ARTICLE (May 27 2010): Pakistan, a country dipped in all sort of debts (external, internal, aid, swaps, etc), a country facing vicious circle of poverty, inequitable income distribution, a country having risky environment of doing business, a country facing energy shortfall, a country having citizens frustrated over socio-economic problematic issues, and now another challenge is making its way to be fit in this system.
Consumers are to cope with already lingering inflation and are now compelled to welcome another form of inflation attached with new/proposed VAT system. The value-added tax (VAT) is a proportional tax paid on all sales and at each stage of the production process. A sudden rise in prices will be observed due to increased production cost.
What would happen at the end? Of course, the government will earn benefits and revenues at the cost of end-consumers' cut on consumption. It is true, the government has no means to generate revenue but taxes to stabilize the shaken economy. However, one must think, would this system be able to help generate revenue in true sense?
When the miserable people are forced to follow strict policies, it is equally possible that the people would be spying to evade taxation to reduce their burdens as already happens under the GST. Another reality is also obvious that cannot be refused and neglected that our economy is debt-ridden where the IMF and the World Bank are dictating us very sophistically and toning our economy according to their conditionalities.
Implementing authorities claim that the VAT associated inflation will not be more than 1% to 1.5%. To examine this statement, lets analyse the VAT's inflationary impact on those countries where it has been implemented and distressing the consumer.
In the United Kingdom, a developed country, a cut on the VAT from 17.5% to 15% was applied in December 2008 to ease the recessionary impact during financial crunch. Hence, the Consumer Price Index (CPI) was recorded at about 3% in January 2009, which was previously standing at 3.1% in December 2008, but as the government reverses the cut to 17.5% in January 2010, the UK inflation rate jumped to 3.5% in January 2010, to a 14-month high after a rise in the VAT as described by the Office of National Statistics and the Bank of England.
Similarly, one of the Southern African countries, Botswana, which is also renowned as a regional leader in economic freedom in Africa, has also experienced the same impact. The Central Statistics Office (CSO) reported that the annual CPI jumped to 7.1% in April 2010 from 6% due to the increase in the VAT rate from 10% to 12%.
As Federal Board of Revenue (FBR) has claimed that about Rs 150 billion would be collected in addition to sales tax collection. How this would happen? Let's analyse it, the GST applies on goods and some of service sector whereas the VAT will be applied on all goods and services (except some minor exemptions) throughout the production process - at each stage of production.
So what will happen? Production cost will be raised, and it might create an output gap, and upward pressure would be on tradable goods' prices. Overall consumption would decline, as the consumer's spendings are compelled to be discouraged. In addition to this, the VAT on all services sector, and usual price hike in oil and electricity would further increase the burden of end consumer.
The inflation rate as in April 2010 was risen by 13.26%, which could be risen further by the end of this fiscal year. After implementing the VAT, an addition of 1% to 1.5% to already existing inflation will be excessively high, because it would not be an addition rather a multiplicative impact. Now the FBR would be in ease to collect the additional amount of Rs 150 billion after levying tax on the pockets of already poor people of Pakistan, who have been facing the inequitable income distribution as well. Does the government think about those poverty-ridden people?
A long debate has already been held on the VAT. Assuming that everyone would have a plenty of knowledge in relation to its all dimensions - Its mechanism, implementation, calculation and compliances, now discussion should be extended. Addressing a legislative forum on the Federal Value Added Tax Bill 2010 on March 13, 2010, former FBR Chairman Abdullah Yousuf and Muslim League (N) leader Ishaq Dar have expressed serious concern over the VAT implementation.
The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has already been protesting over the VAT implementation. Experienced governmental and non-governmental professionals are demanding to the government to defer its implementation at least for one year. Response of public is also flamboyant that is not appreciating and positive.
One wonders, after all by whom it has been stressing to be implemented on urgent grounds. Even if the government has decided to implement the VAT from the start of coming fiscal year 2010-11 then it should have done groundwork through media and create awareness among the trading community about the VAT.
