THE proposed value-added tax bill is a departure from the globally VAT approved parameters. VAT requires simplified procedures, lesser involvement of the Federal Board of Revenue in day-to-day affairs and devolving of functions at grass roots level.
VAT has failed in those countries or resulted in corruption where the tax collecting functionaries are invested with immense discretionary powers.
First, VAT is built around local trade practices. VAT also ensures that basic products, daily used domestic food items, medicine, and agricultural products are not brought under its net. Second, VAT is imposed on moveable goods. It would be interesting to see how the proposed VAT has addressed these issues in Pakistan. The other important question is whether or not the FBR has fixed the nuts and bolts of the machinery that will administer VAT.
A draconian provision has been introduced in which tax fraud means tax evasions. Tax fraud in all over the developed economies is willful evasion of tax and it does not cover tax avoidance. Tax evasion could result from data feeding errors, and it is well known to the Board that the person being shown as short filer or stop filer has actually filed the returns.
The FBR and its IT team PRAL has failed to ensure that all the payments and returns filed are correctly reflected in its database. Now a person can go behind the bars for three years if FBR fails to capture his returns as well as payments. Is it sensible to enlarge the scope of tax fraud to such an extent that it empowers the board to scare the people for their lives?
If we look at the list of exemptions, all food items except for unprocessed peas, wheat and wheat flour are now taxable. It implies that now 40 per cent of the population living below the poverty line would be whipped to pay tax n all the items that they consume just to stay in existence. Even all kind of vegetables and pulses will be taxable. How can the board collect from the sales of such basic items? It will be ridiculous to note that donkey cart holders will have to pay taxes on sales made on carts. Lo and behold, taxes have to be paid on medicines..
The FBR claimed that it has engaged international consultants to develop and draw the framework of VAT system. However, there are many new rules that do not make sense in the proposed VAT bill. For example, retailers have to indicate the registration number of such buyer who is not required registration. But how a retailer can mention registration number of an unregistered person? Is there any country where retailers maintain such record? The proposed bill has assigned the function of refund processing, registration and revising of the returns to the board. It is not understood; if the board has to perform basic functions then what role its field offices of more than 30,000 workforces shall play. If the board has developed the capacity and skills then what is stopping it now from processing of thousands of pending refund claims. The only plausible reason may be that it is not willfully releasing refunds just to recover its pathetic tax collection, which is less than nine per cent of GDP.
The proposed VAT bill has also empowered the FBR to cancel the registration where it has found that registration is not required or where the declaration in form of returns are not reliable. What kinds of tools are available with the board to check the credentials of the taxpayers? It is however not defined what is reliable return. The taxpayers shall remain at the mercy of the FBR. Strangely as per section 69 of the bill, audit can only be initiated where tax fraud is suspected. It is very naive to assume that a person like Micheal Keen could agree with the proposal to restrict the audit only to the suspected fraud cases. In VAT, audit is a normal exercise, which instills deterrence amongst taxpayers. Instead of building of the writ of the field enforcement system, the bill portrays as if the board has developed some invisible data mining system through which it will do all the magical works..
The tax invoices have to be issued when transaction is made between two registered persons. As we understand that the registration contains all the vital information of the person, such as his CNIC number and address. Still in the invoice he has to write again all this information. This is classical example, how a simple thing could be made complicated.
We understand that other than the corporates, all the tax payers have to maintain records manually, now just to meet VAT demands, he will have to employ another person just to write down CNIC numbers and addresses of its buyers. This information is of no use to the board as it has already acquired it in its database.
The criticism on the existing GST by the local consultants generally from income tax background and from Carlos Silvanni was that it was a distorted version of VAT. The distortion was in the form of local zero-ratting. But strangely, they have introduced the concept of withholding agents in Section 36 of the bill. The withholding concept is alien to VAT. Previously, FBR introduced the tax on the sales of second-hand cars. It failed for the simple reason that it is a clear case of double taxation.
However the board either does not have the institutional memory or does not learn from its past experiences. And this is evident from the fact that it has introduced the tax on second-hand goods as per Section 21. This section provides for the tax of sales of the goods that are purchased from an unregistered person. The law does not restrict sale of goods to unregistered person. So any taxable good that has already suffered taxes on sale to unregistered person shall again be subject to tax when any person purchases from him and then sells it. Clearly this law shall attract protracted litigations. The board has abolished the tax on advance payments though it has won the case from Supreme Court. It was abolished for the reason that it created liquidity crunch as well as accounting problems but the bill has again introduced the taxes on advances.
The bill has fixed the threshold for registration at Rs7.5 million. The sales tax registration data in terms of different categories, manufactures, exporters, importers, wholesalers etc. It helps the board in evaluating and risk profiling of such persons. However deviating from such categorisation, it has introduced the concept of the registered person without indicating actively. This section shall create lot of problems for large number of taxpayers transacting below Rs7.5 million.
For example, a registered person could only make all supplies to the government department. Now these people have to go for voluntary registration. The board will have no data on business status-wise. Again there is an anomaly that any person importing goods lesser than Rs7.5 million is not required to register. The question arises whether such person is exempt from the sales tax at the import stage. It is strange that the international consultants have consented to such anomalous provisions of law.
In 2005, the FBR zero-rated the input goods of five major exporting sectors. The reason for zero-rating was that the board had paid refunds of more than Rs42 billion in 2004 and 2005 and collected just Rs32 billion. This was done to facilitate genuine exporters and to stop fraudulent refunds. The board has done away with this provision on the plea that it is departure from VAT.
The one question that these gurus needs to note is that France was the pioneer in introducing VAT and till to date zero-rates the indirect exporters. Facing the same dilemma, England has successfully implemented reverse charging on business-to-business transactions. They need to note that the gospel of VAT, sixth directive of EU provides for different options to address local peculiar issues. If the board did not have the capacity in 2005, it definitely has not demonstrated to have it in 2010 when it has failed to settle refunds only of packing material. It is the norm with the present government to push and then retract from serious issues. However, such nonchalant approach while fiddling with the fiscal system needs to be noted by all the stakeholders with utter seriousness. When the government levied taxes on electricity it widened the poverty pool. The present VAT will add to their misery beyond imagination.
Whereas, admittedly the tax-to-GDP ratio is very low but then what the FBR has done to plug the evasion that it claims to be around Rs800 billion apart from dismantling the old system; it needs to put its house in order, check the fraudulent input adjustments and on top of it, have all together fresh look in its IT syndrome.
Pushing the things with speed is good initiative, but not at the cost of propriety and quality of system. The VAT needs to build around local trade conditions as well as a blend of best international practices. The standing committees of the National Assembly and the Senate need to engage private professionals before firming up their opinion on the bill.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/can-proposed-vat-mode-deliver-930
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