The harsh provisions of VAT bill

THE government intends to replace general sales tax by a broad-based value-added tax from July 1, bringing a number of goods and services into tax net. The VAT, a tool for documentation, will remove all exemptions except a few of food and medicine items and will restrict zero-rating to export only.

The extension of VAT to the retail stage is very critical. It makes small traders responsible to collect VAT from customers and deposit the tax so collected into the government treasury. Thus the VAT system will require retailers, firstly to be familiar with the whole VAT system and banking procedures and then maintain proper records/books and issue cash memo to every customer. All this presupposes literacy on the part of retailers. If retailers are brought into new VAT regime, the cost for documentation might not be feasible for them to comply..

The VAT law requires sellers to obtain CNIC/NTN numbers from buyers and mention them on the VAT invoice. This bothers many as to whether they will be carrying out their business activities or would collect data for tax authorities. A similar requirement was introduced through budget-2009-10 for suppliers of taxable goods to mention NTN/CNIC number on tax invoice under GST and Federal Excise Act 2005 but later this condition was withdrawn through amended Finance Act. This requirement in VAT law does not carry any sense.

The VAT law has proposed raising of GST threshold from current Rs5 million to Rs7.50 million and the VAT rate at 15 per cent for the entire supply chain. The higher registration threshold and VAT rate under existing tax culture would encourage under-reporting and tax evasion. Whether VAT would be charged on the actual transaction price or retail price needs to be defined.

The FBR has prepared VAT Implementation Action Plan 2010 containing six components agreed with World Bank Still there are outstanding issues viz (i) drafting of VAT rule (ii) designing of VAT formats covering the whole range of applications, declarations and statements etc; (iii) reviewing procedures and processes for VAT enforcement (iv) development of IT system for VAT regime (v) preparation of broachers, booklets, and manuals (vi) identification of solutions of organisation and staff issues (vii) preparation and launching of publicity campaign, staff/officers training and taxpayers education needed for the purpose.

Despite a host of outstanding issues, the FBR is in the process of implementing VAT in a haste without completing its homework just to meet the IMF conditionality which is a prerequisite for the release of the fourth tranche of $1.2 billion. Singapore took two years and India has phased out its VAT implementation for one year by April 2011 to complete the consultation process. It is correct that 152 countries have adopted VAT but our tax laws, tax machinery, and tax culture will not justify doing VAT in a haste.

The tax authority made presentation before Senate body which shows some commendable features of the VAT Act, 2010 such as withdrawal of powers of FBR to grant exemptions through SROs or special orders to any item or sector. Only the Parliament will have powers to that effect. Though it was explained that the FBR will bring big traders of agriculture products under VAT at the marketing level, but it is in contrast with the statement of

FBR Chairman saying that the agriculture sector would be exempt from VAT in view of constitutional immunity available to this sector.Thus there will be a VAT exemption.

The FBR claims that VAT would have slight inflationary impact which is disputable in view of the fact that it has estimated additional revenue of Rs500 billion to be generated through VAT. How would the revenue jump to this huge amount unless it is collected from the poor consumers on each and every item purchased by them? A simple calculation shows that increase in prices of all goods will be 15 per cent more. The purchasing power of the people has already been reduced and VAT will further burden the poor with high prices of goods/services, aggravating the economic crisis and affecting adversely the growth of economy.

Instead the government has the better choice of generating still more funds if it eradicates corruption. Besides it should concentrate on removing financial and procedural irregularities detected in FBR by the AGPR as per audit report 2007-08 to the tune of Rs101.054 billion, in both direct and indirect taxes. Several public enterprises have also been accused of misuse of funds and unauthorised expenditures and losses to the tune of billion of rupees. The government should initiate corrective measures against these enterprises to protect the taxpayers’ money.

The government proposes to fix the revenue collection target for 2010-11 at Rs1,711 billion. The tax target is tied with certain important assumptions mainly based on an outcome of VAT which is doubtful in view of its rejection by the entire business community.

Going by the blockage of the sales tax refunds, the business community has reasons to fear that the FBR would not ensure speedy refunds under VAT regime. Further, industrialists want that VAT should be implemented across the board on all sectors including the agriculture sector.

There are harsh provisions in the VAT Act such as the provision of forensic audit in addition to normal/special audit, which would give unlimited powers to tax officials to go to any extent for carrying out investigation against a registered unit. It provides that no suit shall be brought in any court to set aside or modify any order/assessment made of tax/penalty levied etc. This provision is against the Constitution. It has introduced other several new concepts e.g. ancillary or incidental supplies, open market price, recovery of defaulted amount of VAT from a son or any other relative of the registered person etc. Probably due to these reasons, the FBR has avoided to circulate the draft VAT laws among all the stakeholders and business community in particular and preferred backdoor diplomacy to give briefing to parliamentarian committees.

Keeping in view its own reservations, the Senate Standing Committee on Finance has rightly recommended to reduce VAT rate from 15 to 12.5 per cent and soften harsh provisions of the Act.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/the-harsh-provisions-of-vat-bill-540