ARTICLE (March 26 2010): Foreign powers, who are busy to spin a spider's web around nuclear Islamic state, which already is caught in a deadly debt trap and has lost its independence in formulating policies to get rid of this monstrous external debt. Total external debt of Pakistan, including foreign exchange liabilities were US $10 billion in 1980 and US $20 billion in 1990.
In May 1998 just before freezing of foreign currency accounts, the external debt was recorded US $42 billion. The burden of debt services, which was 18% in 1980, jumped to 60% in 1998. As of June 2001, Pakistan's total external debt and liabilities stood at US $37.8 billion and on June 30, 2009 our external debts and liabilities have further increased to US $47.26 billion.
According to the estimates of the IMF, Pakistan's debt will increase to US $57.10 billion by the end of current fiscal year and 64 billion by the end of 2011-12. The main reason for this heavy burden of debt has been a result of large and persistent fiscal and current account balance of payments deficits imprudent used of borrowed resources, such as wasteful government spending resort to borrowing for covering non-development needs, undertaking of low economic priority development projects, and poor implementation of foreign aided projects, weakening of debt carrying capacity in term of stagnation or decline in real government revenues and exports and the rising cost of government borrowings both domestic and foreign.
We have wasted the breathing space and have not utilised this time wisely and judiciously to restructure our economy on sound footings and as a result, we had to beg again in front of the IMF with all its conditionalities. Pakistan was the only country in South Asia to be classified as a severely indebted country by the World Bank.
In these circumstances, we are near the economic collapse and on the dictates of the IMF, we are levying various kinds of taxes and making lives of our citizens difficult and miserable. The Federal Value Added Tax Act 2010 is one of the conditions mentioned in letter of intent signed by the Finance Minister on November 27, 2008 in which it was clearly mentioned that the government would initiate a process to implement a full VAT with minimum exemptions.
Beggars have no choice and authorities have drafted the VAT ACT 2010 under the dictates of the IMF. Under the act zero rating on five export industries, leather, textile, carpets, sports goods and surgical goods will be removed and brought into VAT scheme.
Most of these industries are in crises due to impact of war on terror and persistent loadshedding. The exports of the leather sector have recorded 42% decline in the last 20 months and the industry is at the brink of its collapse and if the zero rating is withdrawn and VAT levied, the industry will totally collapse.
How can a sick industry sustain the pressure of new levy of VAT must be better known to our competent economic managers who drafted the VAT Act in air-conditioned offices without knowing the ground reality. These authorities have not even bothered to discuss this issue with the stakeholders before it was finally drafted.
The FBR authorities are of the view that they cannot resist powerful groups, who with connivance of these authorities, obtained exemptions through SROs and the VAT Act will restrain powerful groups from obtaining exemptions and only Parliament is having powers to issue such exemptions meaning that the authorities have been involved in malpractices in the past and SRO's were not issued on merits and in the interest of the country.
Former Commerce Minister Razaq Dawood had advised the then CBR (FBR) to provide draft SRO to the concerned associations of that particulars industry before it was finally issued. After getting suggestions with the industry, final draft of SRO was approved. It was a prudent policy but withdrawn by the FBR.
The trust deficit between trade and government is chronic and deep-rooted. For economic uplift of any country, there must be mutual trust between trade and government authorities. There are inherent flaws in the VAT Act and it has been drafted with a Machiavellian mindset to treat business class like a dacoits or thieves. Some of the provisions of VAT ACT are too harsh and need to be deleted. The definition of "ASSOCIATED PERSON" under sections-3 of VAT Act is objectionable and need to be changed. The present definition is quoted as under:
-- "ASSOCIATED PERSON - (1) for the purpose of the Act, two persons are "associated persons." If the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of other, or both can reasonably be expected to act in accordance with the intentions of third person.
1) The following are presumed to be associated person.
a) An individual and a relative of the individual; and
b) The member's of the association of persons.
Unless the Board is satisfied that neither person can reasonably to act in accordance with the intentions of other. The above definition is against the Constitution and Pakistan Penal Code in which no other individual is held responsible for an act of other person, who may be son, brother or any other relative of the person who is proved to be culprit.
Section 3(4) of VAT Act further defines term "relative" as under: Relative in relation to an individual means; (a) an ancestor, a descendent, of any grandparents, or an adopted, or an adopted child, of the individual; (b) an ancestor, a descendent of any of the grandparents, or an adopted child of a spouse of the individual, or (c) a spouse of the individual or any of the persons specified in Sub-Paragraph (a) or (b).
Under Section 5(a), any activity whether or not activity is undertaken for profit will be called economic activity. Open Market Price as described under section 6 of VAT Act is also debatable. It says: "one supply is similar to another if it is the same as, or closely resembles, the supply in character, quality, quantity, functionality, material, and reputation".
What about two similar mobile phones with similar functions, one produced in China and another in Europe, and the price of Chinese set in Rs 6000 and similar set costs Rs 40,000 if produced by a company of international repute. The present definition suits to tax officials for malpractices and bribing. The most alarming section is Section 12 relating to "Zero-rated supplies" which reads as under:
"A supply or import is a zero-rated supply or import if"
(a) it is specified a zero-rated supply or import in the SECOND SCHEDULE of this Act or it is supply of a right or option to receive a supply that will be zero-rated supply; or
(b) it is specified as a zero-rated supply under a provincial VAT Law.
The Second Schedule of VAT Act is silent on zero rating of five export sectors meaning that zero-rating of five export sectors has been withdrawn. This is an act, which can has serious repercussion on the future of our economy. The policy of the government to export taxes will further result decline in our exports.
The authorities are ready to take any dictation from the borrowing agencies but not facilitate their own citizen, to earn foreign exchange for the country. The VAT Act is contrary to the strategic Trade Policy Framework 2009-12 announced by the Commerce Minister on July 27, 2009.
Secondly, it will encourage culture of flying invoices and other malpractices for which zero rating regime for five sectors was introduced. Due to these flying invoices and malpractices the government was receiving less and paying more in the shape of refund. Finally, it was found that refunds are more because of flying invoices and a few cases of malpractices are still pending in various courts.
The refund procedure in Pakistan has been sluggish and not export-friendly. Exports needed to be encouraged to pay back our debts, otherwise the country will face bankruptcy in future years. We must follow policies of China, India, Bangladesh, Turkey and other similar countries. Export are to earn foreign exchange and not for revenue collection.
The present government must sit with the business leaders of leading export industries and find ways as how to increase our exports. Comparative study of policies to boost exports by various countries must by conducted and Pakistan needs to follow similar policies. Setback to exports means setback to economy, which can be a big setback to present political government.
The present government may not close its eyes on such legislation, which is detrimental to the country in general and to export industry in particular. For good governance, it is imperative to boost exports and the government needs to focus its attention to this important sector of economy.
No economy can be sustainable on more borrowings and without exports. This is the area where immediate government attention is required, otherwise laws like VAT Act can prove last nail in our economy. The first step is to discuss VAT Act with the stakeholders, ie exporters, importers, chamber of commerce, trade association and other concerned trade bodies.
As suggested by the Senate Standing Committee, the bill may be deferred for one year till discussion with the stakeholders is completed and the bill is thoroughly debated before its implementation. The present VAT ACT is not in accordance with the fundamental rights of a citizens of Islamic Republic of Pakistan laid down in our Constitution for example Section 87 of VAT Act reads as under:
-- "87 BAR OF SUITS, PROSECUTION - and other legal proceedings (1) No suit shall be brought in any court including high court in its civil jurisdiction to set aside or modify any order passed, any assessment made, any tax levied, any penalty imposed or collection of any tax made, audit, enquire, investigation conducted under this act or rules made there under or against any action taken by an officer of inland revenue in connection with such matters."
Under this, section officer of Inland Revenue is a supreme authority even above of all superior courts, including high court. No normal person can draft such a legal provisions in which individual's right to seek redress has been snatched.
In case of dispute, who will interpret the law and who will decide that officer concerned has committed mistake. This section is based on presumption that the officer of Inland Revenue in infallible and always correct. This provision has given unlimited discretionary powers to the officer and has paved the way for malpractices and blackmailing.
Under this provision, the legislator has been assigned the job of judiciary, which is too much. While drafting the law, these experts have not taken into consideration ground reality of our country. They have copied few provisions from VAT Law prevailing in Australia where the literacy rate is 100% and in our country literacy is the main issue in documentation of economy.
Under Section 48, it is mentioned that it shall be reasonable for a person to believe that another person is registered for VAT if that another person is on the list placed on the website of the Board. It has been presumed that whole nation is computer literate.
Under Section 69 of VAT Act, an officer may conduct audit, including forensic audit of any registered person. The term forensic audit has not been clarified or defined. If it is an audit through the court, then what about Section 87 which has put bar on legal proceedings.
The Section 70 is about "Special Audit" by an accountant appointed by the Board with unlimited powers. What is the difference between audit and special audit is not clear.
On the one hand, there is bar on suits and, on the other, Section 72 authorises an officer of assistant collector rank to arrest any person suspected or believed to have committed tax fraud. Where the person suspected or believed to have committed tax fraud is a company every director or officer of such company may be arrested.
The business community should open its eyes and stand against such harsh provisions of VAT Act. Such law will discourage investors and can cause serious setback to our industrial growth. At least all foreign investors will shun investment in the presence of such harsh provisions.
The provision along with Section 87 can be called conspiracy against the country to further retard its industrial growth and create unemployment in the country to push us in dark ages. How can a person be arrested just on suspicion having no right of bail before arrest, as VAT Act is a "Divine Law" and above the Constitution of Pakistan.
The government should offer this act for debate among the stakeholders and presentations may be made by the chambers and associations to all the 4 provincial assemblies of Pakistan and National Assembly including Senate. Some of the provisions of the VAT ACT are deceptive such as Section 23 about EXPORT OF GOODS.
To a lay man, it looks like as if exports are zero-rated, but for a person who can understand legal language, it says that on export of goods VAT would not be levied. Nowhere in the world, VAT is on exports even duty-free shops at all airports refund VAT once passenger is having boarding pass and passport.
Many other things like ancillary or incidental supplies need to be clarified. The authorities may avoid to try this adventure to impose VAT on zero-rating export sector. The first step is to defer this law for at least one year and remove all provision, which my open doors for corruption and malpractices. Lastly, the VAT will push inflation rate to sky-high and poor class will be further suppressed.
The rulers should avoid policies which may lead to bloody revolution and make our country unstable. The percentage of people, living below the poverty line, is increasing day by day and as a result, crime rate in the country is increasing to an alarming rate.
Instead of the VAT, it would be better to broaden our tax net to improve tax-to-GDP ratio. The present VAT ACT can also improve this ratio by reducing the GDP and increasing taxes, as will be result of present unthought draft.
(The writer is former Chairman of Pakistan Tanners Association)
Source: http://www.brecorder.com/index.php?id=1035826&currPageNo=1&query=&search=&term=&supDate=
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