The government will charge 15 percent value-added tax (VAT) on the supply of consumer items, sold in packing, under Federal VAT Act, 2010 on which at present sales tax is being charged on the basis of printed retail price.
Talking to reporters on Saturday, a senior tax official said that 15 percent VAT would be charged on the supply of fruit juices and vegetable juices, ice cream, aerated waters or beverages, syrups and squashes, cigarettes, toilet soap, detergents, shampoo, toothpaste, shaving cream, perfumery and cosmetics, tea, powder drinks, milky drinks, toilet paper and tissue paper, spices sold in retail packing bearing brand names and trade marks and shoe polish and shoe cream.
Sources said that the new Federal VAT Act has abolished Third Schedule of the Sales Tax Act, 1990, which would bring items of the Third Schedule under the normal tax regime. Under the Third Schedule, manufacturers have to pay sales tax on all the stages of value addition of consumer items having printed retail price.
A number of dealers, distributors and wholesalers of consumers goods are still out of tax net despite hectic efforts to bring the intermediate linkages in supply chain in the taxation system, tax chargeable at each stage of value addition is not recovered. Under the existing arrangement, manufacturers are paying sales tax of all the stages of value-addition and only one printed retail price has been paid by the end consumer.
Under the Federal VAT Act, 2010, the manufacturers will supply these items on ex-factory price and not on the basis of printed retail price. The wholesalers and retailers would have to pay tax of each stage under the VAT regime. The tax payment by the wholesalers and retailers would be missed, unless brought into the tax net.
According to sources, all kinds of agri-products and power machinery would be brought under the VAT regime. The persons engaged in business of agri-products having annual turnover of Rs 7.5 million would operate under the VAT regime. Except essential food items specified in the First (Exemption) Schedule of the Federal VAT Act, trading of fruits and vegetables would be taxable.
For example, cotton and rice trading would be taxable under the new law, provided annual turnover exceeds Rs 7.5 million. Agriculture trading would be taxable under the new VAT law. The agricultural machinery, cotton trading and rice trading would be taxable under the VAT.
It has been estimated that around Rs 120-150 billion would be collected following enforcement of the Federal VAT Act in the first year. The collection would gradually improve with the expansion of the tax base under the new law. The annual cost of collection would be approximately 0.26 percent as compared to one percent or more in other best tax administrations.
In the process of finalising the new registration threshold, a lot of discussion was done on the threshold of existing Rs 5 million. However, a reasonable registration threshold of Rs 7.5 million has been proposed under the new law. The registration threshold of Rs 7.5 million for VAT has been proposed to ensure that the cost of documentation should not be more for the small and medium size business entities.
The units operating below the VAT registration threshold should not be required to bear extra cost of documentation. The official said that power machinery would be taxed under the new VAT law. In case of fertilisers, sources said, the item would not be exempted under the Federal VAT Act.
The main difference between the Sales Tax Act and the Federal VAT Act is the issue of exemptions. If the new Federal VAT Act is approved in the present form, around 70-80 percent exemptions would end from July 1, 2010. When asked to continue with the current Sales Tax Act without exemptions, sources said that 100 percent changes are needed in the existing law due to distortions and special rules and procedures.
Therefore, an entire new law ie Federal VAT Act would be introduced instead of making 100 percent changes in the existing law. Sources said that provincial governments are not legally empowered to charge tax on imports. Therefore, the problem of input tax adjustment would not arise in case the imported raw materials consumed in some other province. However, telecommunication services have been given to the provinces for the purpose of VAT collection.
About Sindh government's plan to collect VAT on services, the official said that the provincial government has no other option except to allow federal government to collect VAT on services. Till capacity building of the provincial officials, it would be a difficult task for the provincial government to collect VAT on services in the absence of the infrastructure.