General sales tax rate may be raised to 17 percent in budget

ISLAMABAD (May 25 2009): The government may increase standard rate of general sales tax (GST) from 16 percent to 17 percent across the board in the upcoming 2009-10 budget to generate additional revenue for meeting the enhanced collection target in the next fiscal year.Sources told Business Recorder on Saturday that the Federal Board of Revenue (FBR) is likely to propose to the Ministry of Finance to raise sales tax rate by one percent on all items to meet revenue requirements in the next fiscal year. If the government agrees with the proposal, it would be a major revenue generation measure for improving sales tax collection which is an indirect tax, defined as one with a greater incidence on the poor relative to the rich.The standard rate of value-added tax (VAT) in the UK is 15 percent with effect from December 1, 2008 until 31 December 2009. The rate will revert to 17.5 percent with effect from January 1, 2010. The standard rate of VAT in Ireland is 21.5 percent.The standard rate of VAT in Belgium is 21 percent; Bulgaria 20 percent; Denmark 25 percent; Germany 19 percent; France 19.6 percent; Italy 20 percent; Netherlands 19 percent; Austria 20 percent; Poland 22 percent; Portugal 20 percent; Romania 19 percent; Finland 22 percent and the standard rate of VAT in Sweden is 25 percent.As far as India is concerned, VAT was introduced in India on April 1, 2005, at a rate of 12.5 percent. Various states like Andhra Pradesh, Maharashtra, Madhya Pradesh, Kerala, Delhi and Haryana have introduced VAT on certain goods and services with different tax slabs specified in schedules in their respective statutes. Though 12.5 percent VAT is a low rate, there is also "central sales tax" and "service tax" applicable on various goods and services respectively.From the foregoing, it is evident that developed countries, with high income levels and low levels of extreme poverty, high sales tax rate is the norm. Be that as it may, Pakistan may rely on raising this tax as a way to increase its revenue as it is expected to be (i) more acceptable than say tax on the income of rich farmers, and (ii) the mechanism for its collection is already in place.The FBR may generate an additional amount, over and above Rs 26 billion, in 2009-10 following raise in GST from 16 percent to 17 percent. If the proposal is considered by the Finance Ministry, section 3 of the Sales Tax Act 1990 requires amendment through Finance Bill 2009-10 to upward revise the sales tax rate on import and local supply of all items/services liable to this levy.According to sources, the existing 16 percent sales tax might be adjusted upward, depending on the final decision of Finance Ministry. However, the proposal has been drafted at the FBR level to increase sales tax rate in the coming budget.It is worth mentioning that the government had increased sales tax rate from 15 percent to 16 percent in the budget for fiscal year 2008-09. As sales tax on provincial services is charged under the Sales Tax Act, 1990, the rate of tax on provincial services was also brought in line with the provision of Sales Tax Act, 1990. The sales tax on provincial services was also increased from 15 percent to 16 percent from 2008-09.The FBR had also increased sales tax from 20 percent to 21 percent on the import and local supply of 70 industrial inputs/raw materials and raised sales tax from 17.5 percent to 18.5 percent on nine items during the budget 2008-09. As the standard rate of sales tax was increased from 15 percent to 16 percent, this necessitated a sales tax rate increase from 17.5 percent to 18.5 percent and from 20 percent to 21 percent