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The Reformed General Sales Tax (RGST) Bill has become the latest ground for political
games. While the Pakistan People¶s Party (PPP) calls it a necessity, almost all parties are in
strong opposition. Amidst the political rhetoric, economic experts are siding with the
proposed taxation system and the public is flinching at the thought of yet another price
hike.

What is the RGST? Why is it suddenly so important? Is it really as evil as they say?

Here are a few answers.

c
  

The RGST is actually plain old Value Added Tax (VAT) with a new name. Since the VAT has
already had its fill of bad publicity, the government decided it would be a smart move to
rename and repackage the new taxation system.

The RGST is a taxation system that operates by an addition of 15 per cent tax on each and
every value addition on taxable products.

c  

The key players behind the proposed RGST are the International Monetary Fund (IMF), the
World Bank, United States Mission to the European Union (USEU) and other assorted donors
who are tired of paying their taxpayers money to cover up for the leaks in our taxation
system. But this is not to say that we do not need reforms in our taxation system. The
International Monetary Organisations might be the catalysts towards the reforms just now,
but in all reality, tax reforms have been long overdue.

Those who will be affected in one way or other are the suppliers, the manufacturers and the
retailers who will all have to maintain and disclose proper sales and production records and
would thus find tax evasion pretty difficult. Of course, the real victims are the consumers
who would bear the burden of higher costs.

c   

The government is trying its best to impose the RGST mostly because there is no way out of
it this time.

The imposition of more taxes is a condition to which the IMF had agreed to give a monetary
injection to the failing economy of the country. Add flood related damage to the economy
and conditions of the donor countries, and the imposition of the new tax has become a
must.

Although the RGST is being imposed under pressure, economic experts say that Pakistan
was in dire need of it. The new system of taxes will not only raise our revenue but also help
in documenting the economic growth.

c   

The originally proposed VAT was supposed to come in effect back in July, but due to
massive public and political backlash, the government was forced to delay the imposition.

Now, the RGST Bill has been passed by the Senate. Eventually, it will be discussed in the
Parliament and will be passed unless rejected through a vote. The government needs just a
simple majority to pass the Bill. As soon as is passed by the Parliament, the RGST will be
imposed.

Ä


The new tax does have a wider reach than the old GST. When the RGST is imposed,
everyone from the suppliers to the middleman in small and large businesses will be brought
within the tax net.

Unlike the old GST, the RGST will not be imposed just on the final price of a product; rather,
a certain amount of tax will be added at each stage of production.

For example if a supplier sells raw material worth Rs100 to a manufacturer, he would
charge Rs115 instead of Rs100, and remit the extra Rs15 as tax.

After manufacturing the product, the manufacturer, for example, adds a profit of Rs2o. The
product now costs Rs135, but instead of selling it to the retailer at Rs135, the manufacturer
will add another 15 per cent to the value addition of Rs20 which will bring up the cost to
Rs138. The extra Rs3 will be remitted as tax.

Finally, the retailer will add his profit. Assuming that is another Rs20, the price of the
product is now up to Rs158 again. Instead of selling it at Rs158, the retailer will add yet
another 15 per cent of the value addition and the final cost will be Rs161. The retailer will
then pay the added tax back to the treasury.

There are exemptions and conditions, but so far the glitches are being worked out.
According to economic experts, this system of taxation will help bring more people into the
tax net. Not just that, tax evasion will become more and more difficult. Since everyone will
be documenting and paying the tax at each level, any attempt at tax evasion will
automatically be highlighted.

Source:
http://blogs.tribune.com.pk/story/31...ow-about-rgst/
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There are various problems associated with RGST or VAT.

1. First problem is that, this tax is directed towards strong section of traders and
businessmen. This is because previous GST was imposed on the final prdouct, thus
bypassing various stages through which it is now supposed to be implemented. As has been
explained in the Viceroy's post about those stages, now those stages include the whole
production and distribution system of the goods on which this tax is to imposed. This means
that previously those industries which were out of tax documentation will come under tax
net. This is the MAIN problem with RGST.

2. Like all indirect taxes, RGST is also inequitable and regressive in nature. Inequitable tax
means that poor will be hit most with this tax, and regressive means that poor will have to
pay more of their income in form of taxes.

3. IMF and WB, are not necessarily insisting on the RGST. Their main concern is about
reduction of fiscal deficit. Which can be done through increase in direct taxes like income
tax, but problem with direct taxes is that very influential section of society will come under
tax net. Although, certainly more equitable and progressive (poor friendly), this tax is
politically infeasible simply because of corrupt government and their machinery. I must tell
you DIRECT TAXES ARE SURE ANSWER TO PAKISTAN'S PROBLEMS BUT GOVT DOES NOT
WANT TO IMPOSE. In this situation, the only possibility in front of IMF and WB is to lay
stress on imposition of RGST.

4. Another dimension of RGST is the issue of exemptions and different tax rates, while RGST
will remove most of the exemptions and also a flat tax rate will be applied. But this act will
increase prices of some items for example sugar, which is already expensive.

5. One post claimed that taxes are a means to reduce inflation. This is certainly true if taxes
are direct i.e. imposed on their incomes directly. But I am afraid, this is not the case with
RGST. This is because this tax is imposed on goods and services and not on income. Since
this tax is inherently regressive (meaning poor will have to give more of his income in taxes
as compared to rich one), thus rich will not be much affected and will continue spending
although at less rate than before. But the increased price level will override this effect,
hence resulting in inflation.

If that were direct tax, then it would have reduced the income level of rich while not
affecting prices of goods and prices and thus will reduce the overall consumption by rich and
may not have affected poor. Result will be reduction in inflation. This is because most of the
spending comes from rich and decrease in their incomes may have reduced the price level.

Regards

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November 26th, 2010 by Cy

FIRST things first. The reformed general sales tax (RGST) is bad for consumers. Which
means it¶s bad for the poor and the less well-off. The reason is pretty straightforward. RGST
is an indirect tax, i.e. a tax on goods and services. Which means it will get passed on to the
end consumer, which includes the poor and the less well-off.

Yes, the government wants to harp on the positive aspects, for obvious reasons: new taxes
on leather goods and carpets, for example, are unlikely to hurt the poor because they don¶t
use carpets or leather goods.

But look at all the stuff that is getting taxed. And for that we need go no further than the
information ministry¶s six-page handout on RGST. µSurgical items¶ ² which means your next
trip to a doctor may cost more. µPharmaceuticals (other than life saving)¶ ² which means the
next time you have a mild illness you¶ll pay more to get better. µStationery items, dairy
products¶ ² self-explanatory.

But, and here¶s the rub, there is a very different kind of problem which has ravaged the poor
in recent years: inflation. In part, the fiscal deficit the country has been running has helped
keep inflation high. Now, with the floods having added colossal expenditures to the overall
budget, the fiscal deficit, in the absence of revenue-generating measures, would balloon
again ² further driving up inflation.

So for the poor and the less well off, it may be a case of damned if they do, damned if they
don¶t: fight off (theoretically) RGST and inflation would rise; accept RGST and end up paying
more from their pockets.

There is, of course, a better solution: tax something else, or someone else, i.e. the rich.
Which is why the government has cleverly weaved in the µflood tax¶ on incomes. People and
businesses paying income tax, a tiny percentage, will for six months have to pay 10 per cent
more income tax. It¶s really just a ruse, allowing the government to claim that it is moving
towards a fairer tax system.

In truth, at the end of the six months, the country will have an inarguably more unjust and
more inequitable tax system, because by then the RGST regime would have permanently
expanded indirect taxes while direct taxes, i.e. income tax, would return to the original, low,
level.
To understand why this happens, you need to know something about your politicians and
how the state succumbs to special interests. Finance Minister Hafeez Sheikh gave an insight
into this world earlier this week when he candidly admitted that as late as 11.30 the night
before this year¶s budget speech he was receiving calls pressing him to exclude a capital-
gains tax on the stock market.

The rich not only know how to protect themselves, they are far more organised and serious
about it than the average person. The average schmuck working nine-to-five for a pittance
will bend to the government¶s will and pony up the extra 10 per cent income tax
(realistically, he will have no option because it will be deducted at source by his employer).

But the big boys have a bagful of tricks that the average schmuck can only dream of. Access
is of course one thing. Hafeez Sheikh is notoriously inaccessible to the media. But stock-
market kingpins lobbying against a capital-gains tax on their business can reach him at half
eleven the night before the federal budget is unveiled.

Even better than access, however, is being there yourself to look after your interests. Sorry,
we can¶t tax agricultural income because it¶s a provincial subject. Oh, how did that happen?
Well, y¶know, we transferred it to the provinces in the 18th Amendment. Oh, you mean the
provinces where the big landlords control more seats? Yeah, but it was all about
strengthening the federation. Straight face.

Is there any hope of a better, more just system emerging? At present, no. There is no will
for it nor is there the capacity. The clumsiness with which the government has handled the
RGST issue is indicative of that. A systemic overhaul or deep reform by these guys, in this
incarnation, at the present time, is extremely unlikely.

But consider this: the most politically damaging thing a government could do ² pare down
subsidies at a time of soaring inflation and low growth ² this government has done. Why?

Economics and finance have a logic of their own, logic that every government eventually has
to bow before. In 2008, the option was to either embrace the IMF or slide towards economic
oblivion. Purists may argue about that, but it was effectively the only choice in the real world
where politics and economics intersect.

The same goes for the business of taxation. Eventually, economic logic will kick in. It¶s
happened already while setting the rate of RGST: 15 per cent, two per cent lower than the
existing standard rate. In this year¶s budget, the government experimented with a
temporary, one per cent increase in the sales-tax rate. The consequences have been
inevitable.

While in the short-term the demand for goods taxed stays more or less constant (people
take time to adjust habits and consumption patterns), it eventually begins to sag ² higher
price translates into lower demand, meaning you can¶t infinitely raise or rely on indirect
taxes.

So it will be with RGST. It really is a band-aid solution, meant to nominally increase the tax-
to-GDP ratio in the medium term. Eventually, other measures will be required.

At that point the RGST Trojan Horse may be tapped: once you¶ve documented the production
and supply chain, as the RGST aims to do, you¶ve got proof of how much business so many
more businesses are doing.
At present, only the retail level is captured by sales tax. But under RGST, which is really the
value-added tax by a different name, the tax machinery will learn about the activities of
manufacturers, marketers, distributors and wholesalers ² exponentially increasing the
potential targets of the taxman for things like income tax.

The problem? The same as always: special interests. What the taxman can document, the
politician can scuttle. Just like agriculture and textile special interests have worked to keep
those sectors largely out of the tax net, so will other, newly taxed sectors work to acquire
clout in the corridors of power.

But then in the end they will still have to make a choice: do they want Pakistan to swim or
sink economically?

At that point, you better hope you have a lifeboat handy.

Source:
http://www.cyrilalmeida.com/2010/11/...cyril-almeida/
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Quote:

Originally Posted by
 


þ

  
     
  
      

  
I totally do not agree sir, every new tax will be difinitely transfered to end customer causing
more inflation...but offcourse there lies some political goals and miles to be achieved...
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Quote:

Originally Posted by  

      

 
   

 
  



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The Original GST implemented under the General Sales Tax Act 1990 was implemented in
the VAT mode i.e. for the last 20 years, GST has been collected in stages on the value
addition, and not at the final point. Therefore, this R-GST is not any change from the past
practice in the mode of collection.

Quote:

5. One post claimed that taxes are a means to reduce inflation. This is certainly true if
taxes are direct i.e. imposed on their incomes directly. But I am afraid, this is not the case
with RGST. This is because this tax is imposed on goods and services and not on income.
Since this tax is inherently regressive (meaning poor will have to give more of his income
in taxes as compared to rich one), thus rich will not be much affected and will continue
spending although at less rate than before. But the increased price level will override this
effect, hence resulting in inflation.

The idea has always been that GST/VAT/RGST would be used to document the entire
economy and once it has been done, more stress would be on revenue collection through
direct taxes. The indirect taxes would be reduced to a level below 10% (some studies even
propose below 5%) and would only be used to keep a check on the incomes.
__________________
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@M Ali Asghar

Thanks for the information. You are quite right when you said:

"The Original GST implemented under the General Sales Tax Act 1990 was implemented in
the VAT mode i.e. for the last 20 years, GST has been collected in stages on the value
addition, and not at the final point. Therefore, this R-GST is not any change from the past
practice in the mode of collection."

This is right as per law and Sales tax Act. But in practice let me quote an excrept from one
study (Thirsk, 2008):

"Because wholesalers and retailers were felt to be evading sales tax on large scale, the FBR
began to impose sales tax on on the "printed" retail price set by manufacturer, thus pre
collecting tax that would or should have been paid at the later stage."
Reference: Thirsk, Wayne (2008). "Tax Policy in Pakistan: An Assessment of Major Taxes
and Options for Reform" International Studies Program, Working Paper 08-2008, Andrew
Young School of Policy Studies.

Thus in practice GST is collected at final point of sale. Besides, if it were really a VAT, then
there is no need to change it.

Regards

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Want to lead a luxurious lifestyle without paying any tax? Fed up of being expected to
account for your wealth? Well, we at Rabbani, Gillani, Sheikh, Tareen & Co., (RGST & Co.)
have the answer. We are proud to bring you the opulence of Park Lane without the
oppression of taxation in the Principality of Parkistan, known as ³The Enclave of the Rich´, an
autonomous entity exclusively for the rich landed elite. It should not to be confused with the
surrounding Republic of Pakistan, also known as ³the Land of the Poor´.

RGST & Co. bring you prime tracts of land, in beautiful Parkistan, providing the luxury,
comfort and excellence you and your wealth deserve with a privilege available nowhere else
in the world. Other jurisdictions tax the wealthy more than the poor. In Parkistan, thanks to
RGST & Co. we are proud to say that being rich shouldn¶t cost you a penny. Because rich
people have the right to be rich, stay rich and get richer.

All you need to do to qualify for this amazing opportunity is to become an ³agriculturist´.
Yes, it really is that simple. All your income will instantaneously become tax free and it¶s
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satisfied clients have to say: ³Hello ² I am Chaudhry Malik ² I am a wealthy businessman
with large land holdings. In any other country, I would have to pay up to 50 per cent income
tax. But in Parkistan, I just show all my income as ³agricultural´, so even though I earn
millions of dollars, own sprawling estates and live in opulence, I pay only $80 in tax ² and
that¶s just some paltry land tax. Thank you RGST & Co. You make being wealthy profitable.´

What¶s more, not only will you be exempt from income tax ² you actually get paid money
too. Oh yes! Poor Pakistan¶s government will pay you fertiliser, fuel and input subsidies as
well as superb support prices. So you actually make money at both ends«. with subsidised
inputs and tax-free income. It couldn¶t get any better!
However, all we ask of you is that when you are a member of Parkistan you always deny its
lucrative privileges, to protect the sanctity of this exclusive tax haven for the rich. This
haven is strictly for the rich, landed elite. But even though Parkistan is exclusive to you, you
need not be committed to Parkistan. We offer attractive dual residence packages ² our most
preferred location is Canada (three year process), followed by the United States (green card
or business residency) and Dubai (immediate residency). Most of you will wish to maintain a
portfolio of prime residences in these locations and we recommend doing so. The
Principality¶s rich-friendly policies and tax-free status are occasionally subject to frivolous
attacks by the courts and media but, to date, none of our wealthy residents has been
prosecuted, audited or held accountable and we expect that trend to continue.
Still not convinced? Well here is an exclusive offer you cannot afford to miss! If you are one
of the next 100 wealthy politicians to join us at RGST & Co. ² in addition to guaranteed tax-
free income AND huge subsidies AND generous support prices we will also give you
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sure you have ³borrowed´ upwards of Rs 1 billion from any Pakistani bank and we will take
care of the rest. Most of our partners have had an average of Rs3 billion written off ² or
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It pays to be rich but now you can get paid to be rich! Welcome to Parkistan! Where the ³r´
stands for rich!

RGST & Co. are proud to be partners of IMF Inc. Global Subservience UnLimited.

Disclaimer: The above offer expires in three months. In the event of riots, rebellion or an Act
of God, RGST & Co. may withdraw this offer and shall not be held liable for any loss, damage
or suffering resulting thereof.