told Business Recorder here on Monday that the Finance Minister has desired to hold the meeting of the RCG group to have discussion on valuable proposals for introducing tax policy reforms in the Federal Board of Revenue (FBR).
The newly appointed FBR Chairman, Salman Siddique, would also attend the meeting, besides prominent economists, senior tax officials and tax experts as members of the RCG. Sources said that the Finance Ministry would review the recommendations of the sub-groups of income tax, sales tax and customs for picking some specific recommendations pertaining to reforms in the tax machinery.
The Finance Minister is likely to give approval to summary proposals formulated by the sub-groups. The customs-sub group would coordinate with the stakeholders on the customs related proposals. The income tax subgroup would look into rationalisation of tax rates and increasing the number of taxpayers. Following finalisation of the proposals, the proposals would be submitted for approval to the relevant forum in the upcoming meeting. Tax authorities had suggested that before the proposals are put up for approval, they should be discussed with the major stakeholders such as FPCCI, Overseas Chamber, Pakistan Business Council and KCCI.
The sub-group of TRCG on sales tax had recommended that definite revenue generating measures should be adopted immediately which include removing exemptions on goods. Removing the partial exemption on sugar can yield about Rs 20 billion, whereas FBR has estimated other Rs 18 billion to Rs 25 billion by removing some other exemptions. In the sub-group's opinion, the additional one percent federal excise duty (FED) was an anomaly and should be removed. Simultaneously, the sales tax rate may be enhanced by 0.5 percent to 1 percent to make for the loss due to removal of 1 percent FED.
The estimate of Rs 47 billion to 82 billion to be generated by bringing services into the tax net, seems high since it includes services that are already being taxed, such as telecom sector, financial sector, insurance sector, airline and foreign travel services. Collecting RGST from other potential sectors like retailers, wholesalers and transporters may not be easy. The sub-group of the TRCG felt that revenue gains from the service sector may not be realised in the initial few years of RGST implementation.
The sub-group highlighted certain proposed measures which could lead to revenue losses ie, a single reduced reformed GST (RGST) rate of 15 percent (loss of approx Rs 57 billion); removal of special regimes such as steel melters (additional loss of Rs billion 8 to Rs 9 billion): bringing the items currently under the third schedule into RGST (estimated loss of' Rs 7 billion to 12.5 billion). The sub-group was of the view that any tax collected on plant and machinery, after removing the exemption currently provided, will be adjusted as input tax without generating any revenue.
The sub-group of customs had recommended early setting up of five valuation offices abroad to improve customs valuation system for accurate assessment of duties and taxes on the imported goods. Similarly, to avoid smuggling and under-invoicing through the Afghan Transit Trade, weigh bridges and container scanners need to be installed at entry and exit points. The Risk Management System should be developed and put in place in customs.
The sub-group on customs stressed the need of strengthening post-clearance audit and internal audit. The proposed training and career planning of the customs officers is necessary under the reforms. The recruitment, especially of preventive appraisers and inspectors, should be done through Federal Public Service Commission. The sub-group on income tax had recommended one-time tax amnesty for small industries including retail outlets and business units established with the help of undeclared money.
The sub-group also recommended that the protection provided in the Income Tax Ordinance 2001 to the investment made through foreign remittance should be restricted to industrial investments only since this was the main source of erosion of the tax policy as it encourages people to declare their black money at the rate of 2 percent. The presumptive taxes should be phased out withholding taxes made adjustable and their rate reduced with no minimum taxation requirement.