The Punjab government has expressed serious concern over the implementation of the value-added tax (VAT) at the retail stage, and raised several questions on methodology of the Federal Board of Revenue (FBR) to bring the undocumented sector, particularly retailers, into the tax net.
At the international VAT conference, Shamail Ahmed Khawaja, Secretary, Excise and Taxation Department, Punjab, shared provinces'' concerns while discussing implementation of VAT at the retail stage with focus on issues like taxation of ''sacred cows'' vested interest and withdrawal of exemptions. He warned that it was a very big political issue to bring retailers into the tax net.
This issue has its own dimensions and implications under new VAT regime. Even in India, the experiment met with stiff resistance from this segment. Even, the ''Turnover Tax'' also could not resolve the problem, he added. On the other hand, the presentation of provincial government of NWFP did not cover VAT issues, but only focused on revenue generation strategy.
The representative of Punjab government raised a question that under the new VAT law, where would the incidence of taxation lie? It needs to be clarified that the incidence would only be on consumption, "and how would tax be shared ?" he questioned.
He further asked the FBR to clarify how taxes would be shared between the Federation and the provinces in case the existing system was replaced with a comprehensive VAT? It involves two important key issues ie incidence and sharing. Where it will be collected -supply point or the consumption point? From the Punjab''s point of view, incidence on consumption is favourable.
In order to address the issue of provincial shares various options have been presented during the conference which call for careful consideration before building a consensus among all the stakeholders as to whether these options are to be analysed or else they are not mutually exclusive.
He stressed need for a system to address cross border tax issues. In future, provinces may themselves want to collect VAT on services. In such a scenario, a system would be required to address cross border tax issues. Provinces may like to know about such a possibility.
A comprehensive mechanism is required to address the issue of provincial transactions. In case of VAT on services being administered by the provinces, such transactions and invoices would pose a serious problem. He further inquired about the fate of taxation in case the VAT chain involves undocumented sectors.
Similarly, how would the government bring undocumented sectors especially retail into ambit of VAT? Previously, such efforts had faced serious challenges. For example, textile is a major sector in Pakistan. A lot of processes to finish the goods are carried out by business not documented or regulated, thus defeating the whole chain.
He raised the question as to how would the government bring undocumented sectors, especially retail, into tax ambit? The extension of VAT to un-taxed sectors may have political implications. In such situation how the FBR would tackle the issue.
He was of the view that the political economy, while expanding the tax base and setting threshold, issues of exclusion of small businesses and simplification of procedures come to the fore. He also raised another question that what is the level of preparation to be able to efficiently and effectively administer VAT, which involves huge documentation? "We need to adequately address capacity issues prior to shifting to the new mode".
Despite consistent reform program, even the FBR is still grappling with the capacity issues while important sectors and major businesses are yet out of tax net. For retail business, the provinces need to have clear understanding and adequate capacity, Punjab government added.
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