The new Federal Value Added Tax (VAT) Act 2010 has proposed 15 percent VAT on the import and local supply for Defence stores including supply of defence-related equipment to armed forces from July 1, 2010. Talking to a select group of journalists at the Parliament House on Thursday, a senior government official said the government and public sector production like stores for Defence purposes would be brought into the VAT net from next fiscal year.
The production (government or private) would be subject to VAT under the new law. Under existing Sixth Schedule of the Sales Tax Act, 1990 Defence stores are exempted from sales tax. This exemption has been withdrawn under the proposed First Schedule of the Federal VAT Act, 2010.
Presently, sales tax exemption is available to the Defence stores, whether manufactured locally or imported by the federal government against foreign exchange allocation for Defence, including trucks, trailers and vehicles falling under PCT heading 87.04 of the First Schedule to the Customs Act, 1969 (IV of 1969), specially modified for mounting defence equipment, their parts and accessories for supply to Armed Forces."
However, the serial number 62 of Sixth Schedule of the Sales Tax Act has been omitted from the exemption schedule of the Federal VAT Act. Sources said the Defence stores would cover certain kinds of imports by the Ministry of Defence. The defence related procurement also covers imports of motor vehicles for the transport of goods including dumpers designed for off-highway use as specified in the Sixth Schedule of the Sales Tax Act.
When asked whether live animals and live poultry would remain exempted under the VAT, they said internationally VAT is applicable on live animals all over the world. Similarly, VAT would be applicable on import and supply of live animals such as sheep, horses, camels, buffaloes, etc, he added. In reply to a question whether slaughter houses and poultry farms engaged in purchase of live animals and live poultry would be liable to pay VAT under the new law, he clarified.
Comparison of Sixth Schedule of the Sales Tax Act and Exemption (First) Schedule of the Federal VAT Act revealed that the new law has also proposed VAT on the pulses, meat of bovine animals, sheep and goat, fish and crustaceans, edible vegetables including roots and tubers, cereals and products of milling industry, edible oils and vegetable ghee, including cooking oil, on which Federal Excise Duty is charged, levied and collected by a registered manufacturer or importer as if it was a tax payable under the relevant Act.
Sources said the Federal Board of Revenue had discussed three different registration thresholds in consultation with the donor agencies. These registration thresholds included Rs 5 million, Rs 7.5 million and Rs 10 million. However, the FBR has proposed to the Parliament to raise registration threshold from Rs 5 million to Rs 7.5 million per annum.
Talking about the methodology to determine Rs 7.5 million VAT registration thresholds, sources said that the FBR has maintained data on utility bills consumption, rental income, labour and declarations made in the income tax returns by a registered person.
Similarly, the buyers and sellers of a unit would also provide supplies related information to determine VAT registration threshold. The data of suppliers would also be obtained from manufacturers to verify the annual turnover/sales of a person for VAT registration purposes.
Pakistan has an advantage that we have VAT type experience for the last 20 years. The proposed VAT would be broad-based, but a simple law to expand the tax base. Pakistan has been classified as a country where VAT type of sales tax has been applicable.
Sources said that it should be kept in mind that VAT is a trust-based system within the supply chain. About the collection of VAT on services, sources said that the provincial governments would assist the federal government in collection of VAT on services. However, the federal government would be primarily responsible for collection, administration, enforcement and monitoring of the VAT under new law.
The purpose of the VAT is to introduce and implement a broad-based tax on sales and purchases of goods and terminal taxes on goods, or passengers carried by railway, sea or air; taxes on their fares and freights to form a broad-based tax on consumption.
Sources said that we have no intention to make change in the Constitution, but our sole purpose is to implement a broad-based tax under the new law. Where a Provincial Value Added Tax law provides for the Provincial VAT collection, the Board shall apply all provisions of proposed Act necessary to ensure that the Provincial VAT and the Federal VAT operate together as an integrated tax regime.
Responding to a query, official said that the World Bank (WB) has not raised any serious objection on the new VAT Law. The objections about the new VAT Law are of technical/editorial nature. We are removing these objections which are not of serious nature. The FBR has successfully convinced the donors about the applicability of the new VAT law.
Under the scheduled plan, the government would first enforce the Federal VAT Act and later Provincial VAT Act would be implemented in a systematic manner. About zero-rating, sources said that zero-rating facility would only be limited to exports and where there is international commitment. The exemptions would be drastically cut under the new VAT law and these exemptions would only be available on most essential commodities.
The FBR is also implementing an expeditious refund system along with the implementation of the VAT. The purpose of the new system is to ensure speedy payment of refunds to the registered taxpayers. The new electronic system would be implemented at all the Large Taxpayers Units (LTUs) and Regional Tax Offices (RTOs) across the country. At the same time, the FBR is strengthening its audit capacity through implementation of a national audit plan.