Former FBR Chairman Abdullah Yousuf on Thursday said the Value Added Tax would definitely have serious inflationary impact due to withdrawal of exemptions under the Sixth Schedule of the Sales Tax Act, 1990. Sharing his experience on VAT, he informed the participates at a seminar here that the reduced rate of VAT may help check inflation, but reduction in sales tax rates to standard rate of 15 percent VAT would cause revenue loss.
He was of the view that the FBR would face strong resistance from retailers and wholesalers during implementation of the VAT keeping in view past experience. It is apprehended that retailers and wholesalers would create serious problems for the FBR during VAT enforcement. Historically, they have preferred to remain out of the tax net to avoid documentation. It is not possible that all retailers and wholesalers would suddenly become compliant after VAT introduction from July 1, 2010.
He said all best VAT administrations have one agency for collection of VAT on goods and services. In case of Pakistan, a serious distortion is visible where the Federation is allowed to collect VAT on goods and provinces are empowered to collect VAT on services. The best tax administrations have a single legislative authority for collection of VAT on goods and services. This is visible in all tax administrations where VAT is successfully operating bringing the entire supply chain into the VAT net.
When zero-rated sectors would be brought into the VAT net, there is a strong possibility that cost of doing business of such export sectors would increase. The inputs of the five zero-rated sectors would become taxable following VAT enforcement, which would have an affect on their working capital. Former FBR Chairman said the Board did not make necessary arrangements for giving taxpayers education on VAT issues. He said the VAT would be inflationary and prices would go up.
He said VAT is not essentially a new system of taxation as the GST was already in VAT mode. He however pointed out that application of VAT will not be possible if legislative authority for goods and services is not at one source, contending that the collection of tax on services by the provinces, especially as that has been the position taken by the government of Sindh, will be problematic.
Yusuf believes that there are gaps in the preparedness of the FBR to institute a foolproof system especially that of refunds, contrary to the claims of the FBR. He said that a foolproof system, without human intervention, should be such in which the businesses should be satisfied with the system of refunds credited within 72 hours into their account as opposed to just the FBR claims of preparedness.
He believed that the Parliament must reconsider exemptions regime especially from businesses and investment point of view. He also recommended phasing-out of the application of VAT after a comprehensive information drive on VAT for consumers, retailers and businesses as key stakeholders.
Muslim League (N) leader Ishaq Dar was of the view that if the Parliament opted to veto the VAT on goods it would be difficult for the donors to go against the sovereignty of the elected House. The enforcement of VAT could be stopped if the Parliament refused to pass it, he added. He said there was need to defer VAT for one to two years. India deferred VAT for five years as they continued deliberation for evolving consensus before introducing the new regime.
Highlighting difficulties in implementing the VAT on services, he said two bills were tabled into Sindh Assembly under which one seeks to withdraw the right of collection of GST on services from the FBR while the other aimed at introducing VAT on services as being tabled in three other provincial assemblies.
"If the Sindh government agreed to give right of collection of VAT on services for time being, how it could be ensured that this issue would not resurface again," he added. Ishaq Dar said they would support to publish 'Tax Directory' as top to bottom approach is required that the people should know that how much their leadership was contributing to tax net.
He said it was the right of the provinces to impose and collect tax on services in accordance with 1973 Constitution and it was not rendered to them in 18th Constitutional amendment. Dar said tax on services was not made part of Federal Divisible Pool and there was serious dispute on distribution formula to this effect between Punjab and Sindh.
He said VAT is a consumption tax and people pay tax so it is not the right approach to demand a major share only because the main port city is located in Sindh. He also disclosed that there was no credible data of GST on services with exact revenue collection share of each province while Punjab was equipped with this information which was tabled before the NFC in Lahore's deliberations.
Dar, Chairman Senate Standing Committee on Industries and Productions and former Finance Minister, and Abdullah Yusuf, Former Secretary and Chairman FBR, reviewed the bill at the Pildat Legislative Forum in the presence of members of Parliament, business community and media representatives as participants.
Senate has already sent its unanimous recommendations to the National Assembly of Pakistan, the House that can vote on the VAT Bill 2010, to postpone the imposition of value added tax for one year to allow for 'preparation' by business community in particular and the country in general to pay this tax. Imposition of 15 percent VAT will actually cost the final taxpayer at around 21 percent, therefore, VAT rate is proposed to be reduced to 12.5 percent.
Other experts said the imposition of the VAT is subject to parliamentary approval. Speakers observed sales tax already implemented in Pakistan is in VAT-mode and focus should have been on removing exemptions and loopholes in sales tax to increase tax revenue instead of introduction of VAT, believed experts. Parliamentarians believed that the Government should have tabled its Letter of Intent and agreement with the IMF in the Parliament for discussion and approval by the Parliament beforehand.
Ahmed Bilal Mehboob, Pildat Executive Director, who moderated the forum said that the Government of Pakistan is planning to implement the Federal Value Added Tax Bill 2010 from July 2010 if it gets approved from the Parliament of Pakistan. Tabled in the National Assembly of Pakistan on February 24, 2010 and in the Senate of Pakistan on February 26, 2010, the Bill is under consideration at the committee stage in the National Assembly while the Senate Standing Committee on Finance and Revenue, after reviewing the bill, has passed a set of 24 recommendations to the National Assembly.
Similar laws are also pending before Provincial Legislatures. Mehboob said that as is Pildat's practice, the objective behind this forum is to assist parliamentarians understand the context, objective and issues relating to the VAT Bill 2010, especially in view of the government's agreement with the IMF. Pildat believes that like all legislations tabled at the parliament, MPs must take well-considered and informed position on the VAT Bill 2010. The Pildat Forum strives to provide an objective understanding to MPs in this regard.