World Bank asks FBR to abolish sales tax zero-rating system

The World Bank (WB) has strongly recommended to the Federal Board of Revenue (FBR) to abolish sales tax zero-rating system for removing a major anomaly in the value-added tax (VAT) regime.
Sources told Business Recorder on Friday that the World Bank mid-term review mission had submitted new suggestions to FBR Fiscal Research and Statistics (FRS) Wing for improving sales tax refund payment system, survey of business community on reform's impact and sector-wise analysis to narrow the gap in tax collection in the leading sectors.
According to WB, the board should conduct study on 'refunds analysis', which would give an overview of the capacity of the economy to generate refunds. The high levels of refunds led to the declaration of zero-rating of six major sectors, which was an anomaly. Hence, the refunds analysis would help FBR to work out the accurate volume of refunds in view of actual business activity/exports taking place. Ultimately, the exercise would be instrumental in abolishing the zero-rating system in future.
The WB opined that FRS Wing intends to undertake sectoral studies of all major sectors of the economy. The sector studies will enable FBR to assess the gaps in tax collection of these major sectors.
The FRS Wing is involved in preparation of Information Management System (IMS) reports related to direct and indirect taxes through monitoring; preparation of key performance indicators covering all business processes of functional and line departments; impact and evaluation of reform initiatives and related activities, stakeholders' perception surveys, and development of a data warehouse.
The WB said that a baseline survey of stakeholders had been conducted through an external firm. The survey covered 3,450 persons covering 3,000 taxpayers, 300 FBR employees and 150 representatives of opinion leaders/NGOs, trade bodies and intermediaries/agents. The survey was completed in 10 major cities and their adjacent rural areas (Karachi, Lahore, Rawalpindi/Peshawar, Quetta, Faisalabad, Gujranwala, Multan, Hyderabad. and Sialkot.
However, to gain more valuable insight into the dataset, FRS wishes to undertake more detailed analysis of the available dataset. For this purpose, the department is likely to hire services of an international consultant for undertaking further analysis of the baseline data already collected.
A second similar survey will be undertaken in 2009 to assess the changes in perception, sources said. The WB was of the view that the FBR Wing has made excellent achievement in providing valuable business related data into the Nexus (in-house data warehouse program), sources added.