Once in October 2009, the FPCCI and other trade bodies revealed concurrence with the FBR-VAT team to levy the VAT at the retail stage, when it was decided to send teams of the FBR officers and other stakeholders to Thailand, India and South Africa for study of their VAT system and to share their experiences to make the development and implementation of the VAT possible enforcing from next fiscal year.
There are more than 150 traders' associations and chambers, and they are the main stakeholders whose concurrence is essential in implementing any business law, but the policy-making authorities, without taking them into confidence, have expressed their motive to implement the VAT.
To know the positives and negatives of the VAT and its impact on production and consumption, a thorough study should have been required with the consultation of all trade bodies, but a fear of losing sympathies of the IMF and its next tranche of $1.2 billion is making its implementation easier more than ever by our regulatory authorities.
No doubt we need sympathies of our donors and so the government should not be alleged in levying the VAT at this stage because the aid package offered by the IMF includes such type of structural adjustments through which they can assure the revenue generation properly. If the consultation process had have been started almost a year ago, the rigging which is observed now could be equivocated.
Concerned people have been sentient of the position that the VAT implementation can hamper the production, reduce the consumption, give sever inflationary impact and overall it undermines the growth. The protrusion of this issue would further widen the gap, therefore, to escape the situation; efforts should be made to bridge the distances between objections and implementation.
The VAT is not as much different from already existing taxation system of GST, which was converted into VAT mode in 1995-96 having characteristics of self-assessment, input tax credit facility, functional distribution and audit-based procedures, but its scope was limited to goods only. Gradually to increase the tax base, a minor share from service sector was included after the year 2000.
The FBR is highly ambitious to collect revenues up to Rs 1.63 trillion to Rs 1.65 trillion for 2010-11, which is currently standing at the target of Rs 1.38 trillion for 2009-10. Although it's a huge sum to collect yet it is not difficult with existing system if properly managed.
Keeping in view the flaws of existing system of collection like evasion from registration, documentation, and audit penalties, taxpayers' would take time to conform themselves with new system. Complications in achieving the huge target would definitely be faced. Would it not be better to continue with the existing system for the next year unless the people are made aware of new system?
It has been claimed that the VAT model from developing countries has been followed for Pakistan, but the picture presented in the VAT Act 2010 is even not similar to that of developed countries' model. A good-looking VAT Act, 2010 available on the FBR's website with cosmetic proposals need some revisions. There is only one VAT rate ie 15% and the schedules given for exempted and zero-rated supplies are not apprehended truly.
A consolidated list of zero-rated and exempted goods and services would help reducing the obstructions on the way of its implementation. Application of 15% VAT as standard rate will be a burden on taxpayers as 21% along with the inflationary impact on consumer side. The provision of 12.5% VAT rate as already proposed must be assured to win the confidence of public and trading bodies.
In United Kingdom, the VAT mechanism has been running smoothly with a standard rate of 17.5% and a reduced rate of 5%. These rates are not rigid but are subject to fluctuation in view of constrained economic conditions. The package of zero-rated goods include, food, stationary, children's clothing, drugs and medicines on prescription, domestic passenger transport, water and sewerage services, and some others whereas, domestic fuel and power, smoking cessation products, women's sanitary products, and energy saving products come under the cover of reduced rate.
However, private education, health services, postal services, finance and insurance, rent on domestic dwelling and commercial property are exempted from the VAT cover. But Pakistan's VAT Act is hanging between the models of developing and developed countries, by over toning of developed counties' features and least matching with developing countries' model.
The VAT is considered to be regressive tax where poor pay more as percentage of their income than that of rich. Countries already implementing Vat have reduced income tax on lower income class to compensate the burden of VAT on poor. Would it be possible for our government to give compensation packages to ease them? The issue is nothing but time, awareness can come through the passage of time and all apprehensions would be settled down with time. If implementing authorities are determined with this VAT ACT 2010, they must take into account the upcoming tribulations which could damage the foundation of our economy which has already been traumatising.
