Cabinet set to approve RGST today

ISLAMABAD: The federal cabinet is set to approve a revised general sales tax framework on Wednesday. It seeks, among others, withdrawal of exemptions on textile and agriculture sectors.

“This will be a tough decision for the cabinet because the RGST framework seeks withdrawal of exemptions on the textile and clothing sector, which contributes over 55 per cent in the country’s total exports,” a finance ministry official told Dawn on Tuesday.

According to him, the International Monetary Fund turned down a request by government for exempting the textile and clothing sector from GST, saying only exports could be exempted from the levy.

This means that piling up of refunds will cause liquidity crisis for local industries and a reduction in their production. As a result, the industries would carry out massive layoffs to reduce cost, which would aggravate unemployment.

A knowledgeable source in the finance ministry said that officials from various ministries held meetings with Finance Minister Hafeez Shaikh on Tuesday to work out a final RGST draft for presentation in the cabinet meeting.

An FBR official said the withdrawal of exemptions would lead to piling up of refunds for the textile sector because of the ‘ineffective’ system of refund payment to exporters.

“The government has paid out repayment of refunds on some inputs of the textile sector after two years,” the official said, adding that this had happened even after the entire sector was exempted from the GST payment.

More than Rs42 billion refund cases have been pending with tax officials for one year because of the ineffective tax system.

After the withdrawal of exemptions, the refund amount would pile up further because there was no proper documentation of records, the FBR official said.

Sources said that the FBR had to exempt the textile sector from GST because of the alleged corruption in the payment of undue refunds to exporters, causing a loss of billions of rupees to the national exchequer.

An agriculture ministry official said the withdrawal of exemptions on the agriculture sector would further increase prices of food items and inflation.

According to the source, the finance ministry will brief the cabinet on these issues which have been linked with future assistance from donors. The meeting will also consider measures to generate new sources of revenue.

The provincial governments, the source said, could also present the RGST draft in their assemblies after consultation with the federal government, if needed.

There is a deadlock between Sindh and other provinces over the mode of collection of GST on services.

Sindh says the provinces should have a right to collect GST, while Punjab, Balochistan and Khyber Pakhtunkhwa want the centre to collect the tax and then distribute it among the provinces in accordance with an agreed formula.