General sales tax (GST) is in the same mode as value-added tax (VAT) in Pakistan. However, the difference between the two would be one of available exemptions, sources told Business Recorder. VAT allows for greater documentation of the economy--a critical objective for Pakistan, given its large parallel black economy.
In an ideal VAT regime, as proposed in the Federal and Provincial VAT Bills, all exemptions have been proposed to be withdrawn, except on essential food commodities. In contrast, the sales tax regime, as noted in the relevant Schedule of the Sales Tax Act, has numerous exemptions, zero-rating, concessions and distortions, which are major hurdles in documenting business and trade activity.
In the present sales tax system, a large number of distortions, special procedures, exemptions and concessionary notifications have provided limited documentation of the entire supply chain involved in business, starting from manufacturer to end-consumer. Resultantly, only 80,000 sales tax persons have been registered with the sales tax department, and few are actually paying sales tax.
Under the sales tax applicable in the country, domestic zero-rating facility to different sectors is available. The domestic zero-rating facility is very rare in any tax administration, but the same facility is available on domestic supplies to different sectors. In the VAT regime, only a single rate is applicable for all sectors, as compared to sales tax where several rates of sales tax are applicable.
The present sales tax regime has discouraged documentation due to distortions in the sales tax regime. For example, manufacturers of certain items specified in the Third Schedule of the Sales Tax Act, 1990 are paying sales tax of all the stages of value-addition of consumer goods having printed retail price.
Under the value-added tax (VAT) regime, the tax is to be paid on value-addition attributed to each stage, starting from manufacturing down to retail sale to the end-consumer. However, despite efforts to bring the intermediate linkages in supply chain into the taxation system, a number of dealers, distributors and wholesalers are still out of tax net and, resultantly, the tax actually chargeable at each stage on value-addition is not being recovered.
Presently, items chargeable to sales tax under the Third Schedule include fruit juices and vegetable juices, ice cream, aerated waters or beverages, syrups and squashes, cigarettes, toilet soap, detergents, shampoo, toothpaste, shaving cream, perfumery and cosmetics, tea, powder drink, milky drink, toilet paper and tissue paper, spices sold in retail packing bearing brand names and trade marks and shoe polish and shoe cream.
The undocumented wholesalers, dealers and retailers can only be brought into the sales tax regime by withdrawal of the Third Schedule of the Sales Tax Act. VAT is a form of consumption tax, a taxation expert argued. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, and is ultimately passed on to the consumer. It differs from a sales tax which is levied only at the point of purchase.
The sales tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. A portion of the sale may be exempt from the calculation of tax, because sales tax laws usually contain a list of exemptions, he added. A tax official explained that in Pakistan sales tax was introduced in 1951 as a single-stage levy. It remained operative from 1951 to October 1990. There was no concept of input tax adjustment or value-addition under the Sales Tax Act of 1951.
From November 1, 1990 general sales tax was introduced, which was a multistage tax to be paid on each stage of value-addition including manufacturers and supplies. The GST also introduced the concept of input tax adjustment. Later, a number of exemptions were added in the Sixth Schedule of the Sales Tax Act, creating distortions in the regime, the expert observed.
It would be the biggest challenge for the government to check whether the 'reformed GST' (RGST), with minimum exemptions, would be sustainable for 6 months or a year. The powerful lobbies and mafias may gradually again become active to obtain exemptions in future, he added.
Analysts said that when the FBR switched over from the single-stage levy Sales Tax Act, 1951 to the multi-stage value-added tax, 1990, it created multifarious issues in its aftermath that were resolved by the Board from time to time. The value-added tax adapted on the Swedish Model involved lot of documentation.
The business and trade community, wedded to the old Act and rules, agitated against it on account of non-documented business practices, illiteracy, breakage of chain from the manufacturing and import stage down to the retail level, obstacles and harassment in refund damaging exports, smuggling, black economy and miscellaneous other hardships.
The vested trade and business interest groups, through all kinds of political and other devices and pressures, sought, and got, special procedures, special concessionary SROs/notifications, various kind of exemptions including zero-rating of special sectors and introduction of special rates for special kind of trade and businesses. These violations, deviations and aberrations eroded the original style and scheme of the value-added tax.
Presently, there are certain provisions of law in the Sales Tax Act, 1990 which are contrary to the spirit of VAT mode. In case the FBR removes these distortions in the Sales Tax Act, the 'reformed GST', if implemented in letter and spirit, would be identical to VAT.
Referring to section 3 of Sales Tax Act, 1990, experts said that section 3 is a charging section which stipulates that there shall be charged, levied and paid a tax known as sales tax @ 16 percent of the value of taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him and goods imported into Pakistan.
However, sub-section 2(a) of section 3 provides that notwithstanding the provisions of sub-section (1) taxable supplies specified in the third scheme shall be charged tax at the rate of 16 percent of the retail process which, along with the amount of sales tax, shall be legibly, prominently and indelibly printed or imposed by the manufacturer on each article, packet container, package, cover or label, as the case maybe. Provided that the federal government may, by notification in the official gazette, exclude any taxable supply from the said schedule or include any taxable supply therein.
The analysis of sub-section 2(a) of section 3 reflects that only the items specified in the Third Schedule of the Sales Tax Act shall be charged sales tax @ 16 percent of the retail price which inter alia means that the items out of the ambit of third schedule shall not be charged @ 16 percent ad valorem. This stipulation is contrary to VAT mode according to which the supplies chain should be taxed from manufacturing/import stage down to the retail stage in a value-added form. In this system, supplier adjusts his input tax from output tax. The difference of output minus input is paid to the government exchequer. However, the end consumer bears the burden of the taxation in this system.
Secondly, the government has issued SRO.480(1)/2007 wherein special procedure is devised for payment of sales tax by retailers in order to tax the items which are out of the ambit of the third schedule. This special procedure is against the spirit of VAT mode. The sub-section 2(a) of section 3 being contrary to the VAT mode needs to be deleted or suitably amended in order to implement the VAT mode down to the level of retail stage.
In VAT mode only goods exported are to be zero-rated. However, section 4 of Sales Tax Act, 1990 provides for zero-rating for: Goods exported, or the goods specified in the Fifth schedule; supply of stores and provisions for consumption abroad a conveyance proceeding to a destination" outside Pakistan as specified in section 24 of the Customs Act, 1969 and such other goods as the federal government may, by notification in the official gazette, specify.
In addition to the above deviations from the VAT mode the Federal Government has issued SRO 509(1)2007 under section 4(c) of the Sales Tax Act, 1990 wherein input and supply of five export-oriented goods ie leather and articles thereof, textile and article thereof, carpets, sports goods, surgical goods alongwith their raw materials have been notified as zero-rated.
Due to the under reference SRO the local supplies of the subject goods have also been zero rated which is a big violation of the VAT system. Allegedly, it was due to problems/frauds committed in the refunds of these five export-oriented goods the import of their raw materials had been zero rated. But the zero-rating of the local supplies has caused huge losses of revenue in terms of sales tax collection which was otherwise payable in terms of VAT mode.
Experts said that the local sale of finished products of these export-oriented goods should have been charged to sales tax and section 4 is needed to be amended to be brought in line with the pure VAT mode.
About section 8(B) of Sales Tax Act 1990 (adjustable input tax), experts said that in terms of VAT mode the total input tax pertaining to a tax period is to be adjusted from the output tax of that tax period and in case of excess input tax the same is to be carried forward for the next tax period. However, section 8(B) of Sales Tax Act, 1990 said that notwithstanding anything contained in Sales Tax Act, in relation to a tax period, a registered person shall not be allowed to adjust input tax in excess of 90 percent of the output tax for that tax period.
Provided that the tax charged on the acquisition of fixed assets shall be adjustable against the output tax in twelve equal monthly instalments. The Board may, by notification in the official gazette, exclude any person or class of persons from the purview of sub-section (1). A registered person may be allowed adjustment of input tax not allowed subject to the fulfilment of the laid down conditions.
Experts said that a registered person shall not be allowed to adjust input tax in excess of 90 percent of the output tax for that tax period. This condition is contrary to the VAT mode according to which total input tax of a tax period is to be adjusted from the output tax of that, tax period and in case of excess amount of input tax the same is to be carried forward.
The federal government has issued SRO 847(1)/2007 wherein certain registered persons have been excluded from the purview of sub-section (1) of section 8(B) of the Sales Tax Act, 1990 which has created dichotomy in terms of applicability of section 8(B) across the board.
Referring to section 65 of the Sales Tax Act, they said that tax has not been charged in any area on any supply which was otherwise taxable, or according to the said practice the amount charged was less than the amount that should have actually been charged. The registered person did not recover any tax prior to the date it was discovered that the supply was liable to tax and the registered person started paying the tax from the date which it was found that the supply was chargeable to tax.
Moreover, the federal government issued Sales Tax Special Rules, 2007 vide Notification No SRO 480(1)/2007 containing XII (12) chapters pertaining to Retailers, Electric Power, Natural Gas, TCP, Services, Sugar supply to TCP, Advertisements, Customs Agents and Ship-handlers, Stevedore, Oil Marketing Companies, Vehicle dealers, Ginned Cotton, Commercial Exporters, Steel Melters and Re-rollers ship breakers etc Biscuits and Confectionery etc need to quashed or modified to bring in line with pure value-added tax. On the same pattern, all exemptions, conditional or otherwise, except a few internationally accepted by model countries, need to be withdrawn.
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