(The writer worked at Isaacs Accountants (a UK-based firm) as an Accountant, VAT calculation was one of my job duties. Now working in Planning Commission as Research Associate)
Source: http://www.brecorder.com/index.php?id=1061682&currPageNo=1&query=&search=&term=&supDate=
Thursday, May 27, 2010
Third South Asian capital markets moot: SAFE role in mobilising support of capital markets
ARTICLE (May 23 2010): The South Asian Federation of Exchanges (SAFE) - a representative organisation comprising mainly of the stock and commodity exchanges and other depository and clearing institutions of the South Asian region, held its flagship conference, "South Asian Capital Market Conference", at Mauritius from April 22 to 25, 2010.
The conference was organised on the theme of 'Expanding Asset Classes and Growth Opportunities in South Asia', which was aimed at modernising the Saarc capital markets, and for promoting the portfolio investments in the region. The conference was quite successful as it was not only well attended from a host of global and regional players, associated with the investment industry, but also from the perspective of a very large representation from the Pakistani capital market institutions.
Prominent personalities of Pakistan who attended the proceedings of the conference were; Dr Ishrat Husain, former Governor of State Bank of Pakistan; Zubyr Soomro, former country head of Citibank Pakistan; Zafar Shaikh, Director General of National Savings Directorate and the heads of other stock and commodity exchanges of Pakistan.
Similarly, the conference was also attended by many other important institutions from Bangladesh, Bhutan, India, Maldives, Nepal and Sri Lanka, such as the representatives from Chittagong and Dhaka stock exchanges, the Royal Securities Exchange of Bhutan, FT India related exchanges such MCX, MCX-SX, GBoT, Bourse Africa and the exchange domain systems, the Securities and Exchange Board of India, Nepal Stock Exchange, Capital Market Development Authority of Maldives, and the Securities and Exchange Commission of Sri Lanka etc.
As the focus of the conference was to present the region as an investment destination of choice for the global investors, therefore, the presence of a large number of Pakistani institutions and professionals enabled our country to showcase the strengths of our capital markets in a very meaningful and positive way. This led to quite an interest in the Pakistani markets from all those who attended the conference, including the global, African and Mauritius based companies and investment houses.
The role of Pakistan in the holding of this conference was critical as the permanent Secretariat of SAFE is located at Islamabad, which is being looked after by its dynamic Secretary General Aftab Ahmad Chaudhry, who is serving the federation on regular basis and is quite instrumental in mobilising the support of almost all important capital market entities of the country as well as that of the region.
Another factor for the success of the conference was that the chairmanship of the South Asian Federation of Exchanges was held by the Managing Director of Karachi Stock Exchange, Adnan Afridi, who is also a very articulate spokesman for the investment industry of Pakistan. Because of the presence of these two important offices of SAFE in Pakistan, there was a certain degree of interest and enthusiasm from the Pakistani contingent, which was assembled by the chairman and the SG of SAFE to represent our country at this important annual moot of SAFE.
It may be mentioned that the SAFE is a Saarc recognised body, which was accorded this status through the decision of the 27th Council of Ministers during December 2007. In line with the objectives of Saarc, the federation stands to promote regional harmonisation for all the stock and commodity markets of the area.
Founded in 2000 under the initiative of Chittagong Stock Exchange, the SAFE now comprises 17 stock and commodity exchanges, 5 clearing and depository institutions and one affiliate member. The secretariat of the federation was moved to and established on permanent basis at Islamabad, during 2005, and since then the Federation has grown from strength to strength.
The major objectives of the federation include the promotion of co-operation amongst the members in order to develop the respective capital markets and to work towards common standards for listing, trading, clearing, settlement and investors' protection and best business practices in the region's securities markets.
The agenda for promoting co-operation and development of the regional stock markets has also been under the consideration of the SAARC Secretariat for some time. In the recent past, the Saarc finance ministers during their second meeting held in New Delhi on September 15, 2007, had considered the recommendations of the Saarc Finance Secretaries and asked the Saarc Secretariat to look into the subject of 'the management of the stock exchange systems and regulation of the securities markets'.
Accordingly, Saarc Secretariat organised a Colloquium on this subject during April 21 to 22, 2008 at the SAARC Secretariat, Katmandu, Nepal, and prepared a report for the consideration of Inter-governmental Expert Group. In this report, the SAARC Secretariat stated that the colloquium had identified the matter of initiating a study for the codification of the differences in the securities laws and regulations in various member countries of the region.
