Retail sector in Pakistan has always refused to come into the tax net despite government offers of lucrative minimum tax schemes launched in the past. Now Value Added Tax would be implemented from July 1, 2010 but FBR’s clarifications about the proposed VAT regime have failed to build the trust of stakeholders, reports UZMA ALEEM
The International Monetary Fund had deferred, earlier, for an indefinite period of the disbursement of the fifth, US$1.2 billion, instalment of funds to be paid to Pakistan under their $11.3 billion standby agreement. This came after the government failed to meet the condition of tabling draft value-added tax legislation in the four provincial assemblies. Now the IMF has given May 3, 2010, as a tentative date for the approval of the fifth tranche after seeking assurances on VAT implementation from July 1 by government of Pakistan. The IMF was pushing Pakistan to levy the tax to increase tax-to-GDP ratio, the lowest in the South Asia.
The Fund has already twice postponed the executive board’s meeting scheduled earlier to be held last month after Pakistan could not meet the pre-condition of tabling value-added tax in provincial assemblies.
Pakistan agreed with the IMF in November 2009 to impose VAT from July 1 this year. The new tax would help the government to raise an additional 150 billion rupees (US$1.9 billion) in revenue. Local traders and businessmen see inherent flaws in the VAT Act. While a certain section of economists favour this regime of taxation as they see it an important step in economic development through the documentation of economy.
“Though the VAT regime is a much simple trader and customer friendly system of taxation but all the same it is very noble too for the people. It is therefore, yet natural that the trading community in particular and the consumers in general feel unrest about this new tax regime,” Riffat Saqlain, an economist was of the view.
While explaining the phenomenon of VAT she said that each commodity had to pass through several stages of production and distribution. “Value at the final stage is the sum of value created/added at each of these stages. Under VAT value added at each stage of production and distribution is taxed. VAT is essentially a multi-point system of taxation. Thus value added is the difference between a dealer’s Sales and Purchases. Moreover VAT is immensely popular throughout the world. VAT system is presently in operation in more than 135 Countries and covers nearly 85 percent of the World’s population. Even it is operational in the neighbouring countries like India, Bangladesh, Nepal, Sri Lanka and China” she elucidated.
“Actually only dealers above the taxable limit have a tax liability under VAT. VAT is consumer friendly, because of the mechanism of Input Tax Credit where the dealer gets a set-off for the taxes paid earlier within the State, such taxes are not treated as part of the cost thus there is no cascading i.e. Tax on Tax. This ensures that the price of commodities does not increase under VAT,” she added.
Much of Pakistan’s economy is not documented, encouraging the parallel economy to thrive. Pakistan’s parallel economy, or untaxed illegal money, is estimated at $83 billion, or half the country’s entire GDP of $166 billion. The problem has become so big it threatens public welfare plans
In addition, Federal Board of Revenue Chairman Sohail Ahmed also stressed the need to clarify that the VAT would replace the general sales tax (GST) and it would not be an additional tax. The VAT would replace 16 percent GST with the lower rate of 15 percent. The higher rates of sales tax like 21 percent or 19 percent etc would be considerably reduced to 15 percent.
He strongly dispelled the impression that the FBR was not fully prepared to implement a broad-based integrated VAT. The factual position is that the FBR, being a revenue collection agency, has finalised all arrangements for the implementation of VAT. It depends on the successful negotiations of the Ministry of Finance with the provincial governments for implementation of the federal and provincial VAT Bill 2010. However, if even one province disagrees with the VAT law, it cannot be implemented in an integrated form as drafted by the FBR.
However, the existing constitutional and legal framework allows the provinces to empower the FBR to collect sales tax on services. Responding to a query, he said that the taxpayers should deal with a single tax collecting agency for payment of taxes. In case the taxpayer has to confront two to three federal and provincial revenue-collecting agencies, it would not be acceptable to the business units.
About the attitude of the retailers, he said that the retail sector has always refused to come into the tax net despite offering lucrative minimum tax schemes to them. “We will never force the small retailers to obtain registration under the VAT law. Only big retailers having annual turnover of Rs 7.5 million would be liable to registration. The registration threshold of Rs 7.5 million clearly reflects that big businessmen and retail outlets would be liable to register excluding small shopkeepers and retailers. The small business units would be automatically excluded from the VAT regime due to higher registration threshold,” he clarified.
He said that retailers would prefer to come under the documented regime of VAT to avail the facility of input tax adjustment. They would voluntarily obtain VAT registration to make purchases from the registered units. Ahmed was confident that the VAT would not have any major inflationary impact on consumer goods from the next fiscal.
It is a total misconception that the prices of commodities and goods would suddenly jump following imposition of lower rate of 15 percent VAT from 2010-2011. The VAT is a modern and progressive way of taxation on consumption stage. When highest rates of sales tax would be brought down, it would definitely raise prices of the commodities.
“The introduction of 15 percent VAT at consumption level would not escalate inflation, but instead it would encourage voluntary compliance at consumption and retail levels, besides benefiting the economy of the country,” he remarked.
While Main Muhammad Haroon, Lahore chamber of commerce industry’s executive committee member, said that the imposition of VAT would immediately drive up inflation. “Earlier the central bank forecasts that consumer price index (CPI) inflation for the fiscal year ending on June 30 will be close to 12%, up from a low of 8.9% in October 2009 after price increases for electricity tariffs, petroleum products and commodities. In the last fiscal year, the average inflation was 20.5%. The CPI has risen 36.3% since the present coalition government came into power in 2008, with the prices of wheat flour surging 83% and of sugar 168%. The increase in prices of essential items has continued despite regular government promises to contain the trend and punish hoarders and profiteers.
However FBR chairman further clarified that every taxpayer had to deposit his share of tax at the stage of value addition. The registered taxpayers would have the facility of the input tax adjustment and they would pay 15 percent VAT at their stage of value addition. The 15 percent VAT would be paid on the profit earned by a business entity operating under VAT regime. It will result in broadening of the tax base by bringing the entire chain into the VAT net. The biggest advantage of the VAT is the facility of input tax adjustment available to the registered persons under the VAT. It would encourage documentation, as adjustment would not be available to those purchasing from unregistered sellers. In the long run it is a big step towards documentation, as burden of taxes would be shared by the entire supply chain starting from manufacturing sector up to the retail stage.
As far as sales tax on services is concerned, the FBR chairman said that it is the right of the provinces under the National Finance Commission (NFC). Under the NFC Award, the collection of taxes on services is the right of the provinces and FBR being a technically tax collecting agency with expertise at federal level can collect VAT on services also only after the approval from the concerned province
Despite all the clarifications of FBR and government officials, most of the economists and traders do have their apprehensions on the said regime of VAT.
Akmal Hussain, renowned Economist, said that the proposed VAT would increase inflation, erode consumers’ purchasing power and dampen demand. Local business communities have strongly opposed the imposition of VAT, saying it will harm every sector of the economy. However, the rupee “will come under pressure if the IMF money is delayed for more than a month”,
Zafar Iqbal Chaudhry, President of Lahore Chamber of Commerce and Industry urged the government to put off the implementation of Value Added Tax until and unless a consensus is developed among all the stakeholders including all the chambers and trade bodies in the country. He said that there were number of points in the proposed VAT law that need to be amended and in the existing shape it is bound to open floodgates of corruption besides discouraging any new investment.
The LCCI president said that abolition of zero-rating facility available to five export-oriented sectors and reverting back to refund regime is beyond the understanding of the business community as it will open the way of corrupt practices to obtain flying invoices and seriously impede cash flow of the companies.
“The definition of tax fraud has been extended to cover tax evasion. The provision would be massively abused by tax officials. Similarly, vast powers are proposed to be given to tax officials to determine open market value of goods at their whims,” president of LCCI explained.
He was of the view that the section 87 of proposed VAT law was against all norms of justice as it denies a tax payer of his basic right of justice. He further stressed that the Lahore Chamber of Commerce and Industry would not accept the proposed VAT law in its present shape as it has been designed to promote the culture of flying invoices and other prevalent mal practices due to which the law abiding tax payers were suffering a lot and were even paying the taxes of those buyers/sellers who were not paying due taxes and making money.
The methodology to introduce an integrated VAT may have serious implications during implementation of a broad-based VAT from next fiscal year as the government has not taken into confidence the stakeholders. He suggested that each and every trade body including LCCI should be consulted and their views be obtained whether this new proposed draft of the VAT is in conformity with the law of the land or whether it would suit the stakeholders or not. He requested the authorities concerned that unless and until all the trade bodies and stakeholders agree on the enforcement of VAT Act 2010 it should not be implemented.
The LCCI President recommended to restore exemption from Audit on Payment of advance value added tax at import stage; reduction in record keeping period from six years to three years; curtailing discretionary unlimited powers given to the officials for recovery of amount; adjustment of input tax; retention of carry forward facility, streamlining the process of cancellation and suspension of registration; right to go in legal court of law against the tax official decision etc.
He said that any haste in the enforcement of VAT Act will prove to be counter productive to the trade and industry due to its harsh and irritant measures.
The International Monetary Fund had deferred, earlier, for an indefinite period of the disbursement of the fifth, US$1.2 billion, instalment of funds to be paid to Pakistan under their $11.3 billion standby agreement. This came after the government failed to meet the condition of tabling draft value-added tax legislation in the four provincial assemblies. Now the IMF has given May 3, 2010, as a tentative date for the approval of the fifth tranche after seeking assurances on VAT implementation from July 1 by government of Pakistan. The IMF was pushing Pakistan to levy the tax to increase tax-to-GDP ratio, the lowest in the South Asia.
The Fund has already twice postponed the executive board’s meeting scheduled earlier to be held last month after Pakistan could not meet the pre-condition of tabling value-added tax in provincial assemblies.
Pakistan agreed with the IMF in November 2009 to impose VAT from July 1 this year. The new tax would help the government to raise an additional 150 billion rupees (US$1.9 billion) in revenue. Local traders and businessmen see inherent flaws in the VAT Act. While a certain section of economists favour this regime of taxation as they see it an important step in economic development through the documentation of economy.
“Though the VAT regime is a much simple trader and customer friendly system of taxation but all the same it is very noble too for the people. It is therefore, yet natural that the trading community in particular and the consumers in general feel unrest about this new tax regime,” Riffat Saqlain, an economist was of the view.
While explaining the phenomenon of VAT she said that each commodity had to pass through several stages of production and distribution. “Value at the final stage is the sum of value created/added at each of these stages. Under VAT value added at each stage of production and distribution is taxed. VAT is essentially a multi-point system of taxation. Thus value added is the difference between a dealer’s Sales and Purchases. Moreover VAT is immensely popular throughout the world. VAT system is presently in operation in more than 135 Countries and covers nearly 85 percent of the World’s population. Even it is operational in the neighbouring countries like India, Bangladesh, Nepal, Sri Lanka and China” she elucidated.
“Actually only dealers above the taxable limit have a tax liability under VAT. VAT is consumer friendly, because of the mechanism of Input Tax Credit where the dealer gets a set-off for the taxes paid earlier within the State, such taxes are not treated as part of the cost thus there is no cascading i.e. Tax on Tax. This ensures that the price of commodities does not increase under VAT,” she added.
Much of Pakistan’s economy is not documented, encouraging the parallel economy to thrive. Pakistan’s parallel economy, or untaxed illegal money, is estimated at $83 billion, or half the country’s entire GDP of $166 billion. The problem has become so big it threatens public welfare plans
In addition, Federal Board of Revenue Chairman Sohail Ahmed also stressed the need to clarify that the VAT would replace the general sales tax (GST) and it would not be an additional tax. The VAT would replace 16 percent GST with the lower rate of 15 percent. The higher rates of sales tax like 21 percent or 19 percent etc would be considerably reduced to 15 percent.
He strongly dispelled the impression that the FBR was not fully prepared to implement a broad-based integrated VAT. The factual position is that the FBR, being a revenue collection agency, has finalised all arrangements for the implementation of VAT. It depends on the successful negotiations of the Ministry of Finance with the provincial governments for implementation of the federal and provincial VAT Bill 2010. However, if even one province disagrees with the VAT law, it cannot be implemented in an integrated form as drafted by the FBR.
However, the existing constitutional and legal framework allows the provinces to empower the FBR to collect sales tax on services. Responding to a query, he said that the taxpayers should deal with a single tax collecting agency for payment of taxes. In case the taxpayer has to confront two to three federal and provincial revenue-collecting agencies, it would not be acceptable to the business units.
About the attitude of the retailers, he said that the retail sector has always refused to come into the tax net despite offering lucrative minimum tax schemes to them. “We will never force the small retailers to obtain registration under the VAT law. Only big retailers having annual turnover of Rs 7.5 million would be liable to registration. The registration threshold of Rs 7.5 million clearly reflects that big businessmen and retail outlets would be liable to register excluding small shopkeepers and retailers. The small business units would be automatically excluded from the VAT regime due to higher registration threshold,” he clarified.
He said that retailers would prefer to come under the documented regime of VAT to avail the facility of input tax adjustment. They would voluntarily obtain VAT registration to make purchases from the registered units. Ahmed was confident that the VAT would not have any major inflationary impact on consumer goods from the next fiscal.
It is a total misconception that the prices of commodities and goods would suddenly jump following imposition of lower rate of 15 percent VAT from 2010-2011. The VAT is a modern and progressive way of taxation on consumption stage. When highest rates of sales tax would be brought down, it would definitely raise prices of the commodities.
“The introduction of 15 percent VAT at consumption level would not escalate inflation, but instead it would encourage voluntary compliance at consumption and retail levels, besides benefiting the economy of the country,” he remarked.
While Main Muhammad Haroon, Lahore chamber of commerce industry’s executive committee member, said that the imposition of VAT would immediately drive up inflation. “Earlier the central bank forecasts that consumer price index (CPI) inflation for the fiscal year ending on June 30 will be close to 12%, up from a low of 8.9% in October 2009 after price increases for electricity tariffs, petroleum products and commodities. In the last fiscal year, the average inflation was 20.5%. The CPI has risen 36.3% since the present coalition government came into power in 2008, with the prices of wheat flour surging 83% and of sugar 168%. The increase in prices of essential items has continued despite regular government promises to contain the trend and punish hoarders and profiteers.
However FBR chairman further clarified that every taxpayer had to deposit his share of tax at the stage of value addition. The registered taxpayers would have the facility of the input tax adjustment and they would pay 15 percent VAT at their stage of value addition. The 15 percent VAT would be paid on the profit earned by a business entity operating under VAT regime. It will result in broadening of the tax base by bringing the entire chain into the VAT net. The biggest advantage of the VAT is the facility of input tax adjustment available to the registered persons under the VAT. It would encourage documentation, as adjustment would not be available to those purchasing from unregistered sellers. In the long run it is a big step towards documentation, as burden of taxes would be shared by the entire supply chain starting from manufacturing sector up to the retail stage.
As far as sales tax on services is concerned, the FBR chairman said that it is the right of the provinces under the National Finance Commission (NFC). Under the NFC Award, the collection of taxes on services is the right of the provinces and FBR being a technically tax collecting agency with expertise at federal level can collect VAT on services also only after the approval from the concerned province
Despite all the clarifications of FBR and government officials, most of the economists and traders do have their apprehensions on the said regime of VAT.
Akmal Hussain, renowned Economist, said that the proposed VAT would increase inflation, erode consumers’ purchasing power and dampen demand. Local business communities have strongly opposed the imposition of VAT, saying it will harm every sector of the economy. However, the rupee “will come under pressure if the IMF money is delayed for more than a month”,
Zafar Iqbal Chaudhry, President of Lahore Chamber of Commerce and Industry urged the government to put off the implementation of Value Added Tax until and unless a consensus is developed among all the stakeholders including all the chambers and trade bodies in the country. He said that there were number of points in the proposed VAT law that need to be amended and in the existing shape it is bound to open floodgates of corruption besides discouraging any new investment.
The LCCI president said that abolition of zero-rating facility available to five export-oriented sectors and reverting back to refund regime is beyond the understanding of the business community as it will open the way of corrupt practices to obtain flying invoices and seriously impede cash flow of the companies.
“The definition of tax fraud has been extended to cover tax evasion. The provision would be massively abused by tax officials. Similarly, vast powers are proposed to be given to tax officials to determine open market value of goods at their whims,” president of LCCI explained.
He was of the view that the section 87 of proposed VAT law was against all norms of justice as it denies a tax payer of his basic right of justice. He further stressed that the Lahore Chamber of Commerce and Industry would not accept the proposed VAT law in its present shape as it has been designed to promote the culture of flying invoices and other prevalent mal practices due to which the law abiding tax payers were suffering a lot and were even paying the taxes of those buyers/sellers who were not paying due taxes and making money.
The methodology to introduce an integrated VAT may have serious implications during implementation of a broad-based VAT from next fiscal year as the government has not taken into confidence the stakeholders. He suggested that each and every trade body including LCCI should be consulted and their views be obtained whether this new proposed draft of the VAT is in conformity with the law of the land or whether it would suit the stakeholders or not. He requested the authorities concerned that unless and until all the trade bodies and stakeholders agree on the enforcement of VAT Act 2010 it should not be implemented.
The LCCI President recommended to restore exemption from Audit on Payment of advance value added tax at import stage; reduction in record keeping period from six years to three years; curtailing discretionary unlimited powers given to the officials for recovery of amount; adjustment of input tax; retention of carry forward facility, streamlining the process of cancellation and suspension of registration; right to go in legal court of law against the tax official decision etc.
He said that any haste in the enforcement of VAT Act will prove to be counter productive to the trade and industry due to its harsh and irritant measures.
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