FBR informs Finance: several sections of ST Act, 1990 against concept of new VAT law

The Federal Board of Revenue (FBR) has informed the Ministry of Finance that several sections of the Sales Tax Act, 1990 and notifications are totally against the concept of new Value Added Tax (VAT) law to be introduced from fiscal 2010. Sources said on Wednesday that the Advisor to the FBR Chairman Abdul Wadood Khan has drafted a comprehensive report on new VAT law, which would help in drafting new law.
The FBR is planning to amend/delete these controversial sections of the Sales Tax Act through legislation after drafting of the new VAT law by the concerned expert team. This is a first of its kind of FBR report, which identified actual distortions in the Sales Tax Act, which would be removed for implementation of broad-based VAT.
The FBR has conveyed to the Finance Ministry that certain provisions of law in the Sales Tax Act, 1990 are contrary to the spirit of VAT mode. Some of major controversial provisions included Third Schedule of the Sales Tax Act, section 4, section 8(B), section 65, section 71, SRO.480(1)/2007, SRO 509(1)2007, Sales Tax Special Rules, 2007 vide SRO.480(1)/2007 and zero-rating of local supply of some leading sectors is a major violation of the VAT regime.
The rationalisation of the Sales Tax Act in line with the basic concept and standard international VAT practices would be done by deleting/amending the said sections/provisions of law. Advisor to the FBR Chairman has given a detailed explanation to the Finance Ministry for changes in these sections and provisions of the Sales Tax Act, special procedures and SROs to implement a true VAT law in Pakistan.
To switch over from the single stage levy Sales Tax Act, 1951 to the multi-stage Value Added Tax, 1990 created multi-furious issues in its aftermath and were resolved, by the Board from time to time. The Value Added Tax adapted from 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 misc. other hardships.
The vested trade and business interest groups through all kinds of political 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 VAT.
Whereas, the donor agencies have also desired to go for a pure VAT as per standard international practices and the VAT Act is under preparation. The report said that section 3 of Sales Tax Act is against the concept of new VAT law.
The examination of sub-section 2(a) of section 3 reflects that only the items specified in the Third Schedule 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% 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. In the light of the foregoing discussions 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 other goods as specified in this section. In addition to this deviations from the VAT mode, the government has issued SRO 509(1)2007 under section 4(c) of the Sales Tax Act 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 zero-rated.
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.
Wadood further said 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 bring in line with the pure VAT mode.
Explaining the section 8(B) of Sales Tax Act, the report pointed out 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 is a serious violation of the VAT mode.
The perusal of section 8(B) reflects 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 quite 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 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 which has created dichotomy in terms of applicability of section 8(B) across the board.
In the light of foregoing section 8(B) needs to be amended to align the Act with pure VAT mode, report said. About section 65 of Sales Tax Act, the report highlighted that section 65 was incorporated during the initial years of promulgation of Sales Act, 1990 due to the reasons that the business community was not fully aware about the Sales Tax Act, 1990 and its implementation thereof.
Section 65 has now become redundant in the wake of the fact that almost 19 years have parsed and the business community is well aware of the applicability of sales tax on different items hence unnecessary exemption as provided under section 65 of the Sales Tax Act 1990 needs to be omitted;
Regarding section 71 of Sales Tax Act, the report pointed out that the in VAT mode no special procedures are provided, however, in Sales Tax Act a provision for special procedures has been provided vide section 71 of Sales Tax Act.
The FBR had also issued Sales Tax Special Rules, 2007 vide 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.
Moreover, all the exemptions conditional or otherwise except few internationally accepted by the model countries need to be withdrawn and those enjoying concessions must be dragged into the pure VAT mode. The pure VAT system is an audit based system. The self-assessment being one arm and the audit being the second arm of the new system.
The audit needs to be vigorously implemented in a fool proof and harassment free manner and mode ensuring justice and fairness giving fullest opportunity to the auditee according to objective criteria by exercising continuous and effective vigil by the senior supervisory officers to ensure zero tolerance for corruption and harassment, Abdul Wadood Khan added.