ARTICLE (April 13 2010): The government of Pakistan has introduced Federal Value Added Tax Bill 2010 (VAT) in the Parliament, which will replace Sales Tax Act, 1990 from First of July 2010.The bill is under consideration and the Provincial VAT Bills have also been introduced in the provincial assemblies for imposition of value-added tax on services by the provinces, which will also be collected by the Federal Board of Revenue on behalf of the provinces.
The value-added tax will be imposed on sale of goods and on services @ 15 % unless the goods or services are exempted from VAT by including it in the First Schedule of the VAT Bill. The exempted goods are listed in the First Schedule of the VAT BILL, which are only 14 in numbers, including wheat and wheat flour, medicines, books etc Transportation services by railway, sea and air will remain federal services.
The five items, listed in the Second Schedule of the bill will be zero-rated like exports and others. The VAT paid on zero-rated supplies or services will be refundable to the exporter/supplier. The rate of VAT will be 15 % across the board in place of the present multiple rates of sales tax being collected, starting from 16 % and above. The VAT, paid on input purchases or services, will be deductable from the output VAT payable on taxable supplies.
Under Sales Tax Act 1990, the FBR has the power to grant exemptions from sales tax and also has arbitrary coercive powers, including the power to arrest and prosecute. It is the job of the Parliament to impose tax or to grant exemption from the tax imposed. However under the Sale tax Act not only the power to grant exemption was assumed by the FBR, but very arbitrary and coercive and otherwise unnecessary powers were also acquired by the FBR.
The FBR made generous use of the power to grant exemptions by issuing SRO/general orders/circulars resulting in a completely distorted sale tax law. On the other hand, arbitrary coercive powers, including arrest, were granted to the FBR under the Sale Tax Act, which have resulted only in creating massive avenues of corruption and were fully used by the FBR officials for making personal gains without raising any significant additional revenue.
As the things stand the Sales Tax Act does not generate the otherwise possible revenue, but is anti-development and it is responsible for massive corruption, therefore, the VAT Act is the requirement of time. But it is to be kept in mind that the VAT Bill 2010 under consideration has been basically drafted by the officers of FBR, therefore, the bill can fall victim to the inherent bureaucratic tendency to acquire power, which may or may not be necessary for the tax collection.
The perusal of the VAT Bill, 2010 leads to the understanding that while the bill under consideration has positive features, but it also grants too much power and discretion to the FBR officials, which will open floodgates of corruption and harassment without making any significant addition to revenue collection.
Just to explain this point that the VAT Bill is being used by the FBR to acquire unnecessary and even unconstitutional powers, reference is made to the two sections of the Vat Bill under consideration.
Section 72 of the bill grants arbitrary power to arrest anybody, not necessarily a tax defaulter, who in the opinion of the low-ranking officer of the FBR is suspected (just only suspected) of any offense or is believed to commit offence liable to prosecution. The arrest can be made even of a person against whom no tax demand is outstanding. It will be better to refer to the wording of section 72 of the Bill which reads as under;
"72. Arrest and prosecution: (1) An officer of Inland Revenue, not below the rank of an Assistant Commissioner Inland Revenue, after taking prior permission from the Board may arrest for prosecution, any person suspected or believed to have committed tax fraud or other offence liable to prosecution in accordance with the relevant provisions of the Code of Criminal Procedure, 1898 (Act V of 1898)
"(2) Where a person suspected or believed to have committed a tax fraud is a company, every director or officer of such company, suspected or believed to have been personally responsible for the commission of such tax fraud may be arrested and such arrest shall not absolve the company from any tax liability or other obligations under this Act and rules made there under;"
The section 72 of the VAT Bill quoted in the foregoing grants power to arrest anybody who may be suspected (just suspected) of commitment of an offence. The person to be arrested does not have to be a person against whom any tax is due or on whom any notice of default has been served or it has been established that the person has committed any tax fraud. All the directors and officers of the company are liable to be arrested and prosecuted. The person to be arrested can be anybody against whom there is mere suspicion in the mind of the officer of some supposed tax offence or just obstruction in official duty.
The power of arrest just on the basis of suspicion being granted to the FBR through section 72 of the VAT Bill as quoted above has been granted over and above other powers of penalty, attachment of goods, bank account seizure, sealing of the business premises , embargo on movement of goods , attachment and sale of fixed assets of the defaulters, recovery from others holding money of the defaulters and others powers granted under section 61 of the bill, which are more than sufficient to serve the purpose of tax collection. This power is being asked for by the FBR is only for promoting personal gains of the officers and will have no significant impact on revenue targets. Therefore, it is considered as not required.
Not only the power to arrest on the basis of mere suspicion but even the arrest of those against whom no tax is due from is beyond comprehension but the official can arrest even those persons who are not otherwise part of operation of the business. Like the lady director, who may be a director due to family ownership, but is a housewife taking no part in business, can also be arrested.
Not only that section 72 is highly un called for but in the Third Schedule to the VAT Bill, there are 7 different violations listed on account of which the person can be arrested which include such minor items like "obstructing the officer of Inland Revenue in the performance of his official duties". This is again very subjective and the taxpayer can be blamed on the basis of personal bias. If at all there is any obstruction to duty, the power to impose the penalty is already provided in the bill, which is appropriate but not the power to arrest.
It is the considered view of the majority that Section 72 of VAT Bill should be deleted and the power of arrest and prosecution by a special judge as also.
Provided in serial number (5)(ii)-(9)--(10)-(11)-(12)-(13)-and (15) of Third Schedule of the bill should be omitted, which otherwise will only bring harassment, but will not bring any significant generation of revenue.
Similarly, Section 87of the VAT Bill is not at all necessary and it is not included in any other tax law. Section 87 of the VAT Bill says that the remedies otherwise available under the law from the higher appellate forums are not applicable in the case of VAT Bill. It will be better to refer to the wording of section 87 of the Bill which reads as under;
"SECTION 87. Bar of suits, prosecution and other legal proceedings: (1) No suit shall be brought in any court, including the high court in its original 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, enquiry or 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."
On the one hand, the FBR wants unchecked power to arrest any person ,not necessarily a tax defaulter, on the basis of mere suspicion in the mind of a low-ranking official and, on the other, no person affected by the unjust action of the FBR official is allowed to approach the court or high court come what may. One is forced to ask is this a law to collect tax or is it a black law where any person merely on the basis of suspicion will be arrested and the action of the officer cannot be challenged in a normal court of law, high court or even supreme court.
It is a considered view that Section 87 should altogether be removed and under no circumstances, it should be allowed to be part of VAT Act as it is against the basic human fundamental rights and unconstitutional and grants freedom to act to the FBR official without any limit or law.
For the reason stated in the foregoing Section 72, dealing with the arrest and prosecution, section 87 may be deleted from the VAT Bill. Besides this, it is to be kept in mind that the VAT Bill is mostly a copy of Sales Tax Act 1990 and Section 61 of the VAT Bill, dealing with recovery of arrears of tax is a true copy of section 48 of Sales Tax ACT 1990. Section 61 of the VAT Bill for the recovery of arrears allows the official to collect the tax by withholding any money due from the FBR's other sections or any other person owing money to the defaulter, attaching the bank account, putting embargo on removal of production or goods, stopping clearance of goods by customs, attachment and sale of movable/immovable property, powers for the attachment of bank account and goods of the associated person of the defaulters. Under section 61 of the bill, the powers granted are too harsh. All these powers can be applied at one time and at once without giving any time notice to the taxpayer. Moreover, no distinction is made between admitted tax not paid or the disputed tax imposed by the department, which is a big injustice to the tax payer.
As per section 79(4) of the bill, it has been made compulsory for the Commissioner, Appeal, to decide the taxpayer's appeal in 90 days, therefore, it can be provided in section 61 that the recovery proceedings as provided in clause (c) to (h) of section 61 will become applicable only after the decision of the first appeal of the taxpayer. The powers u/s 61 are draconian and 30 days' notice time for payment and decision in the first appeal should be made a precondition for theses recovery actions to become applicable.
In a nutshell, it is suggested on the basis of field experience that section 87 of the bill is to be deleted and the power to arrest as given in section 67 as well as in Third Schedule of the bill is not at all required for tax target, but will open floodgates of corruption and harassment, therefore, section 87 and section 67 together with the word "that such person shall further be liable, upon conviction by a Special Judge, to imprisonment for a term, which may extend to five years, appearing seven times in the 3rd Schedule should be deleted. This change will have no affect on the working or efficiency of the bill in actual operation but will reduce corruption and harassment to a great extent.
Similarly, in order to make the bill acceptable to the business community without compromising its efficiency, it is also suggested that section 69(audit) may be reworded to provided for audit once in three years with 30-day notice time to the taxpayer before being subjected to any adverse action of hardship and the audit objection should be decided by the officer of the rank of Deputy Commissioner therefore, section 69 may read as under:-
"69. Audit by officer of Inland Revenue: (1) The officer of Inland Revenue, authorised in this behalf by the Board, may conduct audit, including forensic audit once in three years, of any registered person on giving at least 30 days advance notice.
"(2) Each of the audit observations of the officer of Inland Revenue shall be conveyed to the concerned registered person with at least 30 days time to reply and finalised by the Deputy Commissioner or an officer above on examining the viewpoint of such registered person."
As per prevailing economic condition of our country, audit should be conducted once in three years after giving 30 days' notice, but the audit objection should be finalised by the officer above the office conducting the audit after receiving the viewpoint of the taxpayer.
These proposals, if adapted, will reduce the level of corruption and harassment without compromising the ability and power of the bill to generate the potential revenue.
(The writer is Chief Consultant, Osmani & Afzal Associates.) oaa2000@hotmail.com and jitala@jitala.com
Source: http://www.brecorder.com/index.php?id=1043695&currPageNo=1&query=&search=&term=&supDate=
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