Presently, the federal sales tax on goods under the Sales Tax Act, 1990 is being collected by Federal Board Revenue (FBR) under Entry No 49 of the Fourth Schedule of the Constitution of Islamic Republic of Pakistan, 1973 (Constitution). The 18th Amendment introduced many changes in the Constitution on April 10, 2010 including addition of the phrase 'sales tax on services' to the original Entry No 49, restricting the right of imposition of tax of the federal government to the extent of 'the taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed'. The sales tax on services has been devolved to the provinces. The implication of this change is that the provinces can collect the sales tax on services as a provincial levy. Previously, the sales tax on services was collected through the machinery of FBR under the various heads of services like the services rendered by hotels, marriage halls, lawn, clubs and caterers, advertisement on TV and radio, the services conducted by customs agents, ship chandlers, stevedores and the courier services as mentioned in the then Provincial Ordinances which are repealed now.
Under the mandate of 18th Amendment and in line with sanction of 7th National Finance Commission (NFC) Award, it is the province of Sindh, which first took the initiative of establishing a provincial collecting board under the name of Sindh Revenue Board (SRB) with the objective of building the capacity of collection of revenue through independent provincial means and resources and to devise a mechanism and machinery for the said purpose. The province of Sindh has also introduced a provincial enactment under the name of Sindh Sales Tax on Services Act, 2011 for the imposition of the said tax under the various heads of services. All the remaining provinces followed suit and introduced almost similar provincial enactments for levying and charging the sales tax on services.
The prevailing sales tax system in Pakistan is mainly Value Added Tax (VAT) based system, bearing some of the basic features and characteristics of the universally accepted style and norms of VAT system. Unlike single point of sales tax, VAT is a multistage levy, applicable at each stage of the chain of supply till the stage of bearing the impact of VAT by the end consumer. VAT is collected on the basis of tax paid on sales minus tax paid on purchases or more precisely stated this is output-input adjustment based tax.
Section 3 is the charging section and the registered person is liable to pay sales tax at the rate of 17% or any other applicable rate in the course of furtherance of any taxable activity carried on by him. The person importing the goods is also liable to pay sales tax at the given rate as mentioned in the charging section. In the scheme of Sales Tax Act, 1990, imports have been made subject to tax under section 3(1)(b) and exports are zero rated by Section 4 of the Act, 1990. Despite the taxable supply of goods or import of goods, section 13 of the Act has exempted certain articles or goods as mentioned in the Sixth schedule from the applicability of charging provision of the tax. In Pakistan VAT is based on 'destination principle' which simply implies that imports are taxed and exports are completely free of the tax.i
The claim of excess input tax by the registered person or timely grant of refund by the exchequer is the Achilles' heel of any VAT system. A VAT invoice constitutes a potential claim on the fiscal resources of the state.ii In Pakistan, Section 10 of the Act, 1990 contemplates that in case taxable purchases exceed the output tax on account of zero rated local supplies or export, the excess amount of input tax is required to be refunded within 45 days of filing the claim to the registered person. The claim of refund ought to be based upon the genuine amount of excess input credit (after deduction of output tax minus input tax) paid to the exchequer, therefore, the scrutiny and cross matching of output input adjustment is an essential process before release of the refund claim to the registered person. The FBR sometimes withheld even the genuine claims of the refund amount in order to inflate the figures of state collection or to meet the revenue target set by the government. However, the slow release of refund claims may has adverse effects on the recycling of the funds, at the disposal of businessmen. The refund claims of about PRK 200 billion of the registered persons are still pending with FBR up to the year 2016 despite tall claims of the government to release the same without any further delay.
Basically, the VAT system is based on a principle of mainly self-assessment, self-policing and self-enforcing type of taxation. And, an audit is a tool through which the tax functionaries monitor the business activities after having access to business record and other related documents on annual basis. The purpose of this exercise is to scrutinise the record and documents in order to forestall any tax evasion. Section 25 of the Act, 1990, has empowered the Commissioner or an officer of the Inland Revenue authorized by the Commissioner to call upon any person in whose possession such record or documents including electronic data is made under his control, to produce such record or documents or give access electronic for the purpose of conducting audit. "Legally speaking an audit report is at best an opinion of the auditor and a material in support of the departmental version. The audit report is nothing more than part of charge-sheet which needs to be established through the process of adjudication."iii Any person aggrieved by the process of adjudication may approach the departmental hierarchy of revenue authority or Court of law in order to redress his grievance.
