The Federal Board of Revenue (FBR) will organise a value-added tax (VAT) conference on September 3-4 in Islamabad to finalise an effective strategy to fully implement VAT at the retail stage from fiscal year 2010. Sources told Business Recorder here on Friday that the FBR has constituted a seven-member committee to finalise arrangements for organising the VAT conference.
The committee would co-ordinate and handle conference-related issues. The FBR has included two income tax officials as part of the 'VAT Process Re-Engineering Team'. These Additional Commissioners of Income Tax would assist the sales tax officials in drafting VAT law. The FBR has also directed the Director-General of Human Resource Management (HRM) to provide list of officials having relevant experience of VAT laws.
The FBR has already constituted a VAT committee comprising top sales tax officials having vast knowledge and experience of VAT. According to sources, zero-rated regime and all kinds of special procedures and rules needed to be abolished for implementation of the VAT at the retail stage. As far as the board-in-council decision to study VAT of India is concerned, it would not be an appropriate country to study VAT, as India has entirely different system of service tax and sales tax at provincial level.
The Indian and Pakistan VAT systems are entirely different, whereas other South Asian countries could be studied for VAT purposes. A special committee of the Federal Board of Revenue (FBR) to enforce VAT at retail stage might chalk out some lucrative incentive/credit to those selling goods to the registered persons within the VAT supply chain.
The FBR is working on some new mechanism to attract retail sector for sales tax registration following failure of four schemes, including Trade Enrolment Certificate (1999); Enlistment Tax; Turnover Tax and Special Procedure for payment of Sales Tax by Retailers. These special schemes were enforced by distorting the VAT regime, but all of them failed in the past.
The FBR agreed that the distortion in the VAT chain would not be done to provide incentive to the retailers. Within the VAT regime, some facility needs to be provided to retailers and wholesalers. The VAT regime totally failed in the past.
In Pakistan, VAT chain is not complete where retailers and wholesalers are paying nominal tax, which is not even one percent of total sales tax collection. The committee has been assigned the task to formulate proposals to complete the VAT chain from entry of goods to exit of goods without compromising the VAT regime.
The VAT regime up to the stage of retailers has only been successful in documented economies. Such VAT enforcement has always created problems in the informal economy. Even in countries like Turkey, there is a 'Shahi Bazaar (like Bara Bazaar) where there is no documentation. In Malaysia, VAT is successful due to the documentation of the economy.
The committee took notice that VAT could only be implemented if there was support of political will. If the VAT chain is completed, the burden of tax on the already taxed sector would be reduced. The extension of VAT at the retail stage would not increase worries of common man, as there is no VAT on essential commodities. It is only payable by people having capacity to pay the tax.
It is learnt that all kinds of lucrative schemes have failed to attract retailers for sales tax registration purposes in the past. There is a need to introduce an incentive mechanism for retailers to opt for normal VAT regime.
For example, introduction of VAT withholding adjustable against output tax to be paid by retailers. At the same time, the cost benefit analysis is to be conducted vis-à-vis institutional capacity of current working strength to execute enforcement-related measures. The strong deterrence of audit and enforcement has to be developed prior to implementation of VAT in retail sector.
In the past, the FBR tried its level best to offer lucrative schemes and incentives to attract retail sector, but all techniques failed to implement VAT at the retail stage. For example, Trade Enrolment Certificate segregated retailers on the basis of annual turnover into 11 categories.