Issues in Enforcing Value-added Tax

The federal government intends to introduce value-added tax from July 1, at a proposed flat rate of 15 per cent. The VAT will replace general sales tax in most cases and bring into the tax net some hitherto untaxed classes of retailers and suppliers.

The Federal Board of Revenue (FBR) has sent the draft of the Federal Value Added Tax Bill 2010 to the parliament. A Senate committee is currently examining it.

Meanwhile, businessmen are voicing their concerns over the manner in which the VAT is being introduced. A common complaint is that their input has not been sought. Business leaders also lament that the FBR has done nothing to create mass awareness about how VAT will be implemented. They fear that operational issues would crop up if VAT is imposed without taking them into confidence. That is why many business lobby groups have rejected it.

But the Federation of Pakistan Chambers of Commerce and Industry appears to be somewhat accommodative. “We have invited the FBR Chairman on 15th of this month at FPCCI in Karachi. He would listen to our views and respond to them. Amendments can be inserted into the proposed law and sent again to the parliament for approval,” said Mr Zakaria Usman, FPCCI vice-president.

“Before that, representatives of key business associations will hold a two-day brainstorming session at FPCCI to prepare a comprehensive presentation on VAT.”

Pakistan’s tax-to-GDP ratio is about nine per cent—the lowest in the region. As such any move to enhance tax revenue should not be normally opposed. And businessmen do realise this. “What we are complaining about is that we were not taken on board when FBR finalised draft legislation for VAT,” explained Mr S. M. Muneer, a former FPCCI president.

On March 8, Mr Asrar Raouf, FBR Member Policy (Direct Taxes) assured businessmen at a luncheon at Korangi Association of Trade and Industry that FBR was open to receive their inputs on how to go about introducing VAT.

He said even the proposed rate of 15 per cent VAT was open for discussion with business community. His boss, FBR Chairman Sohail Ahmed, is expected to say similar things when he visits FPCCI. “But VAT is to take effect from July 1.”

“How on earth our issues would be taken care of in such a short span of time?” questioned Mr Anis Majid, Chairman, Karachi Wholesale Grocers Group. “Whereas imposing VAT on retail businesses with a turnover of Rs7.5 million is not a big issue, the requirement for registration of such suppliers making supplies worth Rs75,000 or more (during the course of an economic activity) would definitely create problems for many.”

An ex-president of Karachi Chamber of Commerce Mr Anjum Nisar pointed out that as a matter of routine our bureaucracy is used to taking crucial decisions first and seeking stakeholders’ inputs later. This has delayed—and even failed many a good moves in the past. And I fear it can delay the imposition of VAT as well. Not only the businessmen required enough insight into operational issues of VAT, officials of FBR who would be involved in its collection also needed a certain level of training,” he added.

One of the issues, which businessmen fear they will have to face, is refund of taxes under VAT regime due to absence of effective electronic payment system. But FBR Member Policy Mr Asrar Raouf says that unlike General Sales Tax or GST regime, there will be a fully-automated refund system working under VAT.

He explained at a meeting with Karachi-based businessmen that refund system under VAT would operate on sale and purchase invoices and by the time next return is filed, a refund adjustment would already have taken place in the claimant’s bank account. Unlike in GST regime, no cheques would be issued against refunds. However complaints keep mounting against FBR over delays in refunds claimed under GST. Recently, Federal Tax Ombudsman Mr Shoaib Suddle revealed that 20 per cent of all disputes that his office received related to GST refunds.

Another VAT issue relates to determining the extent of value-addition in a product. Although FBR officials say all major agricultural crops would stay out of the VAT regime till processing stage, businessmen wonder how the tax authorities would determine the extent of value-addition in a crop that would make it liable for VAT. “We have been told that in case of pulses no value-add tax would be charged if the value-addition is less than five per cent,” said Mr Anis Majid. “We however, don’t know how exactly they would determine it.”

The draft of the proposed legislation for VAT finalised by FBR and posted on its website lists only a few food items as exempted from VAT. These include unprocessed peas; wheat and wheat flour; ice and waters except those for sale under brand names/trade marks; table salt including iodised salt but excluding salt sold in retail packing bearing brand names and trade marks.

This implies that all other edible items including fresh food items would be subject to value-added tax. Retailers fear that this might push up already high food inflation .”Besides, subjecting hundreds of food items to VAT would also increase the required paperwork,” feared an office-bearer of Karachi Retail Grocers Group who declined to be identified.

Generating more tax revenue from retail business is principally a good idea. It would help in bringing a large number of businesses and individuals in tax net and documenting the economy and would yield roughly Rs400 billion additional revenue per year. “But literacy rate in our country is too low. Expecting the retailers to know the nitty gritty of the new tax within a few months does not make sense.”

FBR had finalised the draft of the Federal Value-added Tax Bill 2010 on the last day of January and came up with its corrected version on February 27. “They should have done this at the start of this fiscal year giving all the stake holders a full year time to develop an understanding about VAT and debate its pros and cons at various forums,” said a trader based in Jodia Bazar.

Some businessmen say instead of introducing VAT at the export, import, retail and supplies stage in one go, the government should impose it on one particular area and gradually expand its scope to other areas. That is what many other countries have done. They say that replacing various tax slabs under GST regime for different class of businesses with unified VAT in one go may create confusion as these businesses and individuals have got used to GST over a period of time. They fear that a sudden replacement of GST regime by VAT would increase the frequency and volumes of tax litigation.

As VAT legislation is also to be vetted by provincial legislatures, it seems that no meaningful discussions can take place on this subject if the federal government is determined to impose it from July 1. Sindh Chief Minister Syed Qaim Ali Shah has said that provincial assemblies’ input should be given due weightage in the proposed VAT law. One has to see how quickly the provincial assemblies’ inputs and recommendations of the trade and industry can be incorporated into the proposed law for introducing VAT.