ISLAMABAD: After two days of hectic consultations and political intervention, the federal and provincial governments agreed to implement the Reformed General Sales Tax (RGST) through legislation in the national and provincial assemblies in a couple of days.
Under the agreement, sales tax exemptions given to five major sectors, including textiles, will be abolished, but the federal government will pay about 35 per cent of the total sales tax collection on services to the provinces.
“A record note of implementation of the RGST in the country was prepared by the participants, based on consensus,” an official announcement said.
It said the note would be shared with the chief ministers. The parties agreed that the RGST should be implemented at the federal and provincial levels at the earliest.
“The right of the provinces to levy GST on services was completely recognised. It was upheld that the provinces reserved the right to collect sales tax on services if they so desired,” the announcement said.
Taxes on services not involving cross-provincial transactions and not requiring input adjustments will be collected by the provinces.
Taxes on services involving cross-provincial transactions and requiring input adjustments or refunds will accrue directly to the provinces, but there will be a single audit at the level of the Federal Board of Revenue.
Officials said it would make no big difference if the RGST legislation was approved by the federal and provincial governments a day or two later than the deadline of Oct 1.
Finance Minister Hafeez Shaikh told journalists that the government had originally announced a 15 per cent rate of GST in the budget but now there could be a one-time higher adjustment because of the floods. He said the rates had not been finalised.
The minister said the government was considering options for additional tax revenue, including a flood tax on income and imports and higher GST, but all the three options might put an undesirable burden on existing taxpayers.
He said the burden on existing taxpayers had to be balanced and moderate.
“One thing is clear that there will not be a 10 per cent increase in income tax as is being discussed in media. The tax rate will be much lower,” he said.
He said people who had large property and landholdings and had not been affected by the floods could be taxed as a one-time measure, but it was yet to be decided if the flood tax should be for one year, 18 months or nine months.
An official told Dawn thatunder the agreement on the RGST, the federal government will collect sales tax on four services on behalf of the provinces and keep them in a single account — finance, banking and insurance; construction; franchises; and advertisements.
Sindh demanded 50 per cent share of the total collection in accordance with the sales tax weight agreed in the National Finance Commission award. Punjab wanted its distribution on the basis of consumption, entailing 60 per cent share to the province in line with overall shares of the net proceeds from the divisible pool.
Khyber Pakhtunkhwa and Balochistan sought 14 per cent and nine per cent shares, respectively, as defined in the final revenue sharing mechanism of the award.
The demands created a deadlock in negotiations and the Sindh government took up the matter with President Asif Ali Zardari who presided over a meeting of the federal and provincial finance ministers and their technical teams in the afternoon and asked the centre to accept the provinces’ demands and absorb the financial burden of the difference.
This was followed by another meeting at the Prime Minister’s House where it was agreed that Punjab and Sindh be given 60 per cent and 50 per cent share of the additional tax collection on services and Khyber Pakhtunkhwa and Balochistan 15 per cent and nine per cent.
As the cumulative provincial shares stood at 134 per cent, the federal government agreed to meet the shortfall of 34 per cent. Three groups of services were defined for implementing the sales tax.
Collection on services that do not involve any refund or input adjustment will remain with the provincial governments.
Sindh will collect sales tax on telecommunications in its jurisdiction but input adjustments and refunds will be paid by the federal government and the province will return to the centre amounts equivalent to the refund.
The tax on financial, construction, advertisement and franchise services will be collected by the FBR and the provinces will be given shares in accordance with the distribution formula.
It was agreed that the provincial government would be free to impose flood tax on services and goods of their own choice at rates they deemed fit.
The rate of the RGST decided by the federal government will be acceptable to the provinces and all exemptions under the existing sales tax regime will be withdrawn.
The exemptions apply to textiles, pharmaceuticals, machinery, fertilisers and pesticides and 122 other categories.