VAT emerges as the main fiscal tool

In the Budget 2007-08, there have been some legal changes and tariff adjustments for a better fiscal dispensation. Budget targets surpassing trillion rupees benchmarks have not resulted in the imposition of heavy taxation. The budget presents a bold initiative for CBR sales tax chapter, making it in line with best international trade practices.
VAT, despite being self-assessment system and, notwithstanding a widening gap between collection and theoretical liabilities, has emerged as the main fiscal tool. Adoption of best international trade practices in no way means tailoring our business processes in accordance with conditions hitherto alien to our market behaviour.
All it implies is to rationalise our tax management in which it is not deprived of efficiency and transparency accruing from experiences gained from where it was being followed much earlier than us. Though the VAT in the country is no more in an embryonic stage, it is not a grown up affair either. Even any span of a system per-se is not much relevant, rather it is the focus and the direction which make any arrangements worthwhile.
In the context of sales tax, there have been two milestone developments. Although evolutionary in nature, these are likely to have far-reaching impact on deposit, collection and evaluation of sales tax. To this extent, one may not notice any exceptional changes. All the tariff changes have similar effects. However, the change in the concept of input tax credit adjustment and uploading of web based application are the segments of the main launching pad for GST in times to come.
How far these two components are relevant to each other and, importantly, the taxpayers, needs to be addressed. The basic promise of any fiscal arrangement is to be easily accessible, executable and accountable. These conditions can visibly be met when the system can calculate the payables and receivables and the concerned person finds himself bound to defray the due amount. Same case applies to tax man who is deprived of any discretion and his authorities are limited within the automated confines of system.
There has been different portfolios of registered persons in which one was paying wholesome whereas the other has been showing only credit input adjustment. Surprisingly, the both have almost a similar share in the total transactions. Such lop-sided collection does not provide a level-playing field to all the stakeholders, choking economy's trickledown effects. The input adjustment is a grey area not only for Pakistan but it is also strongly felt in a developed economy, although for different reasons.
The credit input adjustment is not in control even in most developed countries. IMF in one of its reports has pointed out that "At the heart of the VAT is the credit mechanism, with tax charged by a seller available to the buyer as a credit against their liability on their own sales and, if in excess of the output tax due, refunded to them. This creates opportunities for several types of fraud characteristics of the VAT".
The right to deduct shall arise at the time when the deductible tax becomes chargeable. Even on input tax adjustment, EU provides for different discretions to Member states as is evident from the following: "Authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods and services".
It would have been in place to allow credit input adjustment only to the extent of consumption as is done in most of the economies where VAT is followed. However, the sales tax chapter has not aligned in toto with VAT concept of input adjustment and has rather and rightfully initiated the process. It would be now easier both for the tax-man which is being replaced with an automated system and the businessman to cross match the payment or receivables with actuals. It will enable the system to calculate sector-wise value-addition after adjusting 90% of input tax against the actual liability.
It will also show the compliance level in different sectors, and once a system develops nobody shall complain of tariff protection and windfalls. With the compliance level improving, there will be less value manipulation, hence stability in prices particularly of industrial goods.
The other significant change on the sales tax side is a bold step of introducing web based application. As we all know that half-hearted computerisation messes up with information. And so was the case with sales tax in the past. It flirted with the ideas of accepting documents through free portals such as yahoo, hotmail and email. Any process not supported with back-end operation fails to provide desirable results rather it results not only in germinating but proliferating system cookies. The sales tax has also been persisting with using client-end software which is a better option when real time access to data is not available.
The current sales tax chapter under the enterprising lady member evaluated different segregated semi-automated procedures. It constituted a VISTA team to develop business as well as technology for real time access to taxman and analysis for the tax machinery. The said team indigenously developed user-friendly softwares. In a very short time, the VISTA team thoroughly examined registration, refund and returns filing business processes.
An integrated program "Computerised Risk Based Evaluation of Sales Tax (CREST)" has developed real time web application for registration, filing of returns, refund, invoice summery and information for desk audit. Any registered person can use web application. This real time access shall make both the tax machinery and the taxpayer accountable to fully automated system with no concealed cushions. It is hoped that with a change in input credit adjustment and through transparent web application, a compliant tax culture will develop and flourish.