Sun. Jul 14th, 2024

The government is considering options to increase the GST by one percentage point

By Vaseline May30,2024

This single step, if allowed by the government, could generate Rs180 billion in revenue in the next budget

People buy groceries from makeshift stalls at the weekly ‘Sunday market’ in Lahore on April 2, 2023. – Online

ISLAMABAD: The government is considering options to increase the GST rate by 1 percent in the upcoming Budget 2024-25 in a bid to meet IMF conditions, The News has learnt.

This single step, if allowed by the government, could generate Rs180 billion in revenue in the next budget.

Another proposal under consideration is to do away with various rates in GST and bring all sectors under the standard rate of GST.

On the personal income tax (PIT), the IMF has prescribed an increase in the tax rate for those with higher incomes and increased the maximum rate from 30 percent to 40 percent. However, the proposal to bring pensioners receiving more than Rs100,000 into the tax net has been dropped for now.

The IMF has shared its draft report with Pakistani high-ups and asked for stringent measures in the upcoming budget, including options to increase the GST rate by 1 percent and hike rates for higher income groups of the salaried class.

A top official said the draft report and the Economic and Financial Policy Memorandum (MEFP) are under discussion and the government will implement the agreed terms in the upcoming budget to pave way for signing of the Staff Level Agreement (SLA ) after the budget. approval. The IMF wants the FBR’s tax collection target to be in the range of Rs12.9 trillion for the 2024-25 budget, but the FBR is still pushing for a maximum of Rs12.5 trillion.

The IMF wants to discuss with the provinces the possibility of harmonizing the tax rate and basis (for example the deductions and the depreciation percentage) of the agricultural income tax with what would apply at the federal level.

The IMF wants to repeal the existing SME tax framework under the Fourteenth Schedule for the manufacturing sector, tax all manufacturers and abolish the special tax regime for the construction sector as soon as possible and subject the sector to standard income tax regimes. The IMF has proposed a front-loaded program under which the government will have to take very difficult tax decisions, such as increasing the GST rate by at least 1 percent, from the standard rate of 18 percent to 19 percent.

For wage earners, it is proposed to further increase the higher income tax from 30 percent to 40 percent in the next budget.

There are seven slabs in PIT for the salaried class and the IMF is asking to reduce this to four slabs. For the highest income category earners where the taxable income exceeds Rs6,000,000, the FBR will charge Rs880,000 + 30% of the amount exceeding Rs6,000,000. Now the IMF is proposing to increase the maximum rate from 30 to 40 percent.

On the rationalization of GST, the IMF has recommended abolishing all zero rates (Fifth Schedule) except on exports and bringing all other goods to the standard rate.

The Fund has asked for the exemptions (Sixth Schedule) to be limited to the supply of residential property only (except first sale) and for all other goods to be brought to the standard rate. This will also increase fuel taxes, in line with the average of comparable countries in the region and emerging economies.

The IMF aims to abolish the reduced rates under the Eighth Schedule and return goods covered thereto to the standard rate, with the exception of a small number of essential items such as food basics and vital education and health care items, which are subject to a single reduced rate of 10 percent should be taxed. The bank wants to undo all compliance-related disruptive changes in tax policy. This includes eliminating the minimum taxes and removing the ninth and tenth schedules under the GST Act.

On the income tax side, the IMF wants to revoke the FBR’s discretionary power to grant tax incentives to industrial companies and the Cabinet’s discretionary power to grant tax incentives. There are calls for the Tax Expenditure Report to be supplemented with a chapter assessing the costs and benefits of tax incentives.

If the tax incentives are granted in the future, they should be time-bound and subject to regular assessment of costs and benefits. If costs are higher than initially expected and/or benefits are lower, incentives should be withdrawn immediately.

The IMF recommends converting remaining incentives to cost-based incentives where possible, and reforming the minimum tax to allow for the effect of accelerated deductions. It wants to implement a half-year rule to limit deductions in the year an asset is put into use and withdraw the minimum tax in the medium term, as corporate tax administration (CIT) capacity increases and corporate tax revenues to rise.

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