Association of Chartered Certified Accountants (ACCA) has recommended that South Asian countries particularly Pakistan should limit Value Added Tax (VAT) or sales tax exemptions to health, education, charity and basic essential food items excluding those supplied to restaurants and hotels, etc.
According to a special report of ACCA dated November 2016 on 'Indirect taxes - current trends across South Asia and UAE', ACCA recommended reduction in tax concessions and tax amnesties, and avoid special regimes so as to protect the rudimentary character of VAT as a modern consumption tax.
It recommended use the services of VAT-experienced technical experts and professionals for smooth and trouble-free VAT implementation and management.
The report discussed the evolution of VAT and current trends of indirect taxes across South Asia and UAE. The countries selected for the purposes of the research include Bangladesh, India, Pakistan, Sri Lanka and UAE. These countries are in the process of reforming their tax systems for better and efficient collection of taxes. The report discusses the importance of indirect taxes and revenue collection, thresholds, tax rates, zero-rating, exemptions and various other areas of indirect tax administration along with recommendations to improve the same.
ACCA found that the audit and enforcement measures are sometimes carried out on a political basis or for political reasons. There are also indicators of corruption, which promotes malpractices, whereas there are not enough incentives and system-based motivations for taxpayers to comply voluntarily. There is a tendency for repeated use of amnesties (amnesty schemes), usually for politically motivated reasons. The dispute settlement/resolution procedures are slow and burdensome. The tax policies cannot be considered to be inclusive and there is no scientific future planning behind tax policy formulation, which sometimes results in the continuance of instabilities. Further, there is an illogical penal framework including penal taxation to combat the non-compliance that is generated by the in-built weaknesses of the system. These weaknesses are partly due to the absence of appropriate constitutional, legal and administrative reforms/improvements.
ACCA recommended these countries to reduce compliance cost but attract optimal voluntary compliance by building incentives into the tax system (carrot and stick policy approach) and share data among different government departments, organisations, institutions, authorities and agencies as well as between different government departments at regional and global level for BTB (broadening tax base) and anti-tax-evasion/avoidance purposes.
These countries should make the VAT system a seamlessly integrated unified tax management regime with preference for single hand and single rate tax administration with a uni-declaration mechanism (in countries where powers to collect VAT are divided between the central/federal governments and the state/provincial governments) and optimise the application of Information Technology and modern scientific tools to enhance the overall efficiencies of tax management, tax monitoring, taxpayers' facilitation (including dispute resolution/settlement regime) and tax collectors' accountability through regular capacity building and fair wage and reward systems.
The report recommended the countries to enhance the public trust in the overall tax machinery, especially, in the appellate forums so as to attract voluntary compliance and create rapport between the taxpayer and tax collector on the one hand and the tax collector and tax adjudicator on the other.
ACCA recommended that the countries to maximise the effectiveness of enforcement through institutional revamping and strengthening of resources of both staff and materials, review the minimum tariff values fairly at regular intervals for fair and accurate VAT collection on imports. With the introduction and rationalisation of VAT, the least productive indirect taxes should be considered for permanent abandonment, it added.
About Pakistan, report said that in Pakistan, federal as well as provincial governments are competent to levy various types of tax. The responsibility for collecting taxes for the federal government has been assigned to the Federal Board of Revenue (FBR), a semi-autonomous federal agency, whereas recently established provincial revenue authorities are responsible for the collection of sales tax on services. Federal government has implemented both types of tax, ie direct and indirect, including income tax, general sales tax on goods, customs duty and excise duty. Under the 18th Amendment to the Constitution of Pakistan made in 2010, the responsibility for collecting sales tax on services along with certain other taxes was devolved to the provincial governments.
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