The ACCA has observed that implementation of the new value-added tax (VAT), with no exemptions across all sectors, would increase prices of goods, having a negative impact on economic growth of the country.
Sources told Business Recorder here on Wednesday that the ACCA, a global body of professional accountants, has submitted a comprehensive report on VAT in Pakistan to the Federal Board of Revenue (FBR) with suggestions to increase VAT registration threshold to about Rs 8-9 million.
The FBR can improve revenue collection, up to Rs 200 billion annually, by checking incorrect input tax credits, the ACCA said. According to the report, as implementation of VAT across the economy, with very few exemptions, would increase prices and hence have a negative effect on consumption resulting consequently in impacting economic growth.
The time period over which VAT will be implemented in Pakistan thus needs serious consideration. On the basis of experience in different developing and transitional economies, experts suggest a 5-10 years period as more realistic for implementing a full VAT regime. Given the fact that Pakistan already has VAT in some form, the period may at best be reduced to two years.
It suggested that a simple VAT scheme should be introduced in Pakistan, following best practices like UK, or Australia where VAT started out simply but then became more complex. The ACCA report has highlighted that a single rate, being easier to administer and less open to evasion, is one of the best practices in VAT countries. Out of 141 countries, 76 administer a single rate of VAT.
The report further said that capacity enhancement of FBR officers and processes improvements also need careful consideration. The main area of concern is documentation and ensuring an effective inbuilt mechanism of self-control and self-regulation of the registered businesses. The business processes need to be studied and VAT incorporated in them to make it an essential component, so that tax evasion is minimal and non-beneficial to the taxpayer.
The ACCA experts said that a great challenge with a full VAT regime would be the verification process. Even with a moderate tax base of VAT, at present tax administrators check returns only for accuracy, on the basis of reported information, but there is no systematic cross-checking of invoices outside the audit system. The FBR can benefit from South Korean model. In South Korea, the issuance of a tax invoice to the purchaser of goods and services is compulsory.
The suppliers and purchasers submit a form to their tax office containing details of tax invoices. Tax offices feed details of these invoices into the national tax system (NTS). Successful management of these challenges would result in effective implementation of VAT in Pakistan. The VAT model which will be most appropriate for Pakistan is reviewed in the next section, the ACCA added. About threshold, ACCA pointed out that thresholds vary widely (from zero to $600,000) from country to country.
Whether there should be no threshold for registration (as in Chile), or whether it should be very high is a very important factor to be decided when designing a VAT regime. Fixing the threshold at a low level means burdening tax administration with substantial amount of work. It does, however, provide more information to the tax collecting agents, making verification of transactions of other big taxpayers easier.
It also means more revenue. Fixing the threshold at a very high level may encourage splitting of businesses to avoid registration. The benefit of a higher threshold, however, is low administrative cost. Thus, both the administrative capacity of FBR and the taxpayers' compliance costs should be the criteria for setting an ideal VAT registration threshold.
It is suggested that threshold level may be increased to Rs 8 million-9 million. As businesses would be paying input tax, the potential loss due to non-registration would be very partial but there would be a saving in administrative costs. Alternatively, it is suggested that the FBR may conduct a comparative study of cost and benefit (to the economy as a whole) of taxing a particular volume of sales.
The threshold can be fixed where cost-to-benefit ratio is equal to one. The ACCA said that any VAT invoice constitutes a potential claim on the exchequer, and falsifying such claims is perhaps the most common form of VAT fraud. VAT's self-enforcing character is not always effective. It is essential from an administrative perspective to have a detailed knowledge of the normal or expected patterns of credits and liabilities for firms in all the different lines of business that are subject to VAT.
There is a need to conduct a comprehensive study on the treatment and verification of input tax to gauge and arrest misuse of the system. Experts say that revenue can be increased by Rs 200 billion annually by checking incorrect input tax credits.
The Sales Tax Automated Refund Repository (STARR) computerised system should be used not only for issuance of refunds but also for checking the veracity of claims for adjustment of input tax. The time limit should be fixed for the issuance of invoices. Moreover, it is hoped that the STARR will be updated to the extent that the responsibility currently held by the claimant of an input adjustment to ensure the deposit of tax by his supplier is done away with, the report added.
The effective implementation of VAT depends on the willingness of the business community and the public. Stakeholders' engagement and rectification of perceptions about the regressive nature and inflationary impacts of VAT will determine the success of VAT implementation in Pakistan.
The success of VAT in different countries needs to be promoted. The prime goals of VAT administration should be to promote voluntary compliance and increase VAT revenue by effective and efficient economic processes. Identification of taxpayers, ensuring tax registration, processing of returns, carrying out tax audits, assessments and collection, properly administering credits and refunds are the main functional areas of tax administration, the ACCA report said.