The Revenue Advisory Council (RAC) has informed the Federal Board of Revenue (FBR) that the exemption list (First Schedule) of the proposed Federal VAT Act 2010 would be expanded to bring maximum food items and essential commodities consumed by general public to minimise inflationary impact of VAT from July 1, 2010. Sources told Business Recorder here on Friday that an important meeting of the RAC, headed by Dr Hafeez Pasha, was convened to work out the revenue implications of VAT.
The meeting was attended by FBR Chairman Sohail Ahmed, FBR Members and members of the RAC from private sector. The RAC and FBR in principle agreed to compile a list of items which would be liable to lower rate of nearly 5 percent VAT. The RAC also explored the possibility to introduce two different rates--of 15 percent and 5 percent--for imposition of VAT on goods/services and essential food commodities respectively.
In this regard, a separate list of items/basic essential commodities would be compiled for imposition lower rate of VAT. According to initial estimates of RAC, an amount of Rs 35 to 40 billion has been worked out from additional services to be included in VAT. According to rough estimates, the FBR could generate around Rs 16-17 billion from withdrawal of exemptions.
The RAC has also worked out that the FBR would generate an amount of Rs 70-80 billion during first year of VAT implementation. The revenue loss during transition of sales tax to the VAT would be offset by VAT implementation gains. During this process of loss and gain in the first year, the net gain would be around Rs 70-80 billion following implementation of VAT.
This realistic figure negates FBR figure of Rs 50 billion loss during transition from sales tax to VAT. The FBR had mentioned this transitional loss in the 'frequently asked questions (FEQs) on VAT' released for the general public. The chief of VAT had already said that the FBR would gain Rs 150 billion following implementation of the VAT during a press conference.
During the meeting of the RAC, it was analysed that the FBR may reach the figure of Rs 1350 billion during current fiscal year against the projections of Rs 1380 billion, reflecting a shortfall of Rs 30 billion. The RAC highly appreciated the performance of the FBR which may reach the figure of Rs 1350 billion in current economic situation of the country.
The final revenue collection for 2009-10 may slightly be raised in case the FBR manages to generate some amount out of Rs 27 billion through enforcement measures. Keeping in view the shortfall, it has been observed that the revenue collection target for the next fiscal year would be between Rs 1630 and Rs 1650 billion for 2010-11. The RAC further submitted analysis that Rs 1701 billion would be an over-ambitious target which could not be achieved under the current pace of revenue collection.
During the day-long meeting, it was agreed to expand the list of exemptions to include essential food items and goods consumed by the general public. Some of the food items which are presently part of the Sixth Schedule (exemption schedule) of the Sales Tax Act would be included in the First Schedule of the Federal VAT Act.
Presently, most of the exempted items have been brought into the VAT regime and VAT exemption is only available on the import and supply of 14 goods including unprocessed peas, wheat and wheat flour; ice and waters excluding those for sale under brand names or trademarks; table salt including iodised salt excluding salt sold in retail packing bearing brand names and trademarks; books (including brochures, leaflets and similar printed matter, children's pictures, drawing or colouring books, music printed or in manuscript form, maps and hydrographic or similar charts), newspapers and periodicals, other than material wholly or predominantly devoted to advertising; Holy Quran in whatever form or on whatever media; diapers for adults (patients); ambulances and firefighting trucks; dextrose and saline infusion giving sets along with empty non-toxic bags for infusion solution, and dextrose and saline infusion giving sets; artificial parts of the body; intra-ocular lenses and glucose testing equipment; contraceptives and accessories thereof; precious metal, other items specified in the Exemption Schedule of the Federal VAT Act.
When the draft of the First Schedule (Exemption Schedule) was issued under Federal VAT Act, most of the exempted items of the Sixth Schedule of the Sales Tax Act were subjected to VAT. The Exemption Schedule is likely to be expanded to ensure that basic foods items and essential commodities should remain out of the VAT ambit, officials added.
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