The colloquium had also recommended that the study would reference the securities regulations of each of Saarc member countries with the international benchmark standards of G-30 recommendations and IOSCO principles. The colloquium had also recommended that subsequent to this exercise, the Saarc Secretariat may undertake the process of bringing in the necessary harmonisation of the securities laws and regulations in the region.
Besides this, the colloquium had also recommended that each country should develop their own Institutes of Capital Markets so as to develop the skills and know how of all those involved in the business of the securities markets of the respective countries, and then a regional institute may be set up for certifying qualifications from the member countries on uniform standards.
In this backdrop, while it is quite clear that the Saarc Secretariat had been instrumental in advocating an increase in co-operation between the stock markets of the region, however no fruitful results have been achieved so far on this front.
Furthermore, the regional regulators, who co-ordinate their efforts through the 'South Asian Securities Regulators Forum,' have also not decided on the 'things to do' items for the regional integration because of which the goal of achieving standardisation in the regional securities regulations has not been achieved. Side by side with this, the region has not seen the kind of liberalisation in the capital control policies which could have afforded the easy flow of portfolio investments within the region.
As progress on both of these factors is quite critical, therefore no meaningful progress can be achieved with regards to the opening of the economies of the region for facilitating the integration of the financial services industry of the SAARC union without the involvement of these two prime regulators of the financial services industries.
On the other hand, SAFE is slowly engaged in expanding the mutual and bilateral co-operation between the stock and commodity markets of the region as can be seen from the progress that it has achieved during the initial ten years of its progress.
During all these years, SAFE has grown from a handful of members to a total of 23 members today, has introduced a distinct regional index under the name of Dow Jones SAFE 100 index, has advocated and promoted the regional investments and has also come up with different models for the integration of our markets.
However, as all such efforts needed the blessings from both the Saarc Secretariat as well as the regional governments/regulators for the implementation of various initiatives, the lack of such support has obviously resulted in the wastage of efforts of SAFE as neither Saarc nor the regional governments/regulators have patronised and prioritised the initiatives promoted by SAFE.
One such example of the wastage of efforts of SAFE has been the lack of adoption of the study on 'the model listing standards for the region'. This study was conducted and finalised with the technical assistance from a World Bank affiliated donor agency to SAFE.); however, its non-adoption by the regional regulators underscores the point that more is needed to be done both by the Saarc Secretariat as well as the regional governments/regulators.
Until and unless the agenda of SAFE for the seedier integration of the region's capital markets is not supported by the regional governments and the Saarc Secretariat, no meaningful progress can be achieved by our policy makers. On the sidelines of a very successful conference, SAFE also held its annual executive committee as well as the general body meetings.
While part of the agenda for these meetings related to the appointment of the new office-bearers such as the chairman and the secretary general for the federation, however, during both of these meetings SAFE took a stock of its performance and achievements during the last ten year and approved plans for the next ten years during the short, medium and long term horizons.
SAFE aims to achieve certain short-term objectives till the end of December 2011, medium-term objectives by the end of December 2014, and long-term objectives by the end of December 2020. These objectives range from the creation of a distinct corporate identity for SAFE to the ultimate harmonisation/integration of our capital markets. Besides these objectives, SAFE also aims to get the apex body status of Saarc, and intends to align its efforts with the agenda of the Saarc heads of states meetings so as to get maximum support for its initiatives.
Considering the objectives of SAFE, it is highly recommended that the Government of Pakistan provides all out support to its initiatives so as to enable our country to reap maximum benefits from the presence of the SAFE's Secretariat in Pakistan as well as to promote the growth of our markets and the economy on the whole.
Given the political atmosphere and the situation of our region, the time period of next ten years for the integration of our capital markets may appear to be an ambitious target, but as long as SAFE continues to work with the same zeal and devotion, the goal may well be within its reach. All that is needed is the constant support of the Saarc Secretariat and the regional governments for the agenda of SAFE during the next ten years of our lives ahead.-PR
Source: http://www.brecorder.com/index.php?id=1060483&currPageNo=1&query=&search=&term=&supDate=
The conference was organised on the theme of 'Expanding Asset Classes and Growth Opportunities in South Asia', which was aimed at modernising the Saarc capital markets, and for promoting the portfolio investments in the region. The conference was quite successful as it was not only well attended from a host of global and regional players, associated with the investment industry, but also from the perspective of a very large representation from the Pakistani capital market institutions.