In Pakistan, although the federal sales tax was introduced in 1990, however it has been facing fierce opposition from the business circles for its enforcement since then. The apprehension of the business community is two-fold: On the one hand, the record keeping requirement of a VAT is quite cumbersome for uneducated business class and on the other hand, there is every likelihood of harassment and corruption at the hands of the tax officials on account of non-maintenance of the required record. VAT supporters believe that undocumented economy is the main reason of underperformance of VAT system and in the absence of formal economy beyond certain percentage, the enforcement of VAT is tantamount to allowing the tax evasion with impunity as the system fails to detect and/or plug in the breaches. Under the prevailing state of affairs and in order to cope with the situation for the time being, a single stage retail tax has to be retained side by side with formal VAT system.iv
There is a plethora of taxation issues including narrow tax bases, generous tax concessions, special treatment and exemptions, weak and fragmented revenue administration and defective structural features of the economy, which are not allowing the collection agency(s) to realise an optimal level tax collection from the total tax potential revenue.v
Admittedly, Pakistan's economy is not fully documented and there is a big segment of informal sector which has been spoiling every single step taken in right direction since inception of the introduction of federal Sales Tax Act, 1990. The frequent breakdown of supply chain of production-distribution has caused unwarranted load of tax upon the registered person. The sales tax at federal level has been hovering around 17% which is slightly on the higher side rate on the registered person especially in the social milieu or in Pakistani context when the buyer is unwilling to pay his tax liabilities voluntarily. The supplier has to pay either from his own pocket, as an additional cost of doing business or lose the buyer straightaway. In any way, the choice is not an easy one either; it is rather quite detrimental for the promotion of business. Fixing of joint and several liabilities upon both the persons of making and/or receiving the supply may have secured revenue for the federal government but it has confused the very concept of fixation of liability upon the defaulting party only.
The success of VAT lies in its complete chain of supply without any disruption or breakage. To achieve this end, there must be very few exempted items or the list of exemptions and VAT must be confined to a very few essential food items of household. "In the United Kingdom, the VAT is progressive mainly because of zero-rating for food, housing and children's clothing. However, while the zero-rating achieves progressivity, it does so at the cost of a great erosion of the tax base, large amounts of revenue forgone, and extraordinarily poor targeting of those groups supposed to be helped"vi
In Pakistan, a long list of exemptions has been provided in the Sixth Schedule and a number of zero rating provisions have been incorporated in the fifth Schedule of the Sales Tax Act, 1990. This special treatment has been creating a bad faith among the genuine tax payers who question the very rationale of this discriminatory approach and/or exclusion of a big segment of society from the scope of charging provisions of the sales tax. The discriminatory treatment with various articles, items and industries smacks of fiscal favouritism and cronyism. This concessional treatment is being regulated through issuance of various Statutory Regulatory Orders (SROs) issued by federal government at its own discretion without any formal policy. This state of affairs has been causing uncertainty about tax legislation and adversely affecting consistency in policy. This extensive concession has caused frustration and disappointment among the genuine taxpayers and business circle.
Furthermore, the persons who are sitting outside the registered regime enjoy a complete tax-free regime under their own age-old and time-tested notion of 'wait and see, nothing will happen'. This rule of thumb is valid and is still holding the field and is not likely to be shattered anytime soon. The collusion of tax evaders with that of the tax administrators has fortified this perverse viewpoint. Under this non-compliance tax environment, the tax evaders cannot be convinced to join the formal tax regime and accordingly the tax base remains as small as ever before. The tax evaders violate the tax provisions without any fear of penal consequences. Instead of taking the tax evaders to task, the government keeps on extending concessions and favours by way of amnesty schemes without forcing them to learn lessons from their default.
In Pakistan the tax effort on the part of tax collectors is also at its lowest ebb, and therefore a big amount of tax revenue remains uncollected. The tax administrators have restricted their role to the extent of collecting the taxes which are 'easy to collect' administratively, leaving aside a big chunk of taxes uncollected, considering them as 'hard to collect' from the potential taxpayers. This easy approach of tax collection has virtually excluded a number of articles, items and industries from the scope of charging provisions of the tax in this regard and left a big source of revenue untapped without any lawful justification.
The government keeps on introducing such 'royal orders' by way of various amnesty schemes, SROs, instructions, rulings, and Notification (s) from time to time, creating uncertainty and non-seriousness about tax enforcement. This anti-tax casual conduct has been dissuading the potential taxpayers to join the mainstream of the tax base. The frequent issuance of such notifications conveys a negative message to potential taxpayers and a perverted approach is fortified that the FBR has a final word on the enforcement, implementation and interpretation of sales tax matters. It is also general perception of the public that FBR can take a U-turn anytime so the taxpayers have to see tax laws through the lens of FBR or try to make arrangement of lobbying at policy level of FBR in order to secure issuance of some favourable SROs. It has rightly been stated that "Continuous tinkering with, and tweaking of, the tax laws through a steady barrage of SROs over time causes the legislation to lose shape and focus, not to mention undermining the efforts of taxpayers to comply with the laws that are in force at any point in time."vii
(To be continued)
(The writer is an Advocate of Supreme Court of Pakistan)
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