Sources told Business Recorder on Tuesday that 15 percent GST rate should not be disturbed in the 2005-06 budget, as the main logic about the applicability of low GST rates in many countries proved wrong on the basis of a comparison of Value-Added Tax (VAT) rates applicable all over the world.
The analysis showed that a few countries have low GST rates as compared to Pakistan. Ten percent GST rate is applicable in Indonesia, 10 percent in Philippines, 10 percent in Australia, 7 percent in Canada, 7 percent Thailand and 5 percent GST rate is applicable in Taiwan and Japan.
In Singapore, 3 percent GST is applicable. But, the tax-GDP ratio in these countries is comparatively better as compared to Pakistan. Pakistan has to annually increase tax-GDP ratio, which would be real challenge after reduction in GST rates.
Moreover, GST rates in rest of the world is much higher as compared to Pakistan. In Denmark, 25 percent GST rate is applicable; Norway 23 percent; Poland 22 percent; Russia 20 percent; Vietnam 20 percent; France 19.6 percent; Turkey 18 percent; UK 17.5 percent; and in China 17 percent GST is applicable.
Similar trend is observed in the remaining countries of the world, except India, Saudi Arabia and Hong Kong, where GST rate is not levied by federal governments.
This analysis clearly negates the claim that 15 percent GST rate in Pakistan is much higher as compared to neighbouring countries. The average GST rate comes to around 20-21 percent on the basis of this comparison, sources said.
"Keeping in view 15 percent GST rate, our tax-GDP ratio comes to around 4 percent and reduction in tax rates would also further decrease this ratio", sources said.
In India, Mode rate (Modified sales tax system) is applicable where sales tax is being levied by provincial governments. India's tax-GDP ratio was 2.9 percent in 1999-2000. Tax-GDP ratio increased 4 percent as compared to lower rates applicable in the past.
In these circumstances, if the CBR reduces GST rate from 15 percent to 10 percent, it should not forget that tax authorities have to take a number of other revenue generation measures to increase tax-GDP ratio and increase revenue collections. For example, services sector is grossly undertaxed as the sector contributes 50 percent of GDP while its receipts are quite low.
Sources said that sales tax is applicable on domestic consumption in Pakistan and GST rates should not be reduced where consumption is more. In case the GST rate is reduced, the CBR has to guarantee the steps for meeting the revenue collection targets.
A tax consultant opined that there are two sets of considerations which determines the optimum GST rate in taxing consumption ie one, efficiency and second, equity. Efficiency, levying lower tax rates on commodities for which demand is more elastic and higher rates on commodities which are luxurious and are used by upper class. This determines the impact of taxation on pattern of consumption.
Secondly, in terms of equity considerations, it will be more appropriate to tax most heavily such goods, which account for a greater share of the expenditure of the better off (ie rich people). Needless to mention, the equity consideration in Pakistan is always ignored in the levy of general sales tax (consumption tax), the consultant added.
Meanwhile, sources said that income tax rates of public limited companies are very much higher all over the world except Bangladesh. Similarly, the rates on small companies are also higher excluding three or four countries.
Moreover, lower rate of GST in other countries of the region cover wholesalers as well as retailers. In Pakistan, most of the retailers are working below the exemption threshold and 15 percent GST rate is needed to meet the revenue targets and annual increase in tax-GDP ratio.
People give example of other countries where low GST rate is applicable, but the fact is that the low GST rate is applicable at the retail level in these countries. But in Pakistan most of the retailers are exempted from sales tax and those falling within the exemption threshold are not liable to pay any sales tax, they added.