The World Bank has detected serious flaws in Sales Tax Act, 1990 including complicated language, special regimes for specific sectors, inconsistent terminologies and extraordinary discretionary powers to the sales tax officials to deal with the registered taxpayers.
World Bank''s ''Pakistan Tax Policy Report'' jointly prepared by Federal Board of Revenue (FBR) and the Andrew Young School of Public Policy has found serious distortions in the Sales Tax Act. At the same time, frequent issuance of sales tax notifications made things more complicated for the taxpayers. Around 75 amendments in the sales tax law were made through issuing new SROs during first nine months of 2007.
According to the WB report, the FBR methodology for collection of sales tax on the "printed" retail price set by a manufacture is also not correct method. The Sales Tax Act grants enormous discretion to the FBR in administering the provisions of the tax. The current law grants broad powers to the tax administration to vary almost all aspects of the tax without parliamentary approval.
While tax laws in many other countries contain provisions for delegated powers to the tax administration, they are typically only in relation to administrative matters and rules and regulations dealing with detail rather than issues related to the tax base, tax rate, or taxpayer. In Pakistan, the tax administration has exercised far greater powers under the sales tax with the result that the law can be, and frequently is, changed in significant ways through the issue of administrative orders.
The WB was of the view that many of the articles in the Sales Tax Act begin with a "notwithstanding" clause proclaiming that, whatever may be the content of the article, may be overturned at any time by a decision of the FBR. In order for the taxpayer to understand how the sales tax works, taxpayer has to read and digest carefully the Sales Tax Notifications and Statutory Regulatory Ordinances (SROs) published regularly in the Gazette that reflect FBR decisions on how the sales tax should take effect any point in time. Many of the notifications and SROs are relatively innocuous involving clarifications of payment procedures, previous SROs and changes in the tax forms. Others, however, engage in fine-tuning of the Sales Tax Act and initiate sales tax policy changes.
In the first nine months of 2007, about 75 changes in the sales tax law occurred through issuing new SROs. By comparison, there were 20 new SROs for the income tax and 15 for the excise tax. Many of these SROs reflect a tendency towards granting more extensive zero-rating and exemption status and relying more on presumptive methods.
For example, a SRO from 2005 stated that pesticides were to be taxed with a 30 percent fixed value addition. Also, in the same year, the FBR fixed the price of potassium fertilisers, both domestic and imported at Rs 4,610 per ton. FBR also began to impose sales tax on the "printed" retail price set by a manufacture, thus pre-collecting tax that should have been paid at later stages. In 2005/06, this method of tax collection was applied to toiletries, tea, confectionery and footwear.
Certain valuation rules in the Sales Tax Act are unusual. A modern VAT should operate as a tax on consumption expenditure. This means that the use of market value rules should be only a last resort. At present, Pakistan values supplies at market value if there is even a small element of in-kind consideration.
A more appropriate approach would be to value the consideration given for a supply, so that where consideration is in-kind, the value of the supply is the market value of the in-kind consideration rather than of the supply. In any case, there are significant deviations even from the valuation rules in the sales tax act itself because of the use of multiplicity of special regimes in effect.
The WB has also identified other weakness in the Sales Tax Act. Firstly, the sales tax is applied to "applications to own use" but the provisions implementing this are not clearly set out and the underlying policy rational is not made apparent. Secondly, clear tax counting rules with regard to applicable time of supply rules are missing.
Thirdly, some definitions are used to implement material provisions. For example, the definition of manufacturer or producer has provisions regarding liability and collection, while the definition of retailer includes rules on price notification and turnover.
Fourthly, there are inconsistencies in terminology, including references to ''deduction, credit, or adjustment of input tax in a single sentence, when all three terms are apparently intended to refer to the same thing. In some cases there is repetition of effect in the legal provisions.
Fifthly, non-adherence to the original structure of the Sales Tax Act has led to new provisions being inserted in unexpected places. Sixthly, the language and certain definitions could be simplified and brought into line with the plain English style of the Income Tax Ordinance 2001. This includes the definitions of taxable persons, firm, business and undertaking, and the concepts of taxable person, taxable activity, and taxable supply, the WB added.
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