FBR’s GST Rate Hike Move, More Than Meets The Eye!

The Federal Board of Revenue increased GST by 2% to 19% on several items. Existing GST rate is 17%. Although apparently this move seems to additionally burden the masses but upon analyzing the move with some depth we feel that this move might in fact bode well on a macroeconomic level.

 

Under the current scenario where General Sales Tax (GST) is levied on the retail price, the onus lies on the distributor to both collect GST from the consumer and pass on to the respective authorities. Considering that a large number of these distributors are not tax registered therefore tax collection remains abysmally low.

On the other hand under the proposed move despite increase in the GST rate by 2%, we anticipate the tax levied to be lower because now the tax would be levied on the factory price which is notably lower than the retail price, thus bringing down the GST actually levied. Furthermore, since the number of manufacturers in the country is significantly lower than the number of distributors therefore; it would be relatively easier and swifter for the FBR to manage tax collection, thus boosting chances of meeting tax collection targets going forward. However, one caveat is that room for understatement of actual prices of products by the manufacturers would significantly rise thus requiring more scrutiny from the FBR.

Nonetheless, upon a more deep realization of the proposed FBR move and hopefully tighter and diligent management of tax collection by the FBR we could see this benefitting the national kitty and the Karachi Stock Exchange (KSE) subsequently.