RGST Imposition: Economic Team to Brief Political Parties
Monday, December 20, 2010
With the mounting pressure from the donors, particularly, the International Monetary Fund (IMF), the government economic team headed by Finance minister, Dr Abdul Hafeez Shaikh, is getting ready for second round of presentations to the political parties on Reformed General Sales Tax (RGST).
Dr Abdul Hafeez Shaikh and his team in the second round would try to convince the political leadership of the country that RGST is an integral part of the government's economic reforms programme initiated sometimes back with a holistic approach to document the national economy.
The political parties will be informed that failure on part of government to put in place proposed RGST will have far-reaching negative impact on Pakistan- both in terms of revenue generation and credibility to honour commitments with the international donors that in such case will simply add to Pakistan's economic woes in the near future.
The second round of the presentation to the political parties on RGST will commence in the next couple of days. The finance ministry has already sent revised draft on RGST presentation to Prime Minister Syed Yousuf Raza Gilani, for approval. RGST has emerged as a highly controversial issue at this point in time.
Seeing opponent's hostile mood, the government assigned the job to Dr Abdul Hafeez Shaikh to pacify the political parties in and outside the parliament. He had held separate meetings with MQM leaders in Karachi and then with Mian Nawz Sharif and Mian Shahbaz Sharif in Lahore in the recent past but without any positive outcome.
The leaders of these two important political parties conveyed to Dr Abdul Hafeez Shaikh and his team that it was not a proper time for the government to venture for any new taxation measures like RGST. They have also demanded to delay RGST imposition for at least one to two years.
The government is finding no way out of the issue. It has either to go for RGST at any cost and get the last two tranches of $3.4 billion of $11.3 billion from IMF under the standby programme to give some financial support to its lowering foreign exchange reserves or succumb to the opposition pressure to delay its implementation. The second choice can put the government in another crisis as Dr Abdul Hafeez Shaikh and his team has already announced to quit the government if RGST plan did not go through.
Better Option – Keeping Dollars or Investment?
Wednesday, December 15, 2010
Memories are valuable in life. I still remember that day when my uncle gave me a ten US dollar note on my tenth birth day. I could not buy an ice cream from general store against the currency but it did create interest and I started collecting and saving foreign currency notes and coins. I have extended family living broad hence my collection started growing steadily. At that time the rupee was trading about 29.40 to dollar (imagine now when Pak currency has fallen to the lowest level verses dollar on the inter-bank market for buying and selling at almost 86.00.)
Graphical representation of Pak rupee value to dollar is as shown in the diagram. Why is rupee falling so fast? Most economists are of the opinion that the main reasons behind the fall of the rupee are an increased demand for dollars due to a spurt in crude oil prices and the flight of foreign funds from the local markets. Demand for rupees, simultaneously, has dipped because capital inflows are down.
Our currency is staggering in a see-saw fashion and declining trend in the value of Pak rupee is increasing day
by day. As a result people have started having foreign currencies at their homes and in bank lockers after purchasing it from the local market. This is another reason of escalating the value of dollar. They believe that keeping dollars and other demanding currencies in their pocket is good option rather than investing it some where else. I have asked number of my friends who are in the know of the matter as to why they are doing this? They simply reply that they do not see a better alternative to invest their money.
Sadly, this perception is wrong. There are number of options available in the market at this time even when liquidity crunch has caught our economy in vice-like grip. There are alternative that would not only secure for our savings at very competitive rate but can also contribute to our national economy. I remember what Quaid-e-Azam had rightly said,
“Thrift as a national asset is going to play an important part in the building up of the state”. So save and invest in Pakistan saving certificates.
Government of Pakistan has issued number of certificates including Defense Saving Certificates, Special saving Certificates, Regular Income Certificates and Bahbood Saving Certificates. Among all Bahbood Saving Certificates for senior citizens and widows are more lucrative than others in terms of rate of return that is 14.16% p.a. This return is exempted from deduction of withholding taxes and Zakat and is far better than the annualized rate of increase in dollar historically that is clearly shown in the diagram except for the year 2009. Further, volatility of exchange rate in favorable direction is quite uncertain, however profit against saving certificates would remain definite as finalized at the time of purchase.
Most of the people are not very much aware of the pros and cons of these saving schemes. Normally retired people are interested to place their retirement funds in any one of the schemes offered by saving centers to make ensure their monthly returns. Some people including businessmen who have ability to judge the main risk, that is the cost of opportunity would reluctant to invest in these schemes. Since this kind of securities offer a very low risk, the interest rate is also lower than the ones offered by private entities.
However, still there is a margin of arbitrage gain that an investor can obtain through replacing their investment in dollars with Behbood scheme. In coming future current offering rates of return against these schemes would be decreased as market correction.
Where is the best place for our investment in today’s scenario considering all risk factors? I posed this question to my colleagues, peers and market experts. Most of them who continuously watch market dimensions like Mr. Tahir Hussain Raza (Director Finance of Acro Group of Companies), working in financial market for many years agree with this analysis and have suggested the same. This understanding can help anyone to make an informed saving decision and not “putting all eggs in one basket.” On the other hand, this would be a good step to reduce a little portion of the undocumented economy worth Rs.100-200 billion of our country.
Banking Sector and RGST
Wednesday, December 1, 2010
The General Sales Tax (GST) Bill 2010 is silent over some key issues of banking sector particularly services provided by banking companies. There are some important issues of banking sector have not been clarified in the General Sales Tax Bill 2010.
Issuance of Tax Invoice:
In the existing FED Rules, banks are not required to issue tax invoice, the proposed law is silent in this regard. The Rule 40 A (6A) of the FED Rules exempt the banks from issuance of tax invoices to their clients. The question arises whether such tax invoice would be required under the GST Bill 2010 or not?. Secondly, whether such exemption would continue under the RGST regime.
Exemption of Some Services:
Existing federal excise duty (FED) is applicable on all services provided by a banking company at the rate of 16 percent except for services against mark up/interest income, Hajj, Umrah, Cheque Book Issuance, Insurance Premium, Musharika and Modaraba Financing and Utility bills collection. After promulgation of GST Bill 2010, the FED at the rate of 16 percent will be converted into GST at the standard rate of 15 percent. However, it is not clear as to whether these services of the FED would remain exempted under the RGST.
Federal or Provincial Jurisdiction:
The main difference between FED and GST is that the former falls under federal jurisdiction, whereas the later falls within the provincial jurisdiction but collection rights may remain with FBR in certain cases. About the issuance of tax invoice, in the existing FED Rules banks are not required to issue tax invoice, the proposed law needs to clarify the issue. In case of sales tax return, this also needs to be clarified by FBR, whether the monthly return shall be filed province wise separately or a combined return is required to be filed with breakups of income and sales tax thereon for all provinces.
Maintenance of Record:
As far as maintenance of record is concerned, he said, all the branches shall be required to keep proper records of GST and related income for the purpose of audit. It is not clear as to whether it will be centralised or will have to deposited province wise; needless to state that the claim of input will also be on the similar lines if the bank so decides to claim the same.