Prominent personalities of Pakistan who attended the proceedings of the conference were; Dr Ishrat Husain, former Governor of State Bank of Pakistan; Zubyr Soomro, former country head of Citibank Pakistan; Zafar Shaikh, Director General of National Savings Directorate and the heads of other stock and commodity exchanges of Pakistan.
Similarly, the conference was also attended by many other important institutions from Bangladesh, Bhutan, India, Maldives, Nepal and Sri Lanka, such as the representatives from Chittagong and Dhaka stock exchanges, the Royal Securities Exchange of Bhutan, FT India related exchanges such MCX, MCX-SX, GBoT, Bourse Africa and the exchange domain systems, the Securities and Exchange Board of India, Nepal Stock Exchange, Capital Market Development Authority of Maldives, and the Securities and Exchange Commission of Sri Lanka etc.
As the focus of the conference was to present the region as an investment destination of choice for the global investors, therefore, the presence of a large number of Pakistani institutions and professionals enabled our country to showcase the strengths of our capital markets in a very meaningful and positive way. This led to quite an interest in the Pakistani markets from all those who attended the conference, including the global, African and Mauritius based companies and investment houses.
The role of Pakistan in the holding of this conference was critical as the permanent Secretariat of SAFE is located at Islamabad, which is being looked after by its dynamic Secretary General Aftab Ahmad Chaudhry, who is serving the federation on regular basis and is quite instrumental in mobilising the support of almost all important capital market entities of the country as well as that of the region.
Another factor for the success of the conference was that the chairmanship of the South Asian Federation of Exchanges was held by the Managing Director of Karachi Stock Exchange, Adnan Afridi, who is also a very articulate spokesman for the investment industry of Pakistan. Because of the presence of these two important offices of SAFE in Pakistan, there was a certain degree of interest and enthusiasm from the Pakistani contingent, which was assembled by the chairman and the SG of SAFE to represent our country at this important annual moot of SAFE.
It may be mentioned that the SAFE is a Saarc recognised body, which was accorded this status through the decision of the 27th Council of Ministers during December 2007. In line with the objectives of Saarc, the federation stands to promote regional harmonisation for all the stock and commodity markets of the area.
Founded in 2000 under the initiative of Chittagong Stock Exchange, the SAFE now comprises 17 stock and commodity exchanges, 5 clearing and depository institutions and one affiliate member. The secretariat of the federation was moved to and established on permanent basis at Islamabad, during 2005, and since then the Federation has grown from strength to strength.
The major objectives of the federation include the promotion of co-operation amongst the members in order to develop the respective capital markets and to work towards common standards for listing, trading, clearing, settlement and investors' protection and best business practices in the region's securities markets.
The agenda for promoting co-operation and development of the regional stock markets has also been under the consideration of the SAARC Secretariat for some time. In the recent past, the Saarc finance ministers during their second meeting held in New Delhi on September 15, 2007, had considered the recommendations of the Saarc Finance Secretaries and asked the Saarc Secretariat to look into the subject of 'the management of the stock exchange systems and regulation of the securities markets'.
Accordingly, Saarc Secretariat organised a Colloquium on this subject during April 21 to 22, 2008 at the SAARC Secretariat, Katmandu, Nepal, and prepared a report for the consideration of Inter-governmental Expert Group. In this report, the SAARC Secretariat stated that the colloquium had identified the matter of initiating a study for the codification of the differences in the securities laws and regulations in various member countries of the region.
The colloquium had also recommended that the study would reference the securities regulations of each of Saarc member countries with the international benchmark standards of G-30 recommendations and IOSCO principles. The colloquium had also recommended that subsequent to this exercise, the Saarc Secretariat may undertake the process of bringing in the necessary harmonisation of the securities laws and regulations in the region.
Besides this, the colloquium had also recommended that each country should develop their own Institutes of Capital Markets so as to develop the skills and know how of all those involved in the business of the securities markets of the respective countries, and then a regional institute may be set up for certifying qualifications from the member countries on uniform standards.
In this backdrop, while it is quite clear that the Saarc Secretariat had been instrumental in advocating an increase in co-operation between the stock markets of the region, however no fruitful results have been achieved so far on this front.
Furthermore, the regional regulators, who co-ordinate their efforts through the 'South Asian Securities Regulators Forum,' have also not decided on the 'things to do' items for the regional integration because of which the goal of achieving standardisation in the regional securities regulations has not been achieved. Side by side with this, the region has not seen the kind of liberalisation in the capital control policies which could have afforded the easy flow of portfolio investments within the region.
As progress on both of these factors is quite critical, therefore no meaningful progress can be achieved with regards to the opening of the economies of the region for facilitating the integration of the financial services industry of the SAARC union without the involvement of these two prime regulators of the financial services industries.
On the other hand, SAFE is slowly engaged in expanding the mutual and bilateral co-operation between the stock and commodity markets of the region as can be seen from the progress that it has achieved during the initial ten years of its progress.
During all these years, SAFE has grown from a handful of members to a total of 23 members today, has introduced a distinct regional index under the name of Dow Jones SAFE 100 index, has advocated and promoted the regional investments and has also come up with different models for the integration of our markets.
However, as all such efforts needed the blessings from both the Saarc Secretariat as well as the regional governments/regulators for the implementation of various initiatives, the lack of such support has obviously resulted in the wastage of efforts of SAFE as neither Saarc nor the regional governments/regulators have patronised and prioritised the initiatives promoted by SAFE.
One such example of the wastage of efforts of SAFE has been the lack of adoption of the study on 'the model listing standards for the region'. This study was conducted and finalised with the technical assistance from a World Bank affiliated donor agency to SAFE.); however, its non-adoption by the regional regulators underscores the point that more is needed to be done both by the Saarc Secretariat as well as the regional governments/regulators.
Until and unless the agenda of SAFE for the seedier integration of the region's capital markets is not supported by the regional governments and the Saarc Secretariat, no meaningful progress can be achieved by our policy makers. On the sidelines of a very successful conference, SAFE also held its annual executive committee as well as the general body meetings.
While part of the agenda for these meetings related to the appointment of the new office-bearers such as the chairman and the secretary general for the federation, however, during both of these meetings SAFE took a stock of its performance and achievements during the last ten year and approved plans for the next ten years during the short, medium and long term horizons.
SAFE aims to achieve certain short-term objectives till the end of December 2011, medium-term objectives by the end of December 2014, and long-term objectives by the end of December 2020. These objectives range from the creation of a distinct corporate identity for SAFE to the ultimate harmonisation/integration of our capital markets. Besides these objectives, SAFE also aims to get the apex body status of Saarc, and intends to align its efforts with the agenda of the Saarc heads of states meetings so as to get maximum support for its initiatives.
Considering the objectives of SAFE, it is highly recommended that the Government of Pakistan provides all out support to its initiatives so as to enable our country to reap maximum benefits from the presence of the SAFE's Secretariat in Pakistan as well as to promote the growth of our markets and the economy on the whole.
Given the political atmosphere and the situation of our region, the time period of next ten years for the integration of our capital markets may appear to be an ambitious target, but as long as SAFE continues to work with the same zeal and devotion, the goal may well be within its reach. All that is needed is the constant support of the Saarc Secretariat and the regional governments for the agenda of SAFE during the next ten years of our lives ahead.-PR
Source: http://www.brecorder.com/index.php?id=1060483&currPageNo=1&query=&search=&term=&supDate=
Why privatise? By AHMAD WAQAS RIAZ
ARTICLE (May 23 2010): The general public has many misconceptions about the privatisation process. Most ordinary people have been misguided by political propaganda and believe that selling government owned enterprises is related to corruption and profiteering by members of the government.
In the past, except for the privatisation of the Pakistan Steel Mills, most have been reasonably successful and have ended in considerable profit to the national exchequer and in subsequent improvement of services provided by the privatised companies to the general public. However, there are lingering doubts about how above board many of those privatisation deals really were.
The most important attempt being made by the present democratic government is to ensure a completely transparent and above board privatisation process. In Pakistan we have an independent and proactive judiciary and a very free and independent media that serve as a watchdog over all official activity. It is, therefore, extremely unlikely that any future transactions can proceed in a secret manner that can benefit any individual in the government.
Before going further, it is important to say that not all state-owned enterprises can or even should be privatised. Those enterprises that are of national interest clearly fall into this category. Then there are some that should not be sold to private investors since they are of sufficient importance that allowing them to fail is not an option. This is an important downside of all private enterprise that must always be kept in mind. Private ventures can and do fail.
Keeping the above in mind, many state owned entities can, however, be privatised safely. It is, therefore, important for the public to understand the concept and the reasons behind privatisation. In a developing country, while the economy is growing, the government has to invest in many enterprises since the private sector is not developed enough to do so. More importantly, the infrastructure does not exist to attract foreign investment.
Once the infrastructure becomes available and the private sector is sufficiently mature, then many state owned enterprises could be turned over to the private sector or foreign investors that can run these enterprises much more efficiently and profitably. By selling off the state-owned enterprises, especially if the government maintains a certain part of ownership, the government reaps a considerable amount of financial benefit.
Besides the initial benefit to the national exchequer, privatisation has multiple secondary advantages. If the privatised enterprise works well then by itself it stimulates further economic activity, creates new jobs and pays more taxes. As economic activity grows in the private sector, foreign investment is attracted to the country with further increase in industrial and economic growth. All this increases the number of well paying jobs producing a wider tax base that further improves the government's tax revenues.
A hidden cost of even so-called successful public sector enterprises is that they are usually profitable because they are government monopolies and have no competition. As such, first, they provide their services and products at a much higher price to the people, especially if we include the money that the government spends on them. Second, they are much less profitable than private sector companies of the same type. This causes considerable indirect loss to the national exchequer even though the general public does not appreciate this loss.
One of the more important reasons to privatise many different enterprises, especially the ones not involved in providing basic services to the people is that in the present state of globalisation where both goods and services are freely available across national borders, only a vibrant and well-run private sector is capable of competing.
Government-run companies controlled by bureaucrats are not capable of growing and becoming more profitable when in direct competition with private enterprise. The major reason being that bureaucracies are by nature risk averse while successful businesses require re-investment and expansion that might seem risky to the public sector managers.
There is, however, one important fact that must be remembered. Businessmen are in business to make a profit. To expect them to buy state-owned ventures that are running in loss and then pump in private investment without the possibility of significant return on their investment is unreasonable. Perhaps, it might be in the national interest to devise privatisation schemes where profits from privatisation are reinvested in Pakistan and not taken out of the country.
Finally, there are two important things that need to be understood. The first one being that the socialist model of state-ownership of all means of production has been universally discredited. For this reason privatisation of former state owned enterprises is now the accepted paradigm all over the world. And in those countries where this is being done successfully, significant expansion and improvement of the national economy is visible, along with better work environment, increased employment, better services and larger government tax base.
The second thing that needs to be pointed out is that in a traditionally feudal and agrarian based economy like Pakistan, many ordinary people still think that wealth is a finite quantity and is related to ownership of land. This is no longer true in modern economies where wealth is being generated in many different sectors from manufacturing and service industries, from telecommunications and the energy sectors along with many other areas.
In summary, privatisation of many state owned-enterprises is a beneficial process, both for the national exchequer, the country and for the private sector. However, those state-owned entities that are important to national security or else are too vital in the public interest to be left to the vagaries of the free markets should not be privatised.
(The writer is a consultant with Privatisation Commission) (ahmadwriaz@hotmail.com)
Source: http://www.brecorder.com/index.php?id=1060477&currPageNo=1&query=&search=&term=&supDate=
In the past, except for the privatisation of the Pakistan Steel Mills, most have been reasonably successful and have ended in considerable profