Q 1. What is difference between VAT and Sales Tax?
Answer:
VAT is levied on goods and services while sales tax
is imposed
generally on goods. Contrary to sales tax VAT has no cascading effect. VAT is a multistage tax, levied only on the value added at each stage in the chain of supply of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. Thus, VAT eventually becomes a single point tax.
Q 2. What will be scope of VAT?
Answer: VAT will cover supply (including import) of both goods and services
at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million will be out of VAT net.
Q 3. How VAT will be helpful in documentation of economy and improve revenue collection?
Answer: Generally, all the commercial activities involving production and distribution of goods and provision of services are brought under tax net giving tolerance for a pre-fixed registration threshold level. This results in documentation of every body in the supply chain. Those who are not registered in the chain are not in a position to claim or deduct tax paid at purchase levels. VAT promotes economic documentation with the help of its in-built invoice-based credit mechanism. Tax invoice is blood line of VAT-induced documentation. VAT has self-enforcing features and documents business transactions through tax invoicing.
Q 4. What will be impact of VAT on food prices?
Answer:
In Pakistan, most of the processed packaged/branded food
items
are already chargeable to sales tax. Basic food items being out of VAT net, there will be no tangible price increase in food items usually sold in processed packaged/branded form. Consumer prices of the food items which are currently being charged to sales tax on retail price basis are likely to fall because VAT will be
charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers.
Q 5. What is difference between goods and services?
Answer:
Goods are tangible supplies (materials, commodities and
articles)
and services are intangible supplies. VAT will regulate mixed supplies on the basis of their contractual character. Under VAT, services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.
Q 6. How general public responding to VAT
Answer: Since standard rate is being decreased from 16% to 15% and registration threshold is being increased from Rs.5 million to Rs.7.5 million and most of the exemptions are being withdrawn, people are generally expecting that VAT will bring economic equity and price stability in the market.
Q 7. What is reaction of Trade Bodies on introduction of VAT?
Answer: Numerous VAT briefings have been given to the trade and industrial bodies and professional circles. After understanding the nature and dynamics of VAT and benefits to the nation of withdrawal of exemptions, opinion of the business lobbies is fast changing in favour of VAT.
Q 8. Why VAT is preferable over GST?
Answer: VAT is more broad-based, equitable and efficient and is without cascading (tax over tax) and hence, is preferable to narrow-based and cascading-ridden traditional sales tax.
Q 9. What is IMF and World Bank stance regarding implementation
of VAT?
Answer: VAT will enable Pakistan to generate and mobilize domestic resources to meet its economic development and social welfare needs.
Q 11. How VAT will protect vulnerable groups of the society?
Answer:
By increasing exemption threshold, decreasing standard tax
rate
and continuing exemption on basic food items, charities, public sector education and health besides withdrawing imposition of tax on retail price basis, vulnerable groups will continue to be protected. Through acceleration of development process with new VAT receipts, employment opportunities will increase and the overall income level of the low strata of society will progress. Besides, with increase in revenue income, state will be in better position to promote social welfare/wellbeing of the masses.
Q 13. Is VAT prone to Tax frauds?
Answer: Every tax is prone to fraud. VAT however, has edge over other consumption taxes as that VAT fraud cannot escape detection sooner or later. Proper monitoring always reduces opportunities for tax fraud. The world experience shows that VAT induces a strong tax culture.
Q 14. What will be role of e-intermediaries in VAT?
Answer: E-intermediaries, appointed by FBR under section 92 of the Federal VAT Bill, 2010, will electronically file tax returns, statements, declarations and other documents specified under VAT law on behalf of and under authorization from the registered persons.
Q 15. What is level of preparedness of FBR in VAT implementation?
Answer: Introduction of VAT in Pakistan being already overdue, FBR is fast preparing itself to replace the existing sales tax system with VAT with effect from 1st July, 2010. In this regard, necessary measures are being taken to increase FBR’s infrastructural and operational capacity to undertake its VAT–related functions and responsibilities. Pakistan is a fortunate country that it has a over 20 years’ experience of VAT-like sales tax management and adoption of pure VAT in Pakistan in lieu of existing sales tax is not likely to pose any unforeseen problem for its tax machinery.
Q 16. Will the VAT implementation increase cost of compliance?
Answer: There will be no increase in compliance cost of those who are already registered and operating under sales tax regime and will automatically switchover to VAT. The new taxpayers will however,
have to incur nominal expense on VAT compliance. Due to IT- based VAT processes, VAT compliance cost usually remain low for the taxpayers who discharge their tax obligations regularly on fair lines.
Q 17. What is response of provinces regarding VAT?
Answer: The Provinces have already tabled the Provincial VAT Bills in their respective assemblies.
Q 18. What is plea of Sindh regarding VAT collection on services?
Answer: Entrustment to Federal Government (FBR) of the functions to collect and enforce Provincial VAT alongside Federal VAT under an integrated tax regime, may not be construed to transfer of taxing powers in respect of services covered under Provincial VAT. Collection and enforcement does not amount to imposition. The Federal Government too is very clear on this constitutional question.
Q 19. Would VAT implementation result into high inflation rate?
Answer: Because of absence of tax cascading and in-built invoice-based input-credit mechanism, VAT is almost non-inflationary as compared to traditional sales tax, VAT is neutral to production and consumption choices. It eventually stabilizes prices in the market.
Q 20. Would exports be zero rated in VAT regime.
Answer: All exports of goods and services shall be zero-rated under VAT.
The input tax involved therein shall be refunded expeditiously.
Q 21. Would there be any exemptions under VAT.
Answer: Upfront VAT exemptions are available under the First Schedule each of the Federal and Provincial VAT Bills. Exemptions will generally cover basic foods items, charities, public sector education and health and international commitments.
Q 22. How exempt goods are different from zero-rated goods?
Answer: Exempt supplies are input-taxed and zero-rated supplies enjoy effective exemption because the input tax involved therein is creditable/refundable.
Q 23. What are meanings of the forensic audit in VAT?
Answer: Forensic audit involves a specialized examination of (mostly documentary) evidence to determine the accuracy or truthfulness of any assertion for judicial or quasi-judicial determination of any fact. VAT Rules will explain the concept of forensic audit under VAT regime.
Q 24. Don’t you think that discretionary powers of VAT officials regarding recovery and raiding business premises are prone to misuse?
Answer: Under section 61 read with section 90 of the Federal VAT Bill 2010, recovery process commences only after the undischarged tax liability has been adjudged or determined through adjudication observing all the principles of natural justice. Detailed recovery
rules shall be included in the VAT rules. There is no concept of physical raids under the proposed VAT system. Section 75 of the Federal VAT Bill 2010 speaks of the lawful access of the authorized VAT functionaries to records and premises only for tax matters.
Q 25. How VAT refunds will be made by FBR?
Answer:
VAT refunds will be paid through Expeditious Refund
Payment
System. This system has already been installed for industrial exporters from the tax period April, 2010 onwards. This system will be upgraded to make electronic refund payments directly in the bank accounts of the taxpayers. The scope of this new refund system will be expanded to cover all other categories of refund claimants in due course.
Q 26. Would VAT result in increase of cost of doing business?
Answer: Reduced VAT rate instead of multiple higher sales tax rates will in fact ease out the cash flow of compliant businesses.
Q 27. Inflation may promote smuggling what are FBR plans in this regard?
Answer: FBR is already working on formulating and implementing an effective anti-smuggling strategy so that economic equity guaranteed by VAT is not distorted by smuggling. Increase in business documentation under VAT will rather discourage smuggling and motivate transfer of investments from irregular to regular business regimes.
Q 28. What is concept of consideration?
Answer: As provided under section 4 of the Federal VAT Bill, 2010, “consideration” means the total of the following amounts:
(a) the amount in money paid or payable by any person, whether directly or indirectly, in respect of, in response to, or for the inducement of the supply; and
(b) the open market price of anything paid or payable in kind, whether directly or indirectly, by any person in respect of, in response to, or for the inducement of the supply.
Consideration includes the amounts of Federal and Provincial taxes
(including VAT) paid or payable by the supplier. However, price discounts/rebates available under open market conditions are permissible under VAT.
Q 29. What is concept of input and output adjustments?
Answer:
The actual concept is input tax adjustment, which means that
to
work out net tax liability, the amount tax paid on the purchases is deducted from the amount of tax charged on sales of taxable goods
or services. This is also known as tax credit. Sections 25 to 34 of the Federal VAT Bill, 2010 relate to adjustments under different circumstances.
Q 30. Would imposition of VAT result in cultivating multiple taxation?
Answer: No. VAT does not provide for tax over tax (cascading). VAT will replace the whole existing sales tax and Federal excise duties on services.
Q 31. What are businesses that are not supposed to charge VAT?
Answer: The businesses who deal in exempt goods or services as well as those whose annual turnover falls below Rs.7.5 million shall not be required to be registered or charge VAT.
Q 32. How a VAT registration can be verified?
Answer: On its website, FBR will, as required under section 48 of the Federal VAT Bill, 2010, regularly maintain an updated list of active registered persons under VAT regime. Such information is even currently available under sales tax regime.
Q 33. How VAT is worked out.
Answer: Under section 18 read with clause (xiv) of section 2(1) of the
Federal VAT Bill, 2010, VAT can be calculated as follows:-
R x Consideration for Supply
100+R
Where “R” is the tax rate
Q 34. What are tax rates under VAT?
Answer: VAT has only one standard rate i.e. 15%. The other rate is zero percent which is applicable on exports or zero-rated supplies.
Q 35. If the Input is used partly for making taxable goods and partly for exempted goods, will input tax credit will be available?
Answer: In such cases input tax adjustment shall be apportioned and be available only to the extent of taxable supplies (creditable purpose)
as laid down in section 27 of the Bill. Apportionment formula in this shall be given in VAT Rules.
Q 36. What will be tax implications on sale of old and used goods or scrapped machinery?
Answer: If not sold to another registered person as ongoing economic activity, such machinery and goods shall be charged to VAT on tax fraction basis as laid down in section 21 of the Federal VAT Bill,
2010.
Q 37. What should be done in case goods are returned from purchaser to seller?
Answer: Input tax adjustment is admissible in cases where supply is canclled as laid down in section 29 of the Federal VAT Bill, 2010.
Q 38. What are the circumstances in which refund of input tax credit
is permissible?
Answer: Where supplies are exported or zero-rated in terms of section 12 of the Federal VAT Bill 2010 and if the part of any adjustable input tax amount remains carried forward without being deducted against any output tax as laid down in section 37(3) of the Bill. Procedures for all categories of VAT refund shall be prescribed in VAT Rules.
Q 39. What treatment will be meted out if a business or a part of business is transferred?
Answer: In terms of section 20 of the Federal VAT Bill, 2010 read with entry
at S.No.1 of the Second Schedule thereof, where any business or part thereof is transferred as ongoing concern, to another registered person, it shall be treated as zero-rated supply, otherwise the buyer shall first pay applicable VAT and shall then be entitled to adjustments on his registration in terms of section 33.
Q 40. What is turnover threshold for VAT registration?
Answer: As laid down in section 41 of the Federal VAT Bill, 2010, registration threshold is Rs.7.5 million per annum.
Q 41. What is cash basis for accounting for VAT?
Answer: Under section 26(4) of the Federal VAT Bill, 2010, input tax deduction on cash purchases is available only if the value of such a purchase including VAT amount is equal to or below Rs.50,000/-.
Q 42. What is invoice basis for accounting for VAT?
Answer: Tax invoice is required to be issued for every taxable supply made
by a registered person to another registered person. The mandatory particulars of a tax invoice are given in section 49(1) of the Federal VAT Bill, 2010. However, under section 50, a registered person may issue a sale receipt for a supply to a person not required to be registered provided the value of such supply does not exceed Rs.25,000/-.
Q 43. How long a registered must keep record?
Answer: As provided in section 54 of the Federal VAT Bill, 2010, period for keeping VAT records is at least six years. However, in case of audit, recovery proceedings, dispute, prosecution or other proceedings, this period extends till such time final decision is made.
Q 44. What is a VAT audit and how a tax payer will be selected for audit?
Answer: Statutory provisions for VAT audit are available in sections 69, 70 and 71 of the Bill. These provisions are to be read with section 54. VAT audit is thus an examination of the records and accounts of a registered person for ascertaining the accuracy of the tax liabilities and other obligations discharged by such person. Detailed audit- related procedures shall be given in VAT Rules coming risk-based audit selection criteria.
Q 45. What happens when a person registered in VAT does not submit returns?
Answer: VAT liability increases due to addition of default surcharge under section 88 of the Federal VAT Bill, 2010. Besides a penalty of Rs.5,000/- is invoked and if the return is not filed within fifteen days
of the due date, a penalty of Rs.1,000/- for each day of default is payable under Serial No.2 of the Third Schedule of the Bill, read with section 89 thereof.
Q 46. Am I supposed to pay VAT on gifts and promotional material?
Answer: Yes, if you are engaged in carrying on any economic activity that involves or intended to involve the supply of taxable goods and services. Economic activity is defined under section 5 of the Federal VAT Bill, 2010, which may be read with sections 9, 10 and
41 thereof.
Q 47. What is treatment when a person liable to registered in VAT is not registered?
Answer: He is registered compulsorily under section 43 of the Federal VAT Bill, 2010. Procedure for compulsory registration on objective lines shall be given in the VAT Rules.
Q 48. When and how registration of a person is cancelled?
Answer: Procedure for cancellation of VAT registration is given in sections
46 and 47 of the Federal VAT Bill, 2010. Registration can be cancelled in the following events:
(i) where a registered person ceases to make taxable supplies;
(ii) where a person is no longer required to be registered (e.g. falling below registration threshold);
(iii) where the supplies made by a registered person otherwise become exempt from VAT despite that a person continues making such exempt supplies. However, a person who is making taxable as well as exempt supplies is required to be registered; and
(iv) where a person has failed to comply with the VAT
obligations or is otherwise not entitled to be registered.
Q 49. What are the books and record kept for VAT?
Answer:
Under section 54 of the Federal VAT Bill, 2010, VAT
records
include tax invoices (both for purchases and sales), credit/debt notes and customs documents relating to imports and exports. Details for simplified VAT records and book keeping shall be provided in VAT Rules.
Q 50. Who is a retail dealer?
Answer: VAT law as such does not differentiate between retailer/retail dealer and wholesaler/dealer. Nor it defines manufacture or manufacturer. Every person of whatever business category is required to get VAT registration if he is engaged in carrying out an economic activity of making supplies of taxable goods and services.
Q 51. When tax becomes payable on supplies?
Answer: As per section 24 of the Federal VAT Bill, 2010, tax is payable at the time of filing a return. However, non-filing of a return does not absolve a person of the obligation to discharge his tax liability under the VAT law. A complete procedure for filing of VAT returns and payment of tax shall be given in VAT Rules.
******
Q 52: There is no distinction between poor and middle/upper class under VAT.
How would you justify?
VAT exemptions on basic food items, charities and public sector health and education, will basically benefit the lower strata of society. Meanwhile, domestic resource mobilization through economic documentation and consequential increase in state earnings will stimulate equitable socio-economic development in society. Just taxes always redistribute resources from rich to poor without hurting opportunities for prosperity at individual level.
Q 53: Why a supplier should be penalized and implicated if fake information is provided by buyer?
Under section 89 of the Federal VAT Bill, 2010 read with Third Schedule thereof,
no penalty has been proposed for a supplier on any such account. Law always protects the bonafide sellers having no knowledge about any mis-conduct of their buyers. The concept of absolute joint or several responsibility has not been incorporated in the VAT law.
Q 54: Job of business community is to undertake economic activity not collection of unnecessary information from purchaser, how you see it?
VAT law does not place any extra burden upon the business community to collect any unnecessary information from their buyers. Only such basic information has been prescribed for VAT invoicing purpose as is minimally necessary to identify exchange, movement or supply of goods and services between different hands.
Q 55: Why Government is not considering to remove deficiencies in GST rather than introducing new tax?
The existing sales tax system substantially distorted on several accounts. Over the passage of time, it has become complex, inefficient and regressive. Thus, a simple, efficient and progressive form of sales tax is a need of the day. VAT does provide a model of such modern form of sales tax. VAT is much more transparent and equitable than traditional and obsolete forms of sales tax. VAT is not a new tax but a modern and simple substitution of the existing sales tax.
Q 56: Promulgation of VAT Act, 2010 in haste may prove counter productive?
Pakistan has more than 20 years’ experience of sales tax of VAT like taxation. VAT will replace sales tax with broad tax base. Thus, Pakistan already has an established infrastructure and good tax management system, which is being further improved for the purpose of VAT. The tax reforms started several years back have brought large scale improvements and refinements in Pakistan’s tax machinery. VAT will improve consumption tax system in the country more progressively and futuristically.
Q 57: Why rich farmers are not imposed VAT tax?
Agriculture as such is not a manufacturing activity. Nor it is an economic activity involving supply of goods and services as such. Commercial trading of agricultural produce will, unless exempted, be covered under VAT. Moreover, VAT being an expenditure tax is also borne by the farmers’ community when they purchase VAT-taxed goods and services either for agricultural purposes or for their personal consumption. The more they spend, the more they pay VAT on their consumption.
Q 58: Why discussing VAT with Chambers & Business community is necessary?
Being representative bodies, Chambers and other business associations operate as bridge between the tax managers and the taxpayers. They motivate their members for tax compliance, Presence of trade and industrial associations is a good source
to promote tax culture through representation. Hence, the confidence reposed in and shown by the trade bodies in the need to replace the existing distorted sales tax system is considered to be a prerequisite to ensure smooth public recognition
of the VAT system. Besides, the suggestions and advices given by these trade bodies also help refine the system in the light of real-world business practices of the market.
Q 59: What are your views regarding perception that VAT implementation would lead to expansion of informal economy?
Broad-based VAT based upon the principles of equity and welfare instead discourage black economy and stimulate transfer of investments from illegal regimes to legitimate regimes. Black economy surges when tax system lacks in equity and justice. VAT is based upon the principles of equity and justice.
Q 60: Is the enforcement of VAT a feasible idea?
In countries like Pakistan, where sales tax system is already existent, VAT introduction is a feasible proposition. VAT is nothing but a refined and modern form of sales tax without cascading or multiple taxation.
Q 61: Would VAT implementation increase gap between pre-tax income and post tax consumption?
VAT is an expenditure tax and is neutral to production or consumption choices. It
is charged only on such component of income as is spent on the purchase and consumption of taxable goods and services. VAT does not affect one’s ability to earn; it rather encourages to earn more. It not only redistributes income transparently but also increases income levels.
Q 62: To how much extent it is true that VAT implementation will lead to transfer
of resources from productive sector of economy to public sector diminishing economic efficiency?
State expenditure out of tax earnings in fact transfers funds from public to private sector by increasing employment opportunities through development and welfare promotion. Taxes like VAT bring efficiency in the national economic system. Public sector commercial/business organizations (parastatals) also pay VAT on their economic activities involving supply of taxable goods and services.
Q 63: Would it not be difficult for a less educated shopkeeper to maintain business record?
The businesses whose annual turnover is less than Rs. 7.5 million will be out of VAT. VAT does not prescribe any watertight records. It only identifies the type of record and leaves the manner and style of its maintenance to the discretion of the taxpayer. Besides, VAT generally provides for very simple records.
Q 64: What is ancillary or incidental supply?
The concept of ancillary or incidental supplies has been explained in section 17 of the Federal VAT Bill, 2010. Artificial splitting of supplies relating to any contracted transaction is discouraged under the VAT law so that disputes as to their tax treatment do not occur.
Q 65: What is progressive or periodic supply?
Progressive or periodic supply is defined under section 16 of the Federal VAT Bill, 2010. Progressive or periodic supplies are to be treated as a series of separate supplies.
Q 66: How “association of person” is different from “associated person”
Association of persons (AOP) is defined under section 2(iii) of the Federal VAT Bill, 2010 and associated person is defined under section 3 thereof. AOP refers to
a group of persons, while the concept of “associated persons” defines relationship between two persons. Adoption of this concept is a result of harmonization of inland taxes laws & administration.
Q 67: What is qualification requirement of an authorized representative.
Qualifications for authorized representatives for VAT purposes shall be specified
in VAT Rules as required under section 84 of the Federal VAT Bill, 2010. In this regard, tentative idea may be taken from rule 59 of the existing Sales Tax Rules,
2006 (SRO 555(I)/2006, dated 05.06.2006).
Q 68: What is default surcharge?
Default surcharge is explained in section 88 of the Federal VAT Bill. Conceptually, it is an additional tax liability accruing on failure to pay principal tax amount due under the law.
Q 69: Please define credit and debit note?
The concepts of credit and debit notes have been used in sections 29 and 51 of the Federal VAT Bill, 2010. The procedure and formats of such notes shall be specified in the VAT Rules. Under the present sales tax regime, the provisions for credit/debit notes are available under Chapter III of the Sales Tax Rules, 2006.
Q 70: What will be role of alternative dispute resolution Committee in VAT?
Section 83 of the Federal VAT Bill, 2010 relates to alternative dispute resolution. ADR committees in fact arbitrate tax disputes between the public and the tax authorities. The idea of ADR has been incorporated into the Pakistan’s tax laws to enhance the level of “neutrality” in the tax administration system.
71. How exemptions in VAT are harmful?
Exemptions create cascading and adversely impact consumption and investment choices. In case of exempt items, input tax continues to be incorporated in price without credit at subsequent stages of supply chain and cannot be invoiced out for adjustment
purposes. Exemptions create inefficiencies and discriminations in the economy. Continuity of exemptions stimulates exemptions for backward and forward supply linkages eventually resulting in “exemption creep” which adversely impacts tax base and creates further inequities and inefficiencies in the economy.
72. How VAT implementation will stabilize prices of the essential commodities?
VAT is neutral to consumption choices and does not factor price fluctuations. Demand and supply is not influenced by uniform VAT with the result that prices are
stabilized with the consistent and uninterrupted growth of demand and supply in the open
and competitive market conditions. VAT mitigates imperfections of fair market competition.
73. How implementation of VAT will support sick industry?
VAT does not create discriminations or subjective preferences in investment choices and hence does not impact business decisions. Independence of business
decisions diversifies both investment and consumption. With such diversifications,
aggregate demand increases, which eventually helps sick industries to recover in open competitive market environment.
74. Is VAT contrary to Strategic Trade Policy Framework 2009?
The gist of Strategic Trade Policy for Pakistan is to promote exports through industrial modernization, diversification of exports and creating new markets abroad for
Pakistani exportables. Since VAT grants expeditious input tax adjustments on the
acquisition of capital goods and ensures rapid payments of refunds on exports, rendering exports competitive in the international market the proposed VAT system in Pakistan will infact facilitate the actualization of the Strategic Trade Policy Framework 2009.
75. What are forums of redressal of grievances available to a person registered in
VAT?
VAT disputes are generally resolved through quasi-judicial process of adjudication. A complete system of adjudications at original and appellate stages is given
in Chapter XII of the Bill. “Alternative Dispute Resolution System” is part of the VAT grievance redresal system. Original adjudication orders are first appeallable before the Commissioner, Inland Revenue (Appeals), whose orders are appeallable before the
Appellate Tribunal. Orders of the Appellate Tribunal are appeallable before the High Court on questions of law. Judgments of the High Court can be appealed against in the Supreme Court.
76. How VAT is investment friendly?
Due to diversification of consumption choices and increase in aggregate demand, new investment opportunities grow. Besides, input tax adjustment in respect of all direct and indirect inputs used or useable in connection with economic activity involving supply
of taxable goods and services, reduces the investment cost. Simplicity of VAT procedures
and absence of physical controls together with enhanced applications of IT reduces the cost of compliance and cost of doing business. VAT is universally considered to be an investment / business friendly tax.
77. How VAT provides a level playing field for registered traders.
All traders are taxed at uniform rate and those operating under exemption threshold either sustain equalization tax or are unable to invoice out their input tax. VAT
has self-enforcing features and that is the reason that a provision for voluntary registration is always available under the VAT system.
78. Would there be different dates for filing of returns for different economic activity when registered persons number is very large?
Standard due date for filing VAT return will be the same for all VAT payers.
However, keeping in view the diversity in business accounting practices, FBR has been authorized to grant permission to file return after standard due date. If need be, such
practices will be accommodated in VAT Rules. In this regard, sections 2(ix), 55 and 94 of
the Bill are relevant.
79. When tax becomes payable on supplies?
Section 19 of the Bill answers this question. Tax becomes payable at the earliest time of supply, issuance of tax invoice or when any part of the consideration for a taxable
supply is received. For progressive and periodic supply, sub section (2) of section 19 and clause (xxix) of section 2 of the Bill may be seen. The payable tax is accounted for and paid at the time of filing of return as provided in section 24 of the Bill. VAT Rules will further give details of these processes/procedures.
80. When tax becomes payable when sold on credit?
The procedure for payment of VAT on credit sales remains the same as is applicable to cash sales. Once supply is made, tax becomes due for payment, no matter whether consideration is received or not. In this regard, the event of supply is important
so far as the liability to pay tax is concerned. This is an international practice.
81. Would discounts be available in VAT regime?
All discounts and rebates conforming to the accepted business practices are permissible if accounted for at the time of supply. VAT Rules will explain how such
bonafide discounts and rebates are to be accounted for in invoicing regime. For the time
being, sub section (1) of section 4 of the Bill may be consulted.
82. Is registration in VAT necessary if a trader is exclusively dealing in exempt supply?
No. But a provision for voluntary registration has been made in section 42 of the
Bill. Procedure for voluntary registration will be explained in VAT Rules.
83. What will be mechanism of controlling inflated refund claim?
The newly developed Expeditious VAT Refund Payment System based upon modern IT applications will automatically conduct cross matching of input and output tax invoices and payments of tax. Thus no possibility of filing inflated refund claim will exist
in VAT regime.
84. Would registration of new businesses in VAT be centralized or localized?
Chapter-VI of the Bill deals with VAT registration regime. VAT registration will
be managed centrally at FBR level. However, the role of the LTUs and RTOs for physical verifications, as and where needed, will continue to matter under VAT regime. Detailed registration procedures will be prescribed in VAT Rules.
85. How smuggling effects VAT collection and implementation?
Smuggling is inimical to all kinds of tax systems. However, VAT has several such self- regulatory mechanisms which makes VAT an anti-smuggling measure on its own. The several privileges available under VAT compliance carry an in-built strength to create disincentives against smuggling. Moreover, proper VAT implementation plan is always accompanied by an effective anti-smuggling campaign. FBR is also working out a strong anti-smuggling strategy. Application of broad-based VAT on goods and services across the board upto retail stage level, itself discourages irregular investments like those
in smuggling.
86. When does a foreigner become eligible to claim a VAT refund.
Clause (b) of sub-section (1) of section 23 of the Bill zero rates the supply of goods made to a foreign tourist or visitor, who takes such goods for use out of Pakistan. Procedure for such zero rating will be covered in VAT Rules.
87. Comment that a comprehensive VAT widens tax net, makes tax evasion difficult?
VAT has several self-enforcing features. When input tax payments increase due to
tax base-broadening, those who do not carry out their economic activities under VAT are automatically motivated for VAT compliance so that they can confine VAT liabilities only to the extent of “value added” or “value addition” made at their stage in the supply
chain.
88. If assets are transferred to other country would VAT be applicable as it is not export?
Actionable claims, money, stocks, shares and securities are not covered in the definition of goods vide section 2(xv) of the Bill. Export of taxable goods and services by registered persons is zero rated under VAT. Sections 12, 23 and 37 and Second Schedule
of the Bill may be seen to understand the statutory scheme of zero rating. In nutshell,
exports are not taxed under VAT. A person transferring his assets, other than taxable goods and services exported by a registered person, shall not attract VAT at the time of such transfer. However, no refund of VAT paid at any earlier stage of the acquisition of such assets shall be admissible.
89. Whether sale of my personal car will attract VAT?
No. Direct sale of personal property not being a part of any economic activity involving supply of taxable goods and services will not be liable to VAT. However, car
dealers will pay VAT on their commissions or brokerage charges if their annual turnover
for such business is Rs.7.5 million or more (above exemption threshold).
90. How delinquent businesses will be brought under VAT net?
FBR has already started rigorous campaign to motivate the businesses to comply with the VAT laws after their enactment when it becomes due. In this regard, measures
like nationalistic motivation, VAT education, VAT-related departmental facilitation, use
of third party data, survey, determination of exemption threshold and compulsory registration shall be undertaken. Still it is understood that VAT has in-build self- enforcement characteristics, which will automatically incentivize businesses towards voluntary compliance. Besides, schemes like free distribution of VAT accounting/book- keeping software and electronic cash registers and VAT paying consumers’ cash reward will further create and strengthen tax culture in the country. FBR is actively working on
all such measures and schemes. Overall VAT implementation strategy revolves around a balanced approach between voluntary compliance and enforcement (imposed compliance).
Saturday, May 22, 2010
How delinquent businesses will be brought under VAT net?
How delinquent businesses will be brought under VAT net?
FBR has already started rigorous campaign to motivate the businesses to comply with the VAT laws after their enactment when it becomes due. In this regard, measures
like nationalistic motivation, VAT education, VAT-related departmental facilitation, use
of third party data, survey, determination of exemption threshold and compulsory registration shall be undertaken. Still it is understood that VAT has in-build self- enforcement characteristics, which will automatically incentivize businesses towards voluntary compliance. Besides, schemes like free distribution of VAT accounting/book- keeping software and electronic cash registers and VAT paying consumers’ cash reward will further create and strengthen tax culture in the country. FBR is actively working on
all such measures and schemes. Overall VAT implementation strategy revolves around a balanced approach between voluntary compliance and enforcement (imposed compliance).
FBR has already started rigorous campaign to motivate the businesses to comply with the VAT laws after their enactment when it becomes due. In this regard, measures
like nationalistic motivation, VAT education, VAT-related departmental facilitation, use
of third party data, survey, determination of exemption threshold and compulsory registration shall be undertaken. Still it is understood that VAT has in-build self- enforcement characteristics, which will automatically incentivize businesses towards voluntary compliance. Besides, schemes like free distribution of VAT accounting/book- keeping software and electronic cash registers and VAT paying consumers’ cash reward will further create and strengthen tax culture in the country. FBR is actively working on
all such measures and schemes. Overall VAT implementation strategy revolves around a balanced approach between voluntary compliance and enforcement (imposed compliance).
Whether sale of my personal car will attract VAT?
Whether sale of my personal car will attract VAT?
No. Direct sale of personal property not being a part of any economic activity involving supply of taxable goods and services will not be liable to VAT. However, car
dealers will pay VAT on their commissions or brokerage charges if their annual turnover
for such business is Rs.7.5 million or more (above exemption threshold).
No. Direct sale of personal property not being a part of any economic activity involving supply of taxable goods and services will not be liable to VAT. However, car
dealers will pay VAT on their commissions or brokerage charges if their annual turnover
for such business is Rs.7.5 million or more (above exemption threshold).
If assets are transferred to other country would VAT be applicable as it is not export?
If assets are transferred to other country would VAT be applicable as it is not export?
Actionable claims, money, stocks, shares and securities are not covered in the definition of goods vide section 2(xv) of the Bill. Export of taxable goods and services by registered persons is zero rated under VAT. Sections 12, 23 and 37 and Second Schedule
of the Bill may be seen to understand the statutory scheme of zero rating. In nutshell,
exports are not taxed under VAT. A person transferring his assets, other than taxable goods and services exported by a registered person, shall not attract VAT at the time of such transfer. However, no refund of VAT paid at any earlier stage of the acquisition of such assets shall be admissible.
Actionable claims, money, stocks, shares and securities are not covered in the definition of goods vide section 2(xv) of the Bill. Export of taxable goods and services by registered persons is zero rated under VAT. Sections 12, 23 and 37 and Second Schedule
of the Bill may be seen to understand the statutory scheme of zero rating. In nutshell,
exports are not taxed under VAT. A person transferring his assets, other than taxable goods and services exported by a registered person, shall not attract VAT at the time of such transfer. However, no refund of VAT paid at any earlier stage of the acquisition of such assets shall be admissible.
Comment that a comprehensive VAT widens tax net, makes tax evasion difficult?
Comment that a comprehensive VAT widens tax net, makes tax evasion difficult?
VAT has several self-enforcing features. When input tax payments increase due to
tax base-broadening, those who do not carry out their economic activities under VAT are automatically motivated for VAT compliance so that they can confine VAT liabilities only to the extent of “value added” or “value addition” made at their stage in the supply
chain.
VAT has several self-enforcing features. When input tax payments increase due to
tax base-broadening, those who do not carry out their economic activities under VAT are automatically motivated for VAT compliance so that they can confine VAT liabilities only to the extent of “value added” or “value addition” made at their stage in the supply
chain.
When does a foreigner become eligible to claim a VAT refund?
When does a foreigner become eligible to claim a VAT refund.
Clause (b) of sub-section (1) of section 23 of the Bill zero rates the supply of goods made to a foreign tourist or visitor, who takes such goods for use out of Pakistan. Procedure for such zero rating will be covered in VAT Rules.
Clause (b) of sub-section (1) of section 23 of the Bill zero rates the supply of goods made to a foreign tourist or visitor, who takes such goods for use out of Pakistan. Procedure for such zero rating will be covered in VAT Rules.
How smuggling effects VAT collection and implementation?
How smuggling effects VAT collection and implementation?
Smuggling is inimical to all kinds of tax systems. However, VAT has several such self- regulatory mechanisms which makes VAT an anti-smuggling measure on its own. The several privileges available under VAT compliance carry an in-built strength to create disincentives against smuggling. Moreover, proper VAT implementation plan is always accompanied by an effective anti-smuggling campaign. FBR is also working out a strong anti-smuggling strategy. Application of broad-based VAT on goods and services across the board upto retail stage level, itself discourages irregular investments like those
in smuggling.
Smuggling is inimical to all kinds of tax systems. However, VAT has several such self- regulatory mechanisms which makes VAT an anti-smuggling measure on its own. The several privileges available under VAT compliance carry an in-built strength to create disincentives against smuggling. Moreover, proper VAT implementation plan is always accompanied by an effective anti-smuggling campaign. FBR is also working out a strong anti-smuggling strategy. Application of broad-based VAT on goods and services across the board upto retail stage level, itself discourages irregular investments like those
in smuggling.
Would registration of new businesses in VAT be centralized or localized?
Would registration of new businesses in VAT be centralized or localized?
Chapter-VI of the Bill deals with VAT registration regime. VAT registration will
be managed centrally at FBR level. However, the role of the LTUs and RTOs for physical verifications, as and where needed, will continue to matter under VAT regime. Detailed registration procedures will be prescribed in VAT Rules.
Chapter-VI of the Bill deals with VAT registration regime. VAT registration will
be managed centrally at FBR level. However, the role of the LTUs and RTOs for physical verifications, as and where needed, will continue to matter under VAT regime. Detailed registration procedures will be prescribed in VAT Rules.
What will be mechanism of controlling inflated refund claim?
What will be mechanism of controlling inflated refund claim?
The newly developed Expeditious VAT Refund Payment System based upon modern IT applications will automatically conduct cross matching of input and output tax invoices and payments of tax. Thus no possibility of filing inflated refund claim will exist
in VAT regime.
The newly developed Expeditious VAT Refund Payment System based upon modern IT applications will automatically conduct cross matching of input and output tax invoices and payments of tax. Thus no possibility of filing inflated refund claim will exist
in VAT regime.
Is registration in VAT necessary if a trader is exclusively dealing in exempt supply?
Is registration in VAT necessary if a trader is exclusively dealing in exempt supply?
No. But a provision for voluntary registration has been made in section 42 of the
Bill. Procedure for voluntary registration will be explained in VAT Rules.
No. But a provision for voluntary registration has been made in section 42 of the
Bill. Procedure for voluntary registration will be explained in VAT Rules.
Would discounts be available in VAT regime?
Would discounts be available in VAT regime?
All discounts and rebates conforming to the accepted business practices are permissible if accounted for at the time of supply. VAT Rules will explain how such
bonafide discounts and rebates are to be accounted for in invoicing regime. For the time
being, sub section (1) of section 4 of the Bill may be consulted.
All discounts and rebates conforming to the accepted business practices are permissible if accounted for at the time of supply. VAT Rules will explain how such
bonafide discounts and rebates are to be accounted for in invoicing regime. For the time
being, sub section (1) of section 4 of the Bill may be consulted.
When tax becomes payable when sold on credit?
When tax becomes payable when sold on credit?
The procedure for payment of VAT on credit sales remains the same as is applicable to cash sales. Once supply is made, tax becomes due for payment, no matter whether consideration is received or not. In this regard, the event of supply is important
so far as the liability to pay tax is concerned. This is an international practice.
The procedure for payment of VAT on credit sales remains the same as is applicable to cash sales. Once supply is made, tax becomes due for payment, no matter whether consideration is received or not. In this regard, the event of supply is important
so far as the liability to pay tax is concerned. This is an international practice.
When tax becomes payable on supplies?
When tax becomes payable on supplies?
Section 19 of the Bill answers this question. Tax becomes payable at the earliest time of supply, issuance of tax invoice or when any part of the consideration for a taxable
supply is received. For progressive and periodic supply, sub section (2) of section 19 and clause (xxix) of section 2 of the Bill may be seen. The payable tax is accounted for and paid at the time of filing of return as provided in section 24 of the Bill. VAT Rules will further give details of these processes/procedures.
Section 19 of the Bill answers this question. Tax becomes payable at the earliest time of supply, issuance of tax invoice or when any part of the consideration for a taxable
supply is received. For progressive and periodic supply, sub section (2) of section 19 and clause (xxix) of section 2 of the Bill may be seen. The payable tax is accounted for and paid at the time of filing of return as provided in section 24 of the Bill. VAT Rules will further give details of these processes/procedures.
Would there be different dates for filing of returns for different economic activity when registered persons number is very large?
Would there be different dates for filing of returns for different economic activity when registered persons number is very large?
Standard due date for filing VAT return will be the same for all VAT payers.
However, keeping in view the diversity in business accounting practices, FBR has been authorized to grant permission to file return after standard due date. If need be, such
practices will be accommodated in VAT Rules. In this regard, sections 2(ix), 55 and 94 of
the Bill are relevant.
Standard due date for filing VAT return will be the same for all VAT payers.
However, keeping in view the diversity in business accounting practices, FBR has been authorized to grant permission to file return after standard due date. If need be, such
practices will be accommodated in VAT Rules. In this regard, sections 2(ix), 55 and 94 of
the Bill are relevant.
How VAT provides a level playing field for registered traders?
How VAT provides a level playing field for registered traders?
All traders are taxed at uniform rate and those operating under exemption threshold either sustain equalization tax or are unable to invoice out their input tax. VAT
has self-enforcing features and that is the reason that a provision for voluntary registration is always available under the VAT system.
All traders are taxed at uniform rate and those operating under exemption threshold either sustain equalization tax or are unable to invoice out their input tax. VAT
has self-enforcing features and that is the reason that a provision for voluntary registration is always available under the VAT system.
How VAT is investment friendly?
How VAT is investment friendly?
Due to diversification of consumption choices and increase in aggregate demand, new investment opportunities grow. Besides, input tax adjustment in respect of all direct and indirect inputs used or useable in connection with economic activity involving supply
of taxable goods and services, reduces the investment cost. Simplicity of VAT procedures
and absence of physical controls together with enhanced applications of IT reduces the cost of compliance and cost of doing business. VAT is universally considered to be an investment / business friendly tax.
Due to diversification of consumption choices and increase in aggregate demand, new investment opportunities grow. Besides, input tax adjustment in respect of all direct and indirect inputs used or useable in connection with economic activity involving supply
of taxable goods and services, reduces the investment cost. Simplicity of VAT procedures
and absence of physical controls together with enhanced applications of IT reduces the cost of compliance and cost of doing business. VAT is universally considered to be an investment / business friendly tax.
What are forums of redressal of grievances available to a person registered in VAT?
What are forums of redressal of grievances available to a person registered in
VAT?
VAT disputes are generally resolved through quasi-judicial process of adjudication. A complete system of adjudications at original and appellate stages is given
in Chapter XII of the Bill. “Alternative Dispute Resolution System” is part of the VAT grievance redresal system. Original adjudication orders are first appeallable before the Commissioner, Inland Revenue (Appeals), whose orders are appeallable before the
Appellate Tribunal. Orders of the Appellate Tribunal are appeallable before the High Court on questions of law. Judgments of the High Court can be appealed against in the Supreme Court.
VAT?
VAT disputes are generally resolved through quasi-judicial process of adjudication. A complete system of adjudications at original and appellate stages is given
in Chapter XII of the Bill. “Alternative Dispute Resolution System” is part of the VAT grievance redresal system. Original adjudication orders are first appeallable before the Commissioner, Inland Revenue (Appeals), whose orders are appeallable before the
Appellate Tribunal. Orders of the Appellate Tribunal are appeallable before the High Court on questions of law. Judgments of the High Court can be appealed against in the Supreme Court.
Is VAT contrary to Strategic Trade Policy Framework 2009?
Is VAT contrary to Strategic Trade Policy Framework 2009?
The gist of Strategic Trade Policy for Pakistan is to promote exports through industrial modernization, diversification of exports and creating new markets abroad for
Pakistani exportables. Since VAT grants expeditious input tax adjustments on the
acquisition of capital goods and ensures rapid payments of refunds on exports, rendering exports competitive in the international market the proposed VAT system in Pakistan will infact facilitate the actualization of the Strategic Trade Policy Framework 2009.
The gist of Strategic Trade Policy for Pakistan is to promote exports through industrial modernization, diversification of exports and creating new markets abroad for
Pakistani exportables. Since VAT grants expeditious input tax adjustments on the
acquisition of capital goods and ensures rapid payments of refunds on exports, rendering exports competitive in the international market the proposed VAT system in Pakistan will infact facilitate the actualization of the Strategic Trade Policy Framework 2009.
How implementation of VAT will support sick industry?
How implementation of VAT will support sick industry?
VAT does not create discriminations or subjective preferences in investment choices and hence does not impact business decisions. Independence of business
decisions diversifies both investment and consumption. With such diversifications,
aggregate demand increases, which eventually helps sick industries to recover in open competitive market environment.
VAT does not create discriminations or subjective preferences in investment choices and hence does not impact business decisions. Independence of business
decisions diversifies both investment and consumption. With such diversifications,
aggregate demand increases, which eventually helps sick industries to recover in open competitive market environment.
How VAT implementation will stabilize prices of the essential commodities?
How VAT implementation will stabilize prices of the essential commodities?
VAT is neutral to consumption choices and does not factor price fluctuations. Demand and supply is not influenced by uniform VAT with the result that prices are
stabilized with the consistent and uninterrupted growth of demand and supply in the open
and competitive market conditions. VAT mitigates imperfections of fair market competition.
VAT is neutral to consumption choices and does not factor price fluctuations. Demand and supply is not influenced by uniform VAT with the result that prices are
stabilized with the consistent and uninterrupted growth of demand and supply in the open
and competitive market conditions. VAT mitigates imperfections of fair market competition.
How exemptions in VAT are harmful?
How exemptions in VAT are harmful?
Exemptions create cascading and adversely impact consumption and investment choices. In case of exempt items, input tax continues to be incorporated in price without credit at subsequent stages of supply chain and cannot be invoiced out for adjustment
purposes. Exemptions create inefficiencies and discriminations in the economy. Continuity of exemptions stimulates exemptions for backward and forward supply linkages eventually resulting in “exemption creep” which adversely impacts tax base and creates further inequities and inefficiencies in the economy.
Exemptions create cascading and adversely impact consumption and investment choices. In case of exempt items, input tax continues to be incorporated in price without credit at subsequent stages of supply chain and cannot be invoiced out for adjustment
purposes. Exemptions create inefficiencies and discriminations in the economy. Continuity of exemptions stimulates exemptions for backward and forward supply linkages eventually resulting in “exemption creep” which adversely impacts tax base and creates further inequities and inefficiencies in the economy.
What will be role of alternative dispute resolution Committee in VAT?
What will be role of alternative dispute resolution Committee in VAT?
Section 83 of the Federal VAT Bill, 2010 relates to alternative dispute resolution. ADR committees in fact arbitrate tax disputes between the public and the tax authorities. The idea of ADR has been incorporated into the Pakistan’s tax laws to enhance the level of “neutrality” in the tax administration system.
Section 83 of the Federal VAT Bill, 2010 relates to alternative dispute resolution. ADR committees in fact arbitrate tax disputes between the public and the tax authorities. The idea of ADR has been incorporated into the Pakistan’s tax laws to enhance the level of “neutrality” in the tax administration system.
Please define credit and debit note?
Please define credit and debit note?
The concepts of credit and debit notes have been used in sections 29 and 51 of the Federal VAT Bill, 2010. The procedure and formats of such notes shall be specified in the VAT Rules. Under the present sales tax regime, the provisions for credit/debit notes are available under Chapter III of the Sales Tax Rules, 2006.
The concepts of credit and debit notes have been used in sections 29 and 51 of the Federal VAT Bill, 2010. The procedure and formats of such notes shall be specified in the VAT Rules. Under the present sales tax regime, the provisions for credit/debit notes are available under Chapter III of the Sales Tax Rules, 2006.
What is default surcharge?
What is default surcharge?
Default surcharge is explained in section 88 of the Federal VAT Bill. Conceptually, it is an additional tax liability accruing on failure to pay principal tax amount due under the law.
Default surcharge is explained in section 88 of the Federal VAT Bill. Conceptually, it is an additional tax liability accruing on failure to pay principal tax amount due under the law.
What is qualification requirement of an authorized representative?
What is qualification requirement of an authorized representative?
Qualifications for authorized representatives for VAT purposes shall be specified
in VAT Rules as required under section 84 of the Federal VAT Bill, 2010. In this regard, tentative idea may be taken from rule 59 of the existing Sales Tax Rules,
2006 (SRO 555(I)/2006, dated 05.06.2006).
Qualifications for authorized representatives for VAT purposes shall be specified
in VAT Rules as required under section 84 of the Federal VAT Bill, 2010. In this regard, tentative idea may be taken from rule 59 of the existing Sales Tax Rules,
2006 (SRO 555(I)/2006, dated 05.06.2006).
How “association of person” is different from “associated person”?
How “association of person” is different from “associated person”?
Association of persons (AOP) is defined under section 2(iii) of the Federal VAT Bill, 2010 and associated person is defined under section 3 thereof. AOP refers to
a group of persons, while the concept of “associated persons” defines relationship between two persons. Adoption of this concept is a result of harmonization of inland taxes laws & administration.
Association of persons (AOP) is defined under section 2(iii) of the Federal VAT Bill, 2010 and associated person is defined under section 3 thereof. AOP refers to
a group of persons, while the concept of “associated persons” defines relationship between two persons. Adoption of this concept is a result of harmonization of inland taxes laws & administration.
What is progressive or periodic supply?
What is progressive or periodic supply?
Progressive or periodic supply is defined under section 16 of the Federal VAT Bill, 2010. Progressive or periodic supplies are to be treated as a series of separate supplies.
Progressive or periodic supply is defined under section 16 of the Federal VAT Bill, 2010. Progressive or periodic supplies are to be treated as a series of separate supplies.
What is ancillary or incidental supply?
What is ancillary or incidental supply?
The concept of ancillary or incidental supplies has been explained in section 17 of the Federal VAT Bill, 2010. Artificial splitting of supplies relating to any contracted transaction is discouraged under the VAT law so that disputes as to their tax treatment do not occur.
The concept of ancillary or incidental supplies has been explained in section 17 of the Federal VAT Bill, 2010. Artificial splitting of supplies relating to any contracted transaction is discouraged under the VAT law so that disputes as to their tax treatment do not occur.
Would it not be difficult for a less educated shopkeeper to maintain business record?
Would it not be difficult for a less educated shopkeeper to maintain business record?
The businesses whose annual turnover is less than Rs. 7.5 million will be out of VAT. VAT does not prescribe any watertight records. It only identifies the type of record and leaves the manner and style of its maintenance to the discretion of the taxpayer. Besides, VAT generally provides for very simple records.
The businesses whose annual turnover is less than Rs. 7.5 million will be out of VAT. VAT does not prescribe any watertight records. It only identifies the type of record and leaves the manner and style of its maintenance to the discretion of the taxpayer. Besides, VAT generally provides for very simple records.
To how much extent it is true that VAT implementation will lead to transfer of resources from productive sector of economy to public sector diminishing economic efficiency?
To how much extent it is true that VAT implementation will lead to transfer
of resources from productive sector of economy to public sector diminishing economic efficiency?
State expenditure out of tax earnings in fact transfers funds from public to private sector by increasing employment opportunities through development and welfare promotion. Taxes like VAT bring efficiency in the national economic system. Public sector commercial/business organizations (parastatals) also pay VAT on their economic activities involving supply of taxable goods and services.
of resources from productive sector of economy to public sector diminishing economic efficiency?
State expenditure out of tax earnings in fact transfers funds from public to private sector by increasing employment opportunities through development and welfare promotion. Taxes like VAT bring efficiency in the national economic system. Public sector commercial/business organizations (parastatals) also pay VAT on their economic activities involving supply of taxable goods and services.
Would VAT implementation increase gap between pre-tax income and post tax consumption?
Would VAT implementation increase gap between pre-tax income and post tax consumption?
VAT is an expenditure tax and is neutral to production or consumption choices. It
is charged only on such component of income as is spent on the purchase and consumption of taxable goods and services. VAT does not affect one’s ability to earn; it rather encourages to earn more. It not only redistributes income transparently but also increases income levels.
VAT is an expenditure tax and is neutral to production or consumption choices. It
is charged only on such component of income as is spent on the purchase and consumption of taxable goods and services. VAT does not affect one’s ability to earn; it rather encourages to earn more. It not only redistributes income transparently but also increases income levels.
Is the enforcement of VAT a feasible idea?
Is the enforcement of VAT a feasible idea?
In countries like Pakistan, where sales tax system is already existent, VAT introduction is a feasible proposition. VAT is nothing but a refined and modern form of sales tax without cascading or multiple taxation.
In countries like Pakistan, where sales tax system is already existent, VAT introduction is a feasible proposition. VAT is nothing but a refined and modern form of sales tax without cascading or multiple taxation.
What are your views regarding perception that VAT implementation would lead to expansion of informal economy?
What are your views regarding perception that VAT implementation would lead to expansion of informal economy?
Broad-based VAT based upon the principles of equity and welfare instead discourage black economy and stimulate transfer of investments from illegal regimes to legitimate regimes. Black economy surges when tax system lacks in equity and justice. VAT is based upon the principles of equity and justice.
Broad-based VAT based upon the principles of equity and welfare instead discourage black economy and stimulate transfer of investments from illegal regimes to legitimate regimes. Black economy surges when tax system lacks in equity and justice. VAT is based upon the principles of equity and justice.
Why discussing VAT with Chambers & Business community is necessary?
Why discussing VAT with Chambers & Business community is necessary?
Being representative bodies, Chambers and other business associations operate as bridge between the tax managers and the taxpayers. They motivate their members for tax compliance, Presence of trade and industrial associations is a good source
to promote tax culture through representation. Hence, the confidence reposed in and shown by the trade bodies in the need to replace the existing distorted sales tax system is considered to be a prerequisite to ensure smooth public recognition
of the VAT system. Besides, the suggestions and advices given by these trade bodies also help refine the system in the light of real-world business practices of the market.
Being representative bodies, Chambers and other business associations operate as bridge between the tax managers and the taxpayers. They motivate their members for tax compliance, Presence of trade and industrial associations is a good source
to promote tax culture through representation. Hence, the confidence reposed in and shown by the trade bodies in the need to replace the existing distorted sales tax system is considered to be a prerequisite to ensure smooth public recognition
of the VAT system. Besides, the suggestions and advices given by these trade bodies also help refine the system in the light of real-world business practices of the market.
Why rich farmers are not imposed VAT tax?
Why rich farmers are not imposed VAT tax?
Agriculture as such is not a manufacturing activity. Nor it is an economic activity involving supply of goods and services as such. Commercial trading of agricultural produce will, unless exempted, be covered under VAT. Moreover, VAT being an expenditure tax is also borne by the farmers’ community when they purchase VAT-taxed goods and services either for agricultural purposes or for their personal consumption. The more they spend, the more they pay VAT on their consumption.
Agriculture as such is not a manufacturing activity. Nor it is an economic activity involving supply of goods and services as such. Commercial trading of agricultural produce will, unless exempted, be covered under VAT. Moreover, VAT being an expenditure tax is also borne by the farmers’ community when they purchase VAT-taxed goods and services either for agricultural purposes or for their personal consumption. The more they spend, the more they pay VAT on their consumption.
Promulgation of VAT Act, 2010 in haste may prove counter productive?
Promulgation of VAT Act, 2010 in haste may prove counter productive?
Pakistan has more than 20 years’ experience of sales tax of VAT like taxation. VAT will replace sales tax with broad tax base. Thus, Pakistan already has an established infrastructure and good tax management system, which is being further improved for the purpose of VAT. The tax reforms started several years back have brought large scale improvements and refinements in Pakistan’s tax machinery. VAT will improve consumption tax system in the country more progressively and futuristically.
Pakistan has more than 20 years’ experience of sales tax of VAT like taxation. VAT will replace sales tax with broad tax base. Thus, Pakistan already has an established infrastructure and good tax management system, which is being further improved for the purpose of VAT. The tax reforms started several years back have brought large scale improvements and refinements in Pakistan’s tax machinery. VAT will improve consumption tax system in the country more progressively and futuristically.
Why Government is not considering to remove deficiencies in GST rather than introducing new tax?
Why Government is not considering to remove deficiencies in GST rather than introducing new tax?
The existing sales tax system substantially distorted on several accounts. Over the passage of time, it has become complex, inefficient and regressive. Thus, a simple, efficient and progressive form of sales tax is a need of the day. VAT does provide a model of such modern form of sales tax. VAT is much more transparent and equitable than traditional and obsolete forms of sales tax. VAT is not a new tax but a modern and simple substitution of the existing sales tax.
The existing sales tax system substantially distorted on several accounts. Over the passage of time, it has become complex, inefficient and regressive. Thus, a simple, efficient and progressive form of sales tax is a need of the day. VAT does provide a model of such modern form of sales tax. VAT is much more transparent and equitable than traditional and obsolete forms of sales tax. VAT is not a new tax but a modern and simple substitution of the existing sales tax.
Job of business community is to undertake economic activity not collection of unnecessary information from purchaser, how you see it?
Job of business community is to undertake economic activity not collection of unnecessary information from purchaser, how you see it?
VAT law does not place any extra burden upon the business community to collect any unnecessary information from their buyers. Only such basic information has been prescribed for VAT invoicing purpose as is minimally necessary to identify exchange, movement or supply of goods and services between different hands.
VAT law does not place any extra burden upon the business community to collect any unnecessary information from their buyers. Only such basic information has been prescribed for VAT invoicing purpose as is minimally necessary to identify exchange, movement or supply of goods and services between different hands.
Why a supplier should be penalized and implicated if fake information is provided by buyer?
Why a supplier should be penalized and implicated if fake information is provided by buyer?
Under section 89 of the Federal VAT Bill, 2010 read with Third Schedule thereof,
no penalty has been proposed for a supplier on any such account. Law always protects the bonafide sellers having no knowledge about any mis-conduct of their buyers. The concept of absolute joint or several responsibility has not been incorporated in the VAT law.
Under section 89 of the Federal VAT Bill, 2010 read with Third Schedule thereof,
no penalty has been proposed for a supplier on any such account. Law always protects the bonafide sellers having no knowledge about any mis-conduct of their buyers. The concept of absolute joint or several responsibility has not been incorporated in the VAT law.
There is no distinction between poor and middle/upper class under VAT. How would you justify?
There is no distinction between poor and middle/upper class under VAT.
How would you justify?
VAT exemptions on basic food items, charities and public sector health and education, will basically benefit the lower strata of society. Meanwhile, domestic resource mobilization through economic documentation and consequential increase in state earnings will stimulate equitable socio-economic development in society. Just taxes always redistribute resources from rich to poor without hurting opportunities for prosperity at individual level.
How would you justify?
VAT exemptions on basic food items, charities and public sector health and education, will basically benefit the lower strata of society. Meanwhile, domestic resource mobilization through economic documentation and consequential increase in state earnings will stimulate equitable socio-economic development in society. Just taxes always redistribute resources from rich to poor without hurting opportunities for prosperity at individual level.
When tax becomes payable on supplies?
When tax becomes payable on supplies?
Answer: As per section 24 of the Federal VAT Bill, 2010, tax is payable at the time of filing a return. However, non-filing of a return does not absolve a person of the obligation to discharge his tax liability under the VAT law. A complete procedure for filing of VAT returns and payment of tax shall be given in VAT Rules.
Answer: As per section 24 of the Federal VAT Bill, 2010, tax is payable at the time of filing a return. However, non-filing of a return does not absolve a person of the obligation to discharge his tax liability under the VAT law. A complete procedure for filing of VAT returns and payment of tax shall be given in VAT Rules.
Who is a retail dealer?
Who is a retail dealer?
Answer: VAT law as such does not differentiate between retailer/retail dealer and wholesaler/dealer. Nor it defines manufacture or manufacturer. Every person of whatever business category is required to get VAT registration if he is engaged in carrying out an economic activity of making supplies of taxable goods and services.
Answer: VAT law as such does not differentiate between retailer/retail dealer and wholesaler/dealer. Nor it defines manufacture or manufacturer. Every person of whatever business category is required to get VAT registration if he is engaged in carrying out an economic activity of making supplies of taxable goods and services.
What are the books and record kept for VAT?
What are the books and record kept for VAT?
Answer:
Under section 54 of the Federal VAT Bill, 2010, VAT
records
include tax invoices (both for purchases and sales), credit/debt notes and customs documents relating to imports and exports. Details for simplified VAT records and book keeping shall be provided in VAT Rules.
Answer:
Under section 54 of the Federal VAT Bill, 2010, VAT
records
include tax invoices (both for purchases and sales), credit/debt notes and customs documents relating to imports and exports. Details for simplified VAT records and book keeping shall be provided in VAT Rules.
When and how registration of a person is cancelled?
When and how registration of a person is cancelled?
Answer: Procedure for cancellation of VAT registration is given in sections
46 and 47 of the Federal VAT Bill, 2010. Registration can be cancelled in the following events:
(i) where a registered person ceases to make taxable supplies;
(ii) where a person is no longer required to be registered (e.g. falling below registration threshold);
(iii) where the supplies made by a registered person otherwise become exempt from VAT despite that a person continues making such exempt supplies. However, a person who is making taxable as well as exempt supplies is required to be registered; and
(iv) where a person has failed to comply with the VAT
obligations or is otherwise not entitled to be registered.
Answer: Procedure for cancellation of VAT registration is given in sections
46 and 47 of the Federal VAT Bill, 2010. Registration can be cancelled in the following events:
(i) where a registered person ceases to make taxable supplies;
(ii) where a person is no longer required to be registered (e.g. falling below registration threshold);
(iii) where the supplies made by a registered person otherwise become exempt from VAT despite that a person continues making such exempt supplies. However, a person who is making taxable as well as exempt supplies is required to be registered; and
(iv) where a person has failed to comply with the VAT
obligations or is otherwise not entitled to be registered.
What is treatment when a person liable to registered in VAT is not registered?
What is treatment when a person liable to registered in VAT is not registered?
Answer: He is registered compulsorily under section 43 of the Federal VAT Bill, 2010. Procedure for compulsory registration on objective lines shall be given in the VAT Rules.
Answer: He is registered compulsorily under section 43 of the Federal VAT Bill, 2010. Procedure for compulsory registration on objective lines shall be given in the VAT Rules.
Am I supposed to pay VAT on gifts and promotional material?
Am I supposed to pay VAT on gifts and promotional material?
Answer: Yes, if you are engaged in carrying on any economic activity that involves or intended to involve the supply of taxable goods and services. Economic activity is defined under section 5 of the Federal VAT Bill, 2010, which may be read with sections 9, 10 and
41 thereof.
Answer: Yes, if you are engaged in carrying on any economic activity that involves or intended to involve the supply of taxable goods and services. Economic activity is defined under section 5 of the Federal VAT Bill, 2010, which may be read with sections 9, 10 and
41 thereof.
What happens when a person registered in VAT does not submit returns?
What happens when a person registered in VAT does not submit returns?
Answer: VAT liability increases due to addition of default surcharge under section 88 of the Federal VAT Bill, 2010. Besides a penalty of Rs.5,000/- is invoked and if the return is not filed within fifteen days
of the due date, a penalty of Rs.1,000/- for each day of default is payable under Serial No.2 of the Third Schedule of the Bill, read with section 89 thereof.
Answer: VAT liability increases due to addition of default surcharge under section 88 of the Federal VAT Bill, 2010. Besides a penalty of Rs.5,000/- is invoked and if the return is not filed within fifteen days
of the due date, a penalty of Rs.1,000/- for each day of default is payable under Serial No.2 of the Third Schedule of the Bill, read with section 89 thereof.
What is a VAT audit and how a tax payer will be selected for audit?
What is a VAT audit and how a tax payer will be selected for audit?
Answer: Statutory provisions for VAT audit are available in sections 69, 70 and 71 of the Bill. These provisions are to be read with section 54. VAT audit is thus an examination of the records and accounts of a registered person for ascertaining the accuracy of the tax liabilities and other obligations discharged by such person. Detailed audit- related procedures shall be given in VAT Rules coming risk-based audit selection criteria.
Answer: Statutory provisions for VAT audit are available in sections 69, 70 and 71 of the Bill. These provisions are to be read with section 54. VAT audit is thus an examination of the records and accounts of a registered person for ascertaining the accuracy of the tax liabilities and other obligations discharged by such person. Detailed audit- related procedures shall be given in VAT Rules coming risk-based audit selection criteria.
How long a registered must keep record?
How long a registered must keep record?
Answer: As provided in section 54 of the Federal VAT Bill, 2010, period for keeping VAT records is at least six years. However, in case of audit, recovery proceedings, dispute, prosecution or other proceedings, this period extends till such time final decision is made.
Answer: As provided in section 54 of the Federal VAT Bill, 2010, period for keeping VAT records is at least six years. However, in case of audit, recovery proceedings, dispute, prosecution or other proceedings, this period extends till such time final decision is made.
What is invoice basis for accounting for VAT?
What is invoice basis for accounting for VAT?
Answer: Tax invoice is required to be issued for every taxable supply made
by a registered person to another registered person. The mandatory particulars of a tax invoice are given in section 49(1) of the Federal VAT Bill, 2010. However, under section 50, a registered person may issue a sale receipt for a supply to a person not required to be registered provided the value of such supply does not exceed Rs.25,000/-.
Answer: Tax invoice is required to be issued for every taxable supply made
by a registered person to another registered person. The mandatory particulars of a tax invoice are given in section 49(1) of the Federal VAT Bill, 2010. However, under section 50, a registered person may issue a sale receipt for a supply to a person not required to be registered provided the value of such supply does not exceed Rs.25,000/-.
What is cash basis for accounting for VAT?
What is cash basis for accounting for VAT?
Answer: Under section 26(4) of the Federal VAT Bill, 2010, input tax deduction on cash purchases is available only if the value of such a purchase including VAT amount is equal to or below Rs.50,000/-.
Answer: Under section 26(4) of the Federal VAT Bill, 2010, input tax deduction on cash purchases is available only if the value of such a purchase including VAT amount is equal to or below Rs.50,000/-.
What is turnover threshold for VAT registration?
What is turnover threshold for VAT registration?
Answer: As laid down in section 41 of the Federal VAT Bill, 2010, registration threshold is Rs.7.5 million per annum.
Answer: As laid down in section 41 of the Federal VAT Bill, 2010, registration threshold is Rs.7.5 million per annum.
What treatment will be meted out if a business or a part of business is transferred?
What treatment will be meted out if a business or a part of business is transferred?
Answer: In terms of section 20 of the Federal VAT Bill, 2010 read with entry
at S.No.1 of the Second Schedule thereof, where any business or part thereof is transferred as ongoing concern, to another registered person, it shall be treated as zero-rated supply, otherwise the buyer shall first pay applicable VAT and shall then be entitled to adjustments on his registration in terms of section 33.
Answer: In terms of section 20 of the Federal VAT Bill, 2010 read with entry
at S.No.1 of the Second Schedule thereof, where any business or part thereof is transferred as ongoing concern, to another registered person, it shall be treated as zero-rated supply, otherwise the buyer shall first pay applicable VAT and shall then be entitled to adjustments on his registration in terms of section 33.
What are the circumstances in which refund of input tax credit is permissible?
What are the circumstances in which refund of input tax credit
is permissible?
Answer: Where supplies are exported or zero-rated in terms of section 12 of the Federal VAT Bill 2010 and if the part of any adjustable input tax amount remains carried forward without being deducted against any output tax as laid down in section 37(3) of the Bill. Procedures for all categories of VAT refund shall be prescribed in VAT Rules.
is permissible?
Answer: Where supplies are exported or zero-rated in terms of section 12 of the Federal VAT Bill 2010 and if the part of any adjustable input tax amount remains carried forward without being deducted against any output tax as laid down in section 37(3) of the Bill. Procedures for all categories of VAT refund shall be prescribed in VAT Rules.
What should be done in case goods are returned from purchaser to seller?
What should be done in case goods are returned from purchaser to seller?
Answer: Input tax adjustment is admissible in cases where supply is canclled as laid down in section 29 of the Federal VAT Bill, 2010.
Answer: Input tax adjustment is admissible in cases where supply is canclled as laid down in section 29 of the Federal VAT Bill, 2010.
What will be tax implications on sale of old and used goods or scrapped machinery?
What will be tax implications on sale of old and used goods or scrapped machinery?
Answer: If not sold to another registered person as ongoing economic activity, such machinery and goods shall be charged to VAT on tax fraction basis as laid down in section 21 of the Federal VAT Bill,
2010.
Answer: If not sold to another registered person as ongoing economic activity, such machinery and goods shall be charged to VAT on tax fraction basis as laid down in section 21 of the Federal VAT Bill,
2010.
If the Input is used partly for making taxable goods and partly for exempted goods, will input tax credit will be available?
If the Input is used partly for making taxable goods and partly for exempted goods, will input tax credit will be available?
Answer: In such cases input tax adjustment shall be apportioned and be available only to the extent of taxable supplies (creditable purpose)
as laid down in section 27 of the Bill. Apportionment formula in this shall be given in VAT Rules.
Answer: In such cases input tax adjustment shall be apportioned and be available only to the extent of taxable supplies (creditable purpose)
as laid down in section 27 of the Bill. Apportionment formula in this shall be given in VAT Rules.
What are tax rates under VAT?
What are tax rates under VAT?
Answer: VAT has only one standard rate i.e. 15%. The other rate is zero percent which is applicable on exports or zero-rated supplies.
Answer: VAT has only one standard rate i.e. 15%. The other rate is zero percent which is applicable on exports or zero-rated supplies.
How VAT is worked out.
How VAT is worked out.
Answer: Under section 18 read with clause (xiv) of section 2(1) of the
Federal VAT Bill, 2010, VAT can be calculated as follows:-
R x Consideration for Supply
100+R
Where “R” is the tax rate
Answer: Under section 18 read with clause (xiv) of section 2(1) of the
Federal VAT Bill, 2010, VAT can be calculated as follows:-
R x Consideration for Supply
100+R
Where “R” is the tax rate
How a VAT registration can be verified?
How a VAT registration can be verified?
Answer: On its website, FBR will, as required under section 48 of the Federal VAT Bill, 2010, regularly maintain an updated list of active registered persons under VAT regime. Such information is even currently available under sales tax regime.
Answer: On its website, FBR will, as required under section 48 of the Federal VAT Bill, 2010, regularly maintain an updated list of active registered persons under VAT regime. Such information is even currently available under sales tax regime.
What are businesses that are not supposed to charge VAT?
What are businesses that are not supposed to charge VAT?
Answer: The businesses who deal in exempt goods or services as well as those whose annual turnover falls below Rs.7.5 million shall not be required to be registered or charge VAT.
Answer: The businesses who deal in exempt goods or services as well as those whose annual turnover falls below Rs.7.5 million shall not be required to be registered or charge VAT.
Would imposition of VAT result in cultivating multiple taxation?
Would imposition of VAT result in cultivating multiple taxation?
Answer: No. VAT does not provide for tax over tax (cascading). VAT will replace the whole existing sales tax and Federal excise duties on services.
Answer: No. VAT does not provide for tax over tax (cascading). VAT will replace the whole existing sales tax and Federal excise duties on services.
What is concept of input and output adjustments?
What is concept of input and output adjustments?
Answer:
The actual concept is input tax adjustment, which means that
to
work out net tax liability, the amount tax paid on the purchases is deducted from the amount of tax charged on sales of taxable goods
or services. This is also known as tax credit. Sections 25 to 34 of the Federal VAT Bill, 2010 relate to adjustments under different circumstances.
Answer:
The actual concept is input tax adjustment, which means that
to
work out net tax liability, the amount tax paid on the purchases is deducted from the amount of tax charged on sales of taxable goods
or services. This is also known as tax credit. Sections 25 to 34 of the Federal VAT Bill, 2010 relate to adjustments under different circumstances.
What is concept of consideration?
What is concept of consideration?
Answer: As provided under section 4 of the Federal VAT Bill, 2010, “consideration” means the total of the following amounts:
(a) the amount in money paid or payable by any person, whether directly or indirectly, in respect of, in response to, or for the inducement of the supply; and
(b) the open market price of anything paid or payable in kind, whether directly or indirectly, by any person in respect of, in response to, or for the inducement of the supply.
Consideration includes the amounts of Federal and Provincial taxes
(including VAT) paid or payable by the supplier. However, price discounts/rebates available under open market conditions are permissible under VAT.
Answer: As provided under section 4 of the Federal VAT Bill, 2010, “consideration” means the total of the following amounts:
(a) the amount in money paid or payable by any person, whether directly or indirectly, in respect of, in response to, or for the inducement of the supply; and
(b) the open market price of anything paid or payable in kind, whether directly or indirectly, by any person in respect of, in response to, or for the inducement of the supply.
Consideration includes the amounts of Federal and Provincial taxes
(including VAT) paid or payable by the supplier. However, price discounts/rebates available under open market conditions are permissible under VAT.
Inflation may promote smuggling what are FBR plans in this regard?
Inflation may promote smuggling what are FBR plans in this regard?
Answer: FBR is already working on formulating and implementing an effective anti-smuggling strategy so that economic equity guaranteed by VAT is not distorted by smuggling. Increase in business documentation under VAT will rather discourage smuggling and motivate transfer of investments from irregular to regular business regimes.
Answer: FBR is already working on formulating and implementing an effective anti-smuggling strategy so that economic equity guaranteed by VAT is not distorted by smuggling. Increase in business documentation under VAT will rather discourage smuggling and motivate transfer of investments from irregular to regular business regimes.
Would VAT result in increase of cost of doing business?
Would VAT result in increase of cost of doing business?
Answer: Reduced VAT rate instead of multiple higher sales tax rates will in fact ease out the cash flow of compliant businesses.
Answer: Reduced VAT rate instead of multiple higher sales tax rates will in fact ease out the cash flow of compliant businesses.
How VAT refunds will be made by FBR?
How VAT refunds will be made by FBR?
Answer:
VAT refunds will be paid through Expeditious Refund
Payment
System. This system has already been installed for industrial exporters from the tax period April, 2010 onwards. This system will be upgraded to make electronic refund payments directly in the bank accounts of the taxpayers. The scope of this new refund system will be expanded to cover all other categories of refund claimants in due course.
Answer:
VAT refunds will be paid through Expeditious Refund
Payment
System. This system has already been installed for industrial exporters from the tax period April, 2010 onwards. This system will be upgraded to make electronic refund payments directly in the bank accounts of the taxpayers. The scope of this new refund system will be expanded to cover all other categories of refund claimants in due course.
Don’t you think that discretionary powers of VAT officials regarding recovery and raiding business premises are prone to misuse?
Don’t you think that discretionary powers of VAT officials regarding recovery and raiding business premises are prone to misuse?
Answer: Under section 61 read with section 90 of the Federal VAT Bill 2010, recovery process commences only after the undischarged tax liability has been adjudged or determined through adjudication observing all the principles of natural justice. Detailed recovery
rules shall be included in the VAT rules. There is no concept of physical raids under the proposed VAT system. Section 75 of the Federal VAT Bill 2010 speaks of the lawful access of the authorized VAT functionaries to records and premises only for tax matters.
Answer: Under section 61 read with section 90 of the Federal VAT Bill 2010, recovery process commences only after the undischarged tax liability has been adjudged or determined through adjudication observing all the principles of natural justice. Detailed recovery
rules shall be included in the VAT rules. There is no concept of physical raids under the proposed VAT system. Section 75 of the Federal VAT Bill 2010 speaks of the lawful access of the authorized VAT functionaries to records and premises only for tax matters.
What are meanings of the forensic audit in VAT?
What are meanings of the forensic audit in VAT?
Answer: Forensic audit involves a specialized examination of (mostly documentary) evidence to determine the accuracy or truthfulness of any assertion for judicial or quasi-judicial determination of any fact. VAT Rules will explain the concept of forensic audit under VAT regime.
Answer: Forensic audit involves a specialized examination of (mostly documentary) evidence to determine the accuracy or truthfulness of any assertion for judicial or quasi-judicial determination of any fact. VAT Rules will explain the concept of forensic audit under VAT regime.
How exempt goods are different from zero-rated goods?
How exempt goods are different from zero-rated goods?
Answer: Exempt supplies are input-taxed and zero-rated supplies enjoy effective exemption because the input tax involved therein is creditable/refundable.
Answer: Exempt supplies are input-taxed and zero-rated supplies enjoy effective exemption because the input tax involved therein is creditable/refundable.
Would there be any exemptions under VAT.
Would there be any exemptions under VAT.
Answer: Upfront VAT exemptions are available under the First Schedule each of the Federal and Provincial VAT Bills. Exemptions will generally cover basic foods items, charities, public sector education and health and international commitments.
Answer: Upfront VAT exemptions are available under the First Schedule each of the Federal and Provincial VAT Bills. Exemptions will generally cover basic foods items, charities, public sector education and health and international commitments.
Would exports be zero rated in VAT regime.
Would exports be zero rated in VAT regime.
Answer: All exports of goods and services shall be zero-rated under VAT.
The input tax involved therein shall be refunded expeditiously.
Answer: All exports of goods and services shall be zero-rated under VAT.
The input tax involved therein shall be refunded expeditiously.
Would VAT implementation result into high inflation rate?
Would VAT implementation result into high inflation rate?
Answer: Because of absence of tax cascading and in-built invoice-based input-credit mechanism, VAT is almost non-inflationary as compared to traditional sales tax, VAT is neutral to production and consumption choices. It eventually stabilizes prices in the market.
Answer: Because of absence of tax cascading and in-built invoice-based input-credit mechanism, VAT is almost non-inflationary as compared to traditional sales tax, VAT is neutral to production and consumption choices. It eventually stabilizes prices in the market.
What is plea of Sindh regarding VAT collection on services?
What is plea of Sindh regarding VAT collection on services?
Answer: Entrustment to Federal Government (FBR) of the functions to collect and enforce Provincial VAT alongside Federal VAT under an integrated tax regime, may not be construed to transfer of taxing powers in respect of services covered under Provincial VAT. Collection and enforcement does not amount to imposition. The Federal Government too is very clear on this constitutional question.
Answer: Entrustment to Federal Government (FBR) of the functions to collect and enforce Provincial VAT alongside Federal VAT under an integrated tax regime, may not be construed to transfer of taxing powers in respect of services covered under Provincial VAT. Collection and enforcement does not amount to imposition. The Federal Government too is very clear on this constitutional question.
What is response of provinces regarding VAT?
What is response of provinces regarding VAT?
Answer: The Provinces have already tabled the Provincial VAT Bills in their respective assemblies.
Answer: The Provinces have already tabled the Provincial VAT Bills in their respective assemblies.
Will the VAT implementation increase cost of compliance?
Will the VAT implementation increase cost of compliance?
Answer: There will be no increase in compliance cost of those who are already registered and operating under sales tax regime and will automatically switchover to VAT. The new taxpayers will however,
have to incur nominal expense on VAT compliance. Due to IT- based VAT processes, VAT compliance cost usually remain low for the taxpayers who discharge their tax obligations regularly on fair lines.
Answer: There will be no increase in compliance cost of those who are already registered and operating under sales tax regime and will automatically switchover to VAT. The new taxpayers will however,
have to incur nominal expense on VAT compliance. Due to IT- based VAT processes, VAT compliance cost usually remain low for the taxpayers who discharge their tax obligations regularly on fair lines.
What is level of preparedness of FBR in VAT implementation?
What is level of preparedness of FBR in VAT implementation?
Answer: Introduction of VAT in Pakistan being already overdue, FBR is fast preparing itself to replace the existing sales tax system with VAT with effect from 1st July, 2010. In this regard, necessary measures are being taken to increase FBR’s infrastructural and operational capacity to undertake its VAT–related functions and responsibilities. Pakistan is a fortunate country that it has a over 20 years’ experience of VAT-like sales tax management and adoption of pure VAT in Pakistan in lieu of existing sales tax is not likely to pose any unforeseen problem for its tax machinery.
Answer: Introduction of VAT in Pakistan being already overdue, FBR is fast preparing itself to replace the existing sales tax system with VAT with effect from 1st July, 2010. In this regard, necessary measures are being taken to increase FBR’s infrastructural and operational capacity to undertake its VAT–related functions and responsibilities. Pakistan is a fortunate country that it has a over 20 years’ experience of VAT-like sales tax management and adoption of pure VAT in Pakistan in lieu of existing sales tax is not likely to pose any unforeseen problem for its tax machinery.
What will be role of e-intermediaries in VAT?
What will be role of e-intermediaries in VAT?
Answer: E-intermediaries, appointed by FBR under section 92 of the Federal VAT Bill, 2010, will electronically file tax returns, statements, declarations and other documents specified under VAT law on behalf of and under authorization from the registered persons.
Answer: E-intermediaries, appointed by FBR under section 92 of the Federal VAT Bill, 2010, will electronically file tax returns, statements, declarations and other documents specified under VAT law on behalf of and under authorization from the registered persons.
Is VAT prone to Tax frauds?
Is VAT prone to Tax frauds?
Answer: Every tax is prone to fraud. VAT however, has edge over other consumption taxes as that VAT fraud cannot escape detection sooner or later. Proper monitoring always reduces opportunities for tax fraud. The world experience shows that VAT induces a strong tax culture.
Answer: Every tax is prone to fraud. VAT however, has edge over other consumption taxes as that VAT fraud cannot escape detection sooner or later. Proper monitoring always reduces opportunities for tax fraud. The world experience shows that VAT induces a strong tax culture.
How VAT will protect vulnerable groups of the society?
How VAT will protect vulnerable groups of the society?
Answer:
By increasing exemption threshold, decreasing standard tax
rate
and continuing exemption on basic food items, charities, public sector education and health besides withdrawing imposition of tax on retail price basis, vulnerable groups will continue to be protected. Through acceleration of development process with new VAT receipts, employment opportunities will increase and the overall income level of the low strata of society will progress. Besides, with increase in revenue income, state will be in better position to promote social welfare/wellbeing of the masses
Answer:
By increasing exemption threshold, decreasing standard tax
rate
and continuing exemption on basic food items, charities, public sector education and health besides withdrawing imposition of tax on retail price basis, vulnerable groups will continue to be protected. Through acceleration of development process with new VAT receipts, employment opportunities will increase and the overall income level of the low strata of society will progress. Besides, with increase in revenue income, state will be in better position to promote social welfare/wellbeing of the masses
What is IMF and World Bank stance regarding implementation of VAT?
What is IMF and World Bank stance regarding implementation
of VAT?
Answer: VAT will enable Pakistan to generate and mobilize domestic resources to meet its economic development and social welfare needs.
of VAT?
Answer: VAT will enable Pakistan to generate and mobilize domestic resources to meet its economic development and social welfare needs.
Why VAT is preferable over GST?
Why VAT is preferable over GST?
Answer: VAT is more broad-based, equitable and efficient and is without cascading (tax over tax) and hence, is preferable to narrow-based and cascading-ridden traditional sales tax.
Answer: VAT is more broad-based, equitable and efficient and is without cascading (tax over tax) and hence, is preferable to narrow-based and cascading-ridden traditional sales tax.
What is reaction of Trade Bodies on introduction of VAT?
What is reaction of Trade Bodies on introduction of VAT?
Answer: Numerous VAT briefings have been given to the trade and industrial bodies and professional circles. After understanding the nature and dynamics of VAT and benefits to the nation of withdrawal of exemptions, opinion of the business lobbies is fast changing in favour of VAT.
Answer: Numerous VAT briefings have been given to the trade and industrial bodies and professional circles. After understanding the nature and dynamics of VAT and benefits to the nation of withdrawal of exemptions, opinion of the business lobbies is fast changing in favour of VAT.
How general public responding to VAT?
How general public responding to VAT?
Answer: Since standard rate is being decreased from 16% to 15% and registration threshold is being increased from Rs.5 million to Rs.7.5 million and most of the exemptions are being withdrawn, people are generally expecting that VAT will bring economic equity and price stability in the market.
Answer: Since standard rate is being decreased from 16% to 15% and registration threshold is being increased from Rs.5 million to Rs.7.5 million and most of the exemptions are being withdrawn, people are generally expecting that VAT will bring economic equity and price stability in the market.
What is difference between goods and services?
What is difference between goods and services?
Answer:
Goods are tangible supplies (materials, commodities and
articles)
and services are intangible supplies. VAT will regulate mixed supplies on the basis of their contractual character. Under VAT, services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.
Answer:
Goods are tangible supplies (materials, commodities and
articles)
and services are intangible supplies. VAT will regulate mixed supplies on the basis of their contractual character. Under VAT, services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.
What will be impact of VAT on food prices?
What will be impact of VAT on food prices?
Answer:
In Pakistan, most of the processed packaged/branded food
items
are already chargeable to sales tax. Basic food items being out of VAT net, there will be no tangible price increase in food items usually sold in processed packaged/branded form. Consumer prices of the food items which are currently being charged to sales tax on retail price basis are likely to fall because VAT will be
charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers.
Answer:
In Pakistan, most of the processed packaged/branded food
items
are already chargeable to sales tax. Basic food items being out of VAT net, there will be no tangible price increase in food items usually sold in processed packaged/branded form. Consumer prices of the food items which are currently being charged to sales tax on retail price basis are likely to fall because VAT will be
charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers.
How VAT will be helpful in documentation of economy and improve revenue collection?
How VAT will be helpful in documentation of economy and improve revenue collection?
Answer: Generally, all the commercial activities involving production and distribution of goods and provision of services are brought under tax net giving tolerance for a pre-fixed registration threshold level. This results in documentation of every body in the supply chain. Those who are not registered in the chain are not in a position to claim or deduct tax paid at purchase levels. VAT promotes economic documentation with the help of its in-built invoice-based credit mechanism. Tax invoice is blood line of VAT-induced documentation. VAT has self-enforcing features and documents business transactions through tax invoicing.
Answer: Generally, all the commercial activities involving production and distribution of goods and provision of services are brought under tax net giving tolerance for a pre-fixed registration threshold level. This results in documentation of every body in the supply chain. Those who are not registered in the chain are not in a position to claim or deduct tax paid at purchase levels. VAT promotes economic documentation with the help of its in-built invoice-based credit mechanism. Tax invoice is blood line of VAT-induced documentation. VAT has self-enforcing features and documents business transactions through tax invoicing.
What will be scope of VAT?
What will be scope of VAT?
Answer: VAT will cover supply (including import) of both goods and services
at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million will be out of VAT net.
Answer: VAT will cover supply (including import) of both goods and services
at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million will be out of VAT net.
What is difference between VAT and Sales Tax?
What is difference between VAT and Sales Tax?
Answer: VAT is levied on goods and services while sales tax
is imposed
generally on goods. Contrary to sales tax VAT has no cascading effect. VAT is a multistage tax, levied only on the value added at each stage in the chain of supply of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. Thus, VAT eventually becomes a single point tax.
Answer: VAT is levied on goods and services while sales tax
is imposed
generally on goods. Contrary to sales tax VAT has no cascading effect. VAT is a multistage tax, levied only on the value added at each stage in the chain of supply of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. Thus, VAT eventually becomes a single point tax.
Thursday, May 20, 2010
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Wednesday, May 12, 2010
Implementation of VAT: Pakistan’s Experience
Implementation of VAT: Pakistan’s Experience
I. Introduction
The emergence of the consumption based Value-Added Tax (VAT) and its unprecedented success in the developed world, motivated largely by its greater efficiency and buoyancy, encouraged the developing countries to adopt VAT during the decades of the eighties and nineties. However, with the exception of a few, many countries faced multiple difficulties in the adoption and implementation of VAT. Pakistan, undeterred by the concern generally expressed in the developing countries, decided to take the bold initiative and move forward with the introduction of VAT in the country, the goal being to develop it into a major national tax. The move launched more than a decade ago was initially confronted with resistance from some of the stakeholders but owing to the efforts on public awareness about the progressive and futuristic dimensions of the tax and political recognition of its significance, the desired support eventually came in. The confidence-building measures introduced over the period helped to further improve the operational environment with the result that VAT is now an accepted part of the country’s fiscal landscape. The efforts to address the issues spurred by its introduction, whether concerning the legislative side or the operational element, remain a part of the continuous reform process.
This paper briefly traces the development of VAT in Pakistan and provides an exposition on its introduction as well as implementation. Starting from its historical context, the paper briefly dilates upon the issues of taxpayers’ registration, adoption of basic threshold, structure of tax rate, audit, refund payments etc. It also encompasses the contentious areas where the tax administration and the taxpayers are trying to develop uniform solutions consistent with the overall philosophy of VAT. These areas include selection of audit including investigative audit and improvement in tax compliance.
II. Historical Context
In 1947, when Pakistan attained independence, the sales tax was a provincial levy covering a limited area of commercial activity. With its conversion to a federal tax in 1951, its scope was extended to imports and domestic sale of goods by manufacturers and licensed wholesalers. The enactment of the Sales Tax Act, 1990 introduced its value added version renamed as General Sales Tax (GST). This was levied on goods only (with many exemptions) and that too at the manufacturing and import stages. A major leap forward was taken in 1995-96 when GST was converted into a full-fledged VAT mode tax with all its basic features; self-assessment, functional distribution, input tax credit facility and audit based procedures. To further increase its base, its coverage was extended to importers in 1997 and to wholesalers and retailers in 1998. Following the trend observed in many less developed economies where documentation was limited, Pakistan also embarked on the levy of GST on goods rather than services. With the expansion of service sector in 1990s, the anomaly was removed and the scope of GST was extended to certain services in 2000.
The effort mounted by tax administration in Pakistan during the last fifteen years supported by the extension of tax base to wholesalers and retailers has led to significant improvement in the VAT collection in the country. VAT revenues (domestic plus import stage) jumped significantly during this period. In absolute terms, the collection increased from US$ 806 million only in the early 1990’s to US$ 2.67 billion in 2000’s. The remarkable performance of VAT can also be judged from the growth in revenue during the last five decades (Table 1).
Table 1: Collection and Growth
Average Annual Collection1 Average Annual Growth2
1950s 3 12.2
1960s 8 8.9
1970s 20 18.5
1980s 120 24.0
1990s 806 21.8
2000s 2668 20.0
1 Collection in millions (converted into US$ at the current exchange rate Pak Rs.60 =US$ 1)
2 Growth in percent
It is interesting to note that the share of VAT in the Federal Tax receipts has increased from about 20% during 1990’s to over 40 % in 2000’s (Table 2). Similarly, VAT to GDP ratio has risen from 2.2 % to 4.4 % during the same period. Among the developing countries of Asia, Pacific and South America which have adopted VAT, Pakistan’s performance has been better than many.
.
Table 2: Contribution
Share of ST in Indirect Taxes Share of ST in Federal Taxes Share of ST in GDP
1950s 24.3 18.6 Na
1960s 26.0 20.2 1.8
1970s 10.7 8.9 0.9
1980s 12.9 10.7 1.2
1990s 27.6 19.7 2.2
2000s 60.5 40.2 4.4
Note: (1) Share in percent; (2) Na means data not available on some components.
III. Implementation: Handling the Issues
Pakistan has reached a stage where VAT has been accepted by taxpayers. The journey up to the present stage has not been easy. Thanks to the gradual introduction of various measures and reengineering of the business processes, the implementation of VAT has been possible in its present manner. Some of the issues and the way they were dealt with are discussed below.
Threshold
At the outset, a system of multiple thresholds was designed to cater to the needs of all categories and levels of taxpayers. In this system, four different kinds of threshold levels for manufacturers and retailers were offered. A lower threshold level of Rs. 0.5 million (US$ 8 thousand) was fixed for manufacturers and Rs.1 million (US$ 16 thousand) for retailers. The enrolled persons under this category were required to pay turnover tax at the rate of 2 % of their annual turnover. Similarly, a higher threshold level of Rs. 5 million (US$ 80 thousand) was fixed for manufacturers and retailers, respectively, making it mandatory for them to pay sales tax at the rate of 15% of their total turnover.
This layered system brought into focus difficulties of various dimensions. On the one hand, it prompted taxpayers to register under the wrong category to avoid tax payment at the standard rate of 15% and on the other hand it encouraged ‘short-life’ taxpayers given the restriction of sales tax registration for suppliers to the government departments. In this case, suppliers would register with the tax department when they were required to show sales tax registration number only to disappear soon, thereby increasing the infractuous tax base. To overcome this problem, the government has recently done away with the system of multiple thresholds and instead set a single threshold for manufacturers and retailers at Rs. 5 million (US$ 8333). Although this move alone has shrunk the VAT base by about 26%, the revenue sacrifice implicit by this action has been nominal as the contribution of the ‘de-listed’ taxpayers was already fairly insignificant. There has been, nonetheless, a substantial gain in terms of reduced cost of tax administration, as the department has to deal with a smaller yet more compliant tax base. It is further hoped that this provision would serve as a reasonable safeguard against taxation of small businesses.
Registration
Since its inception, registration for VAT was done by the local sales tax offices after a thorough investigation. The intending tax registrant was required to submit a large number of documents such as national tax number, income tax returns for the last two years, rent or ownership details of the business premises, utility bills pertaining to the business premises and physical verification of the business premises and manufacturing machinery. There were repeated complaints from taxpayers of unnecessary delays and harassment by the staff of the VAT department deputed for physical verification. In July 2004, a new system of Centralized Registration was put in place at the Central Board of Revenue, Islamabad, using automated Risk Based Registration Module to overcome the registration problems and broaden the much required tax base. The registration form has also been simplified and requirement of documentation has been minimized. Most of the necessary verifications are done through data from other sources. Thus, registration that used to take more than a month is now completed in three to four days and registration certificate is delivered directly to the taxpayer. The new mechanism has also significantly improved the maintenance of comprehensive database of all the VAT registered persons. It is anticipated that the redesigned system will minimize contact between the tax department and the prospective registrants, helping to reduce the complaints emanating from the interaction between the two.
Multiple Tax Rates
VAT in its present form was introduced in Pakistan at the standard rate of 12.5 % in 1992. With an ever increasing need for additional revenue to reduce budget deficit (one of the conditionalties of the Structural Adjustment Program of the IMF), the VAT rate was raised to 18 % in 1995 with a reduced rate of 2 % introduced to bring the small businessmen into the tax net. In response to the taxpayers’ pressure, the rate was cut to 15 % in 1998, though a higher rate of 20 % was introduced on a range of industrial raw materials. Further, a penalty system was introduced in 1999 whereby an additional tax at the rate of 3 % was levied on the supplies made by the registered persons to the unregistered persons. Introduced with a noble intention of encouraging documentation in the economy, the move nonetheless complicated the situation by introducing a system of multiple tax rates. Thus, by 2004 VAT was administrated at five different rates i.e., 2%, 15%, 18%, 20% and 23%. Besides creating administrative difficulties, it also increased the cost of compliance for the registered persons. The complications triggered by the multiplicity of these inconsistent measures finally led to the levy of VAT at the uniform rate of 15% introduced from July 2004.
Refund Payments
Another problematic area in the implementation of VAT has been refund payments. Since VAT is primarily a tax based on value addition at source and exports are zero-rated on the destination principle, there is an in-built need for the documentation of transactions involved in the entire supply chain in the export business. However, the system is marred by the element of fake invoices creating difficulties for its smooth functioning. While textiles cater for the major exportable commodities of Pakistan, various intermediary manufacturing and processing activities are largely carried out in the unorganized and undocumented sector. This gap is filled by invoicing malpractices to inflate refund and suppress local supplies. Thus the refund issue in the textile sector has assumed staggering dimensions posing challenges for the VAT administration in Pakistan.
However, with greater automation of the VAT department through be-spoke software, the problem of refund is being dealt with in a systematic manner. On the basis of data covering supplies and purchases (including imports) of the exporters, all the refund claims are scrutinized centrally by verifying the acquisitions of input including imports and exports. The results of such verifications are transmitted to the local sales tax offices for finalization of refund claims. Through automated verification of refund claims, a number of fraudulent claims have been detected during the last few years. As a result, VAT refund bill of the government has curtailed. In the meantime, payments of the genuine refunds have been accelerated (from 60 days to 30 days).
To further improve the VAT refund system, introduction of a mechanism for “cross matching” of every input tax invoice used in refund claims, on the model in place in Korea, is already underway. From July 2005 onwards, each registered person shall be required to give an aggregate summary of invoices along with the monthly VAT return and this information shall be used to verify the accuracy of assessments and genuineness of the refund claims across the board. The verification process will undergo a prioritized set of risks identified on the basis of information pooled from diversified sources.
The government earlier introduced the scheme of Duty & Tax Remission on Export, whereby a taxpayer is entitled to VAT free purchases of export-inputs from the local market or abroad. Adopted from Korean VAT model but configured to accommodate the local business practices, another comprehensive scheme for duty free delivery of input goods and services for the production of exportable goods has recently been designed. Initially, this scheme will apply to industrial exporters of textile sector, while covering the vending industry and second stage suppliers from the registered sectors. The scheme will be stretched to other export sectors including other segments of textiles. The scheme will be monitored through a tailor- made IT-based infrastructure.
Adjudication
With the introduction of many appellate fora, the number of appeals has increased considerably in the last couple of years. The time involved in settlement of cases before these institutions not only blocks revenue, but also increases the cost of doing business for the taxpayers, especially the small businesses. In an effort to address this problem, the tax administration has come up with an innovated idea of adopting an Alternate Dispute Resolution (ADR) mechanism. An independent judicial committee is constructed comprising members from private sector and tax department that deals with cases of disagreement on the outcome of audit or assessment.
Difficulties due to VAT Design
Pakistan has a peculiar background of VAT implementation. New sales tax legislation was introduced in the year 1990 without any major structural shift in previous legal framework. Till 1996 sales tax was administered through physical controls and documentation partially analogous to excise tax. Liberal exemptions were available and regulated out of statutory precincts. However, in the budget 1996-97, sales tax legislation was drastically altered by incorporating the heterogeneous exemption regimes within the statutory framework. This allowed automatic adjustment of invoice based credit replacing traditional sales tax rebate regime with zero rating system and managing absolute exemptions through the concept of deemed exports. Besides, small size enterprises were accommodated by separately fixing lower level thresholds for manufacturing and retail sectors. Commercial importers and wholesalers were subjected to compulsory registration. Concessions on capital goods were bound with certain procedural compliance in order to encourage voluntary adherence to VAT laws.
Though hitherto several improvements have been made in the VAT design as adopted by Pakistan, there are some problems which need to be addressed in future to make the applied design closer to the one ideally desired. Service sector generally is still out of VAT coverage. However, given the constitutional constraints, several services have been brought under VAT net through provincial and central excise legislations. Meanwhile, attempts have been made and are still being made to minimize VAT exemptions and broaden the tax base by curtailing breaks in VAT application on different stages of the supply chain. Fixation of lower threshold has always remained a problem in Pakistan’s model. It is believed that VAT design problems of Pakistan will be resolved by sharing experience of VAT implementation in other countries.
IV. Lingering Concerns
However, despite this improvement in implementing VAT, there are various aspects of policy and administration where more effort is required. Some of these areas are discussed as follows:
Audit and Penalties
For VAT to be successful, high and fair probability of detection (audit) and strict application of penalties is important. In Pakistan we are actively engaged to base audit on the principle of risk management and selection of criterion on input/output analysis. It is likely to take more time before it is effectively put into place. Currently, our audit programs have lower yield - below 1%, which is far less than the average in the OECD countries. Similarly, the strict application of penalties is not forthcoming. A legal system that allows long delays in the application of penalties tends to contribute toward the blockage of government revenues and as a result diminish the system’s effectiveness.
It is therefore of essence to develop an audit program that lays emphasis on key areas such as audit coverage, selection, methods, staff training and monitoring. Efforts are being made to have cost effective audit by relying more on short, issue-oriented audits of a limited period of activity, covering a broad range of taxpayers. Desk and investigative audit facilities are also being strengthened to supplement the overall audit mechanism. With automation under contemplation, it would be easier to develop and enforce sectoral approaches as well as linkages with other tax systems in order to make audit more effective. Nonetheless, given the critical significance of audit to the success of VAT system, abundant care is being taken to ensure that the program being developed embodies fairness and integrity.
Tax Compliance
Another area of greater concern to the VAT administration is tax compliance. Tax compliance is fairly low in Pakistan. Only 50 % of the registered persons and businesses file monthly tax returns. Realizing that adversarial relationship between taxpayer and tax administration is the major cause of this low compliance, a new taxpayer education and facilitation strategy has been designed. Many initiatives have been introduced to make the system more simple and easy. For example voluntary disclosure (before commencing of audit) does not attract penalties. To facilitate taxpayers, separate returns for different taxpayers have been designed. It is also being considered to introduce electronic filing of return.
It is expected that continuous interaction with the trade and business communities, greater moves towards education and facilitation of taxpayers, a constant improvement in rules and procedures, design of forms and invoices, publication of self help leaflets on VAT provisions, rules and procedures, media campaigns, automation of tax administration and addressing taxpayers’ queries in a meaningful way would help in evolving an environment where voluntary compliance would be encouraged.
V. Future Direction
VAT in Pakistan is a recent phenomenon. Nonetheless, its growth has been faster than that of the any direct tax, which reflects its buoyancy. In order to tap the potential that it holds for the future financial landscape of the country, it is important that the systems are developed in a manner which responds to the future needs and assures easily workable methodologies, while embodying appropriate safeguards. Integration and automation will replace the present footloose and, in certain areas, segmented approach. That being the goal, Pakistan will soon invite expression of interest from the international firms on Supply, Customization and Implementation of Off-the-Shelf (COTS) Sales Tax Application Software Solution. The project seeks the designing, development and implementation of an end-to-end web-based sales tax system with simplified procedures aimed at providing speedy and reliable services to the taxpayers while minimizing their contacts with the tax officials. The new system will be based on functional and technical requirements and will also involve the training of the selected end users. In less than two years, Pakistan expects to have in place a fully modernized and automated VAT system that will be geared towards the future needs.
VI. Conclusion
The implementation of VAT in Pakistan in terms of tax collection and basic principles has been encouraging. While adverse elements in its introduction have been effectively dealt with, some concerns do remain. Issues of compliance, effective audit and strict application of penalties are being studied to further strengthen the system and root out areas of concern. While effective solutions to such problems will form part of the upcoming reforms project, interim measures are underway to address them in ways that are taxpayer friendly and in line with the overall VAT scheme. In this constant pursuit of seeking improvement, Pakistan has learnt from the trail of developments and the elements of progression experienced by some of the countries that have achieved phenomenal success in terms of the growth of VAT. The UK and Korean models contain components concerning the key areas of VAT activity that are akin to our requirements and operational environment. Their further relevance to the indigenous environment will be studied and it is likely that they will be adopted in the upcoming reforms. It will only be fair if the cooperation of these countries in sharing their experiences with us is acknowledged. The support extended by IMF, World Bank and other international institutions has also been highly instrumental in the progress that Pakistan has made in adopting VAT so far and in undertaking its further reformation.
Given the present pace of progress, two years hence, Pakistan will become the first major country in South Asia having implemented VAT in its true sense and modern concept. The enormousness of VAT’s impact on the national economic life and its acceptance by all and sundry, evolved over the years, will come to represent a major paradigm-shift in the mindset of the people. This will also manifest a major success story.
This conference will provide a further unique opportunity to Pakistan to share the experiences of the nations that have successfully integrated VAT into their economic system as well as those who are in the transition of this economic transformation. It is believed that the deliberations at this event will pool in intellectual inputs from all over the world and help the participating countries develop a much greater insight into this important mode of tax and the associated complexities.
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http://www.vattaxforum.com
I. Introduction
The emergence of the consumption based Value-Added Tax (VAT) and its unprecedented success in the developed world, motivated largely by its greater efficiency and buoyancy, encouraged the developing countries to adopt VAT during the decades of the eighties and nineties. However, with the exception of a few, many countries faced multiple difficulties in the adoption and implementation of VAT. Pakistan, undeterred by the concern generally expressed in the developing countries, decided to take the bold initiative and move forward with the introduction of VAT in the country, the goal being to develop it into a major national tax. The move launched more than a decade ago was initially confronted with resistance from some of the stakeholders but owing to the efforts on public awareness about the progressive and futuristic dimensions of the tax and political recognition of its significance, the desired support eventually came in. The confidence-building measures introduced over the period helped to further improve the operational environment with the result that VAT is now an accepted part of the country’s fiscal landscape. The efforts to address the issues spurred by its introduction, whether concerning the legislative side or the operational element, remain a part of the continuous reform process.
This paper briefly traces the development of VAT in Pakistan and provides an exposition on its introduction as well as implementation. Starting from its historical context, the paper briefly dilates upon the issues of taxpayers’ registration, adoption of basic threshold, structure of tax rate, audit, refund payments etc. It also encompasses the contentious areas where the tax administration and the taxpayers are trying to develop uniform solutions consistent with the overall philosophy of VAT. These areas include selection of audit including investigative audit and improvement in tax compliance.
II. Historical Context
In 1947, when Pakistan attained independence, the sales tax was a provincial levy covering a limited area of commercial activity. With its conversion to a federal tax in 1951, its scope was extended to imports and domestic sale of goods by manufacturers and licensed wholesalers. The enactment of the Sales Tax Act, 1990 introduced its value added version renamed as General Sales Tax (GST). This was levied on goods only (with many exemptions) and that too at the manufacturing and import stages. A major leap forward was taken in 1995-96 when GST was converted into a full-fledged VAT mode tax with all its basic features; self-assessment, functional distribution, input tax credit facility and audit based procedures. To further increase its base, its coverage was extended to importers in 1997 and to wholesalers and retailers in 1998. Following the trend observed in many less developed economies where documentation was limited, Pakistan also embarked on the levy of GST on goods rather than services. With the expansion of service sector in 1990s, the anomaly was removed and the scope of GST was extended to certain services in 2000.
The effort mounted by tax administration in Pakistan during the last fifteen years supported by the extension of tax base to wholesalers and retailers has led to significant improvement in the VAT collection in the country. VAT revenues (domestic plus import stage) jumped significantly during this period. In absolute terms, the collection increased from US$ 806 million only in the early 1990’s to US$ 2.67 billion in 2000’s. The remarkable performance of VAT can also be judged from the growth in revenue during the last five decades (Table 1).
Table 1: Collection and Growth
Average Annual Collection1 Average Annual Growth2
1950s 3 12.2
1960s 8 8.9
1970s 20 18.5
1980s 120 24.0
1990s 806 21.8
2000s 2668 20.0
1 Collection in millions (converted into US$ at the current exchange rate Pak Rs.60 =US$ 1)
2 Growth in percent
It is interesting to note that the share of VAT in the Federal Tax receipts has increased from about 20% during 1990’s to over 40 % in 2000’s (Table 2). Similarly, VAT to GDP ratio has risen from 2.2 % to 4.4 % during the same period. Among the developing countries of Asia, Pacific and South America which have adopted VAT, Pakistan’s performance has been better than many.
.
Table 2: Contribution
Share of ST in Indirect Taxes Share of ST in Federal Taxes Share of ST in GDP
1950s 24.3 18.6 Na
1960s 26.0 20.2 1.8
1970s 10.7 8.9 0.9
1980s 12.9 10.7 1.2
1990s 27.6 19.7 2.2
2000s 60.5 40.2 4.4
Note: (1) Share in percent; (2) Na means data not available on some components.
III. Implementation: Handling the Issues
Pakistan has reached a stage where VAT has been accepted by taxpayers. The journey up to the present stage has not been easy. Thanks to the gradual introduction of various measures and reengineering of the business processes, the implementation of VAT has been possible in its present manner. Some of the issues and the way they were dealt with are discussed below.
Threshold
At the outset, a system of multiple thresholds was designed to cater to the needs of all categories and levels of taxpayers. In this system, four different kinds of threshold levels for manufacturers and retailers were offered. A lower threshold level of Rs. 0.5 million (US$ 8 thousand) was fixed for manufacturers and Rs.1 million (US$ 16 thousand) for retailers. The enrolled persons under this category were required to pay turnover tax at the rate of 2 % of their annual turnover. Similarly, a higher threshold level of Rs. 5 million (US$ 80 thousand) was fixed for manufacturers and retailers, respectively, making it mandatory for them to pay sales tax at the rate of 15% of their total turnover.
This layered system brought into focus difficulties of various dimensions. On the one hand, it prompted taxpayers to register under the wrong category to avoid tax payment at the standard rate of 15% and on the other hand it encouraged ‘short-life’ taxpayers given the restriction of sales tax registration for suppliers to the government departments. In this case, suppliers would register with the tax department when they were required to show sales tax registration number only to disappear soon, thereby increasing the infractuous tax base. To overcome this problem, the government has recently done away with the system of multiple thresholds and instead set a single threshold for manufacturers and retailers at Rs. 5 million (US$ 8333). Although this move alone has shrunk the VAT base by about 26%, the revenue sacrifice implicit by this action has been nominal as the contribution of the ‘de-listed’ taxpayers was already fairly insignificant. There has been, nonetheless, a substantial gain in terms of reduced cost of tax administration, as the department has to deal with a smaller yet more compliant tax base. It is further hoped that this provision would serve as a reasonable safeguard against taxation of small businesses.
Registration
Since its inception, registration for VAT was done by the local sales tax offices after a thorough investigation. The intending tax registrant was required to submit a large number of documents such as national tax number, income tax returns for the last two years, rent or ownership details of the business premises, utility bills pertaining to the business premises and physical verification of the business premises and manufacturing machinery. There were repeated complaints from taxpayers of unnecessary delays and harassment by the staff of the VAT department deputed for physical verification. In July 2004, a new system of Centralized Registration was put in place at the Central Board of Revenue, Islamabad, using automated Risk Based Registration Module to overcome the registration problems and broaden the much required tax base. The registration form has also been simplified and requirement of documentation has been minimized. Most of the necessary verifications are done through data from other sources. Thus, registration that used to take more than a month is now completed in three to four days and registration certificate is delivered directly to the taxpayer. The new mechanism has also significantly improved the maintenance of comprehensive database of all the VAT registered persons. It is anticipated that the redesigned system will minimize contact between the tax department and the prospective registrants, helping to reduce the complaints emanating from the interaction between the two.
Multiple Tax Rates
VAT in its present form was introduced in Pakistan at the standard rate of 12.5 % in 1992. With an ever increasing need for additional revenue to reduce budget deficit (one of the conditionalties of the Structural Adjustment Program of the IMF), the VAT rate was raised to 18 % in 1995 with a reduced rate of 2 % introduced to bring the small businessmen into the tax net. In response to the taxpayers’ pressure, the rate was cut to 15 % in 1998, though a higher rate of 20 % was introduced on a range of industrial raw materials. Further, a penalty system was introduced in 1999 whereby an additional tax at the rate of 3 % was levied on the supplies made by the registered persons to the unregistered persons. Introduced with a noble intention of encouraging documentation in the economy, the move nonetheless complicated the situation by introducing a system of multiple tax rates. Thus, by 2004 VAT was administrated at five different rates i.e., 2%, 15%, 18%, 20% and 23%. Besides creating administrative difficulties, it also increased the cost of compliance for the registered persons. The complications triggered by the multiplicity of these inconsistent measures finally led to the levy of VAT at the uniform rate of 15% introduced from July 2004.
Refund Payments
Another problematic area in the implementation of VAT has been refund payments. Since VAT is primarily a tax based on value addition at source and exports are zero-rated on the destination principle, there is an in-built need for the documentation of transactions involved in the entire supply chain in the export business. However, the system is marred by the element of fake invoices creating difficulties for its smooth functioning. While textiles cater for the major exportable commodities of Pakistan, various intermediary manufacturing and processing activities are largely carried out in the unorganized and undocumented sector. This gap is filled by invoicing malpractices to inflate refund and suppress local supplies. Thus the refund issue in the textile sector has assumed staggering dimensions posing challenges for the VAT administration in Pakistan.
However, with greater automation of the VAT department through be-spoke software, the problem of refund is being dealt with in a systematic manner. On the basis of data covering supplies and purchases (including imports) of the exporters, all the refund claims are scrutinized centrally by verifying the acquisitions of input including imports and exports. The results of such verifications are transmitted to the local sales tax offices for finalization of refund claims. Through automated verification of refund claims, a number of fraudulent claims have been detected during the last few years. As a result, VAT refund bill of the government has curtailed. In the meantime, payments of the genuine refunds have been accelerated (from 60 days to 30 days).
To further improve the VAT refund system, introduction of a mechanism for “cross matching” of every input tax invoice used in refund claims, on the model in place in Korea, is already underway. From July 2005 onwards, each registered person shall be required to give an aggregate summary of invoices along with the monthly VAT return and this information shall be used to verify the accuracy of assessments and genuineness of the refund claims across the board. The verification process will undergo a prioritized set of risks identified on the basis of information pooled from diversified sources.
The government earlier introduced the scheme of Duty & Tax Remission on Export, whereby a taxpayer is entitled to VAT free purchases of export-inputs from the local market or abroad. Adopted from Korean VAT model but configured to accommodate the local business practices, another comprehensive scheme for duty free delivery of input goods and services for the production of exportable goods has recently been designed. Initially, this scheme will apply to industrial exporters of textile sector, while covering the vending industry and second stage suppliers from the registered sectors. The scheme will be stretched to other export sectors including other segments of textiles. The scheme will be monitored through a tailor- made IT-based infrastructure.
Adjudication
With the introduction of many appellate fora, the number of appeals has increased considerably in the last couple of years. The time involved in settlement of cases before these institutions not only blocks revenue, but also increases the cost of doing business for the taxpayers, especially the small businesses. In an effort to address this problem, the tax administration has come up with an innovated idea of adopting an Alternate Dispute Resolution (ADR) mechanism. An independent judicial committee is constructed comprising members from private sector and tax department that deals with cases of disagreement on the outcome of audit or assessment.
Difficulties due to VAT Design
Pakistan has a peculiar background of VAT implementation. New sales tax legislation was introduced in the year 1990 without any major structural shift in previous legal framework. Till 1996 sales tax was administered through physical controls and documentation partially analogous to excise tax. Liberal exemptions were available and regulated out of statutory precincts. However, in the budget 1996-97, sales tax legislation was drastically altered by incorporating the heterogeneous exemption regimes within the statutory framework. This allowed automatic adjustment of invoice based credit replacing traditional sales tax rebate regime with zero rating system and managing absolute exemptions through the concept of deemed exports. Besides, small size enterprises were accommodated by separately fixing lower level thresholds for manufacturing and retail sectors. Commercial importers and wholesalers were subjected to compulsory registration. Concessions on capital goods were bound with certain procedural compliance in order to encourage voluntary adherence to VAT laws.
Though hitherto several improvements have been made in the VAT design as adopted by Pakistan, there are some problems which need to be addressed in future to make the applied design closer to the one ideally desired. Service sector generally is still out of VAT coverage. However, given the constitutional constraints, several services have been brought under VAT net through provincial and central excise legislations. Meanwhile, attempts have been made and are still being made to minimize VAT exemptions and broaden the tax base by curtailing breaks in VAT application on different stages of the supply chain. Fixation of lower threshold has always remained a problem in Pakistan’s model. It is believed that VAT design problems of Pakistan will be resolved by sharing experience of VAT implementation in other countries.
IV. Lingering Concerns
However, despite this improvement in implementing VAT, there are various aspects of policy and administration where more effort is required. Some of these areas are discussed as follows:
Audit and Penalties
For VAT to be successful, high and fair probability of detection (audit) and strict application of penalties is important. In Pakistan we are actively engaged to base audit on the principle of risk management and selection of criterion on input/output analysis. It is likely to take more time before it is effectively put into place. Currently, our audit programs have lower yield - below 1%, which is far less than the average in the OECD countries. Similarly, the strict application of penalties is not forthcoming. A legal system that allows long delays in the application of penalties tends to contribute toward the blockage of government revenues and as a result diminish the system’s effectiveness.
It is therefore of essence to develop an audit program that lays emphasis on key areas such as audit coverage, selection, methods, staff training and monitoring. Efforts are being made to have cost effective audit by relying more on short, issue-oriented audits of a limited period of activity, covering a broad range of taxpayers. Desk and investigative audit facilities are also being strengthened to supplement the overall audit mechanism. With automation under contemplation, it would be easier to develop and enforce sectoral approaches as well as linkages with other tax systems in order to make audit more effective. Nonetheless, given the critical significance of audit to the success of VAT system, abundant care is being taken to ensure that the program being developed embodies fairness and integrity.
Tax Compliance
Another area of greater concern to the VAT administration is tax compliance. Tax compliance is fairly low in Pakistan. Only 50 % of the registered persons and businesses file monthly tax returns. Realizing that adversarial relationship between taxpayer and tax administration is the major cause of this low compliance, a new taxpayer education and facilitation strategy has been designed. Many initiatives have been introduced to make the system more simple and easy. For example voluntary disclosure (before commencing of audit) does not attract penalties. To facilitate taxpayers, separate returns for different taxpayers have been designed. It is also being considered to introduce electronic filing of return.
It is expected that continuous interaction with the trade and business communities, greater moves towards education and facilitation of taxpayers, a constant improvement in rules and procedures, design of forms and invoices, publication of self help leaflets on VAT provisions, rules and procedures, media campaigns, automation of tax administration and addressing taxpayers’ queries in a meaningful way would help in evolving an environment where voluntary compliance would be encouraged.
V. Future Direction
VAT in Pakistan is a recent phenomenon. Nonetheless, its growth has been faster than that of the any direct tax, which reflects its buoyancy. In order to tap the potential that it holds for the future financial landscape of the country, it is important that the systems are developed in a manner which responds to the future needs and assures easily workable methodologies, while embodying appropriate safeguards. Integration and automation will replace the present footloose and, in certain areas, segmented approach. That being the goal, Pakistan will soon invite expression of interest from the international firms on Supply, Customization and Implementation of Off-the-Shelf (COTS) Sales Tax Application Software Solution. The project seeks the designing, development and implementation of an end-to-end web-based sales tax system with simplified procedures aimed at providing speedy and reliable services to the taxpayers while minimizing their contacts with the tax officials. The new system will be based on functional and technical requirements and will also involve the training of the selected end users. In less than two years, Pakistan expects to have in place a fully modernized and automated VAT system that will be geared towards the future needs.
VI. Conclusion
The implementation of VAT in Pakistan in terms of tax collection and basic principles has been encouraging. While adverse elements in its introduction have been effectively dealt with, some concerns do remain. Issues of compliance, effective audit and strict application of penalties are being studied to further strengthen the system and root out areas of concern. While effective solutions to such problems will form part of the upcoming reforms project, interim measures are underway to address them in ways that are taxpayer friendly and in line with the overall VAT scheme. In this constant pursuit of seeking improvement, Pakistan has learnt from the trail of developments and the elements of progression experienced by some of the countries that have achieved phenomenal success in terms of the growth of VAT. The UK and Korean models contain components concerning the key areas of VAT activity that are akin to our requirements and operational environment. Their further relevance to the indigenous environment will be studied and it is likely that they will be adopted in the upcoming reforms. It will only be fair if the cooperation of these countries in sharing their experiences with us is acknowledged. The support extended by IMF, World Bank and other international institutions has also been highly instrumental in the progress that Pakistan has made in adopting VAT so far and in undertaking its further reformation.
Given the present pace of progress, two years hence, Pakistan will become the first major country in South Asia having implemented VAT in its true sense and modern concept. The enormousness of VAT’s impact on the national economic life and its acceptance by all and sundry, evolved over the years, will come to represent a major paradigm-shift in the mindset of the people. This will also manifest a major success story.
This conference will provide a further unique opportunity to Pakistan to share the experiences of the nations that have successfully integrated VAT into their economic system as well as those who are in the transition of this economic transformation. It is believed that the deliberations at this event will pool in intellectual inputs from all over the world and help the participating countries develop a much greater insight into this important mode of tax and the associated complexities.
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