Federal Board of Revenue Chairman Sohail Ahmed on Thursday hinted at introducing two to three different rates, ranging between 5 to 7 percent of Value Added Tax for consumers in case scientific studies showed minimum revenue implications of VAT. Addressing a press conference here, Sohail said the quick in-depth VAT studies would soon be completed to check revenue impact of lower as well as other VAT rates.
In view of scientific studies, the FBR would see whether it would be feasible to introduce new rates ie 5 to 7 percent VAT for consumers. "If there is some negative impact of 15 percent VAT on common man, lower rate of VAT would be considered on goods and items," he added.
Next month FBR would be in a position to propose the policymakers about impact of below 15 percent VAT rate based on authentic studies. There is a possibility in the flexibility of the VAT rates for consumer goods. He said that the independent study is being conducted for 5 to 7 percent VAT for consumers instead of 15 percent, after analysing reliable data about the impact of VAT on inflation, revenue and further documentation of the economy.
He stressed the need to clarify that VAT would replace the general sales tax (GST) and would not be an additional tax. The VAT would replace 16 percent GST with the lower rate of 15 percent. The higher rates of sales tax like 21 percent or 19 percent etc would be considerably reduced to 15 percent.
He dispelled the impression that the FBR is not yet fully prepared to implement a broad-based integrated VAT. The factual position is that the FBR, being a revenue collection agency, has finalised all arrangements for the implementation of the VAT. It depends on the successful negotiations of the Ministry of Finance with the provincial governments for implementation of the Federal/Provincial VAT Bills 2010.
However, if even one province disagrees with the VAT law, it cannot be implemented in an integrated form as drafted by the FBR. However, the existing constitutional and legal framework allows the provinces to empower the FBR to collect sales tax on services.
Responding to a query, he said that the taxpayers should deal with a single tax collecting agency for payment of taxes. In case the taxpayer has to confront 2-3 federal and provincial revenue collecting agencies, it would not be acceptable to the business units.
About the attitude of retailers, he said that the retail sector has always refused to come into the tax net despite being offered lucrative schemes. "We will never force the small retailers to obtain registration under the VAT law. Only big retailers having annual turnover of Rs 7.5 million would be liable to registration.
The registration threshold of Rs 7.5 million clearly reflects that big businessmen and retails outlets would be liable to registration excluding small shopkeepers and retailers. The small business units would be automatically excluded from the VAT regime due to higher registration threshold," he clarified.
He said that retailers would prefer to come under the documented VAT regime to avail input tax adjustment. They would voluntarily obtain VAT registration to make purchases from the registered units. Sohail Ahmed was confident that the VAT would not have any major inflationary impact on consumer goods from the next fiscal.
It is a total misconception that the prices of commodities and goods would suddenly jump following imposition of lower rate of 15 percent VAT from 2010-11. The VAT is a modern and progressive way of taxation on consumption stage. When highest rates of sales tax would be brought down, it would definitely not raise prices of the commodities.
"The introduction of 15 percent VAT at consumption level would not escalate inflation, but it would encourage voluntary compliance at consumption and retail levels, besides benefiting the economy," he remarked. He said the VAT will also increase the culture of using documented receipts during buying and selling process.
The FBR Chairman clarified that every taxpayer has to deposit his share of tax at the stage of value addition. The registered taxpayers would have the facility of the input tax adjustment and they would pay 15 percent VAT at their stage of value addition. The VAT will result in broadening the tax base by bringing the entire chain into the VAT net.
The biggest advantage of the VAT is the facility of input tax adjustment available to the registered persons under the VAT. It would encourage documentation, as adjustment would not be available to those purchasing from un-registered sellers.
In the long-run it is a big step towards documentation as burden of taxes would be shared by the entire supply chain starting from manufacturing sector up to the retail stage. As far as sales tax on services is concerned, the FBR Chairman said that it is the right of the provinces under the National Finance Commission (NFC).
Under the NFC award, the collection of taxes on services is the right of the Provinces and FBR being a technically tax collecting agency with expertise at federal level can collect VAT on services also after only the approval from the concerned province.
He said that Pakistan's financial and economy needs to be secured through effective taxation measures like VAT, which would broaden the tax-base. It is very important that Pakistan's potential of revenue collection should be enhanced by introducing VAT on goods and services. Sohail said there would be no significant increase in revenue due to increase in power tariff viz GST, being replaced by VAT.
He said that the VAT is a sharing tax, which has the capacity to generate huge revenue of nearly Rs 500 billion in next few years following implementation of the VAT. To a question, he admitted that the target of Rs 1380 billion for 2009-10 is ambitious. However, the FBR would be able to meet this revenue target set for current fiscal.
"The target of Rs 1380 billion is achievable, although it is difficult." The FBR will manage to provisionally collect Rs 118 billion during March against target of Rs 120 billion. The amount of Rs 118 billion is being collected after reconciliation of data from different areas, as the monthly target is achievable after compilation of final figures.
He said that Pakistan has huge potential to enhance its revenue base by implementing the Value added tax and generate revenues for the prosperity and economic sovereignty of the country. He said the FBR is regularly convening meetings with trade bodies, chambers and associations to educate them about the importance of the VAT, removing unnecessary apprehensions of the business and trade.
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