RGST vs. GST. Kamran Y Mirza CEO Pakistan Business Council December 1, 2010

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2 RGST vs. GST Kamran Y Mirza CEO Pakistan Business Council December 1, 2010

3 PBC An Introduction: A private sector business policy think-tank. Founded in 2005 by 14 (now 30) of Pakistan s largest Business Groups / Corporations including multinationals. A non-political, Section 42 not from profit Company. Core objectives include the creation of a business environment that leads to sustained levels of high economic growth Page 2

4 PBC Member Companies: Colgate Palmolive The Dawood Group Indus Dyeing & Manufacturing Lotte PPTA Ltd. Millat Tractors Ltd., Packages Limited Page 3

5 RGST VS. GST Revised General Sales Tax (RGST) Single Rateof i.e. 15% Standard Proceduresfor all multiple stages, each paying tax on value addition No zero rating onlocal supplies by export sectors. (Exporters to apply for refund) Pakistan unique that local supplies of 5 export sectors are currently zero rated for Sales Tax General Sales Tax (Existing) Multiplerates of tax; 17-22%, base rate 17% Third Schedule(17 major consumer items) = FBR collects Sales Tax at the manufacturer s stage on retail price. Five value added major export sectors are Zero Rated, i.e. the rate of Sales Tax on their inputs and outputs are charged at a zero rate of Sales Tax. (145 items SRO 509 (I)/2007) The 5 sectors are: textiles, leather, surgical goods, carpets & sports goods Page 4

6 RGST VS. GST Revised General Sales Tax (RGST) List of exempt itemsreduced to life saving drugs, basic foods items (live animals, poultry, fish, grains, pulses unbranded / unpackaged food items) General Sales Tax (GST) 43Items are exempt from Sales Tax (Sixth Schedule mostly food items) CommercialImporters to follow standard Commercial importers pay an additional documentation as applicable to local 2% SalesTax at import stage. Practice manufacturers no further documentation final liability. Is closer to the originalsales Tax Law of 1995 with Sales Tax being charged in the VAT mode Considerably distorted due tomultiple rates, exemptions, zero rating, special procedures, etc. Page 5

7 Positive Impact of RGST: Forces documentation which will help to significantly reduce evasion. Raise government revenues = increased investment in Infrastructure / Human Capital Tax-to-GDP ratio (one of the lowest in emerging economies) set to improve after RGST. Lead to reduced Corporate Tax Rate (highest in emerging economies) Will provide a level playing field to the formal sector increase FDI and Local Investment Overall to improve Pakistan s competitiveness (alarming loss in ranking) Page 6

8 Challenges & Issues: Current lack of documentation culture. Proposed Rs.7.5 million turnover threshold dilutes impact and further handicaps formal sector / registered firms. Revisit / Revise downwards Break in chain may adversely impact government revenues in the short term. Refunds of exporters FBR refund system not tested, delays can severely effect liquidity. Exempt Items may need to revise list to reduce consumer burden, e.g. drugs / some processed foods, e.g. packaged milk, bread etc. Page 7

9 Conclusion: To achieve accelerated economic growth rate and to improve Pakistan s global competitiveness, PBC strongly supports the RGST Concept. Page 8

10 Stages of Payment ST Ex. Factory Dist. W/S RT v/s RGST Factory Dist. W/S RT Price * Price ST 17% Payment 17 * RGST 15% Payment ST Paid B/F ST Paid B/F Invoice Invoice Third Schedule = 17 Major Consumer Items Standard Procedure Page 9

11 Country Comparison 2009 data Country Tax-to- GDP ratio Health Spending (% of GDP) Education Spending (%of GDP) India Bangladesh Sri Lanka Malaysia Turkey Egypt Pakistan Slide 10

12 Country Comparison Corporate rate vstax-to-gdp ratio Corporate Tax Rate Tax to GDP Ratio % 40% 35% WWF 2% WPPF 5% 30% 25% 20% 15% 10% 5% 0% Bangladesh Egypt India Malaysia Pakistan Sri Lanka Turkey Page 11

13 World Economic Forum Global Competitiveness Ranking India Indonesia Pakistan Brazil Sri Lanka Bangladesh Page 12

14 Parameters used in the Global Competitiveness Ranking by WEF BASIC REQUIREMENTS Institutions Health and Primary Education Infrastructure Macroeconomic Stability EFFICIENCY ENHANCERS Higher Education and Training Labor Market Efficiency Goods Market Efficiency Market Size Financial Market Sophistication Technological Readiness INNOVATION AND SOPHISTICATION Business Sophistication Innovation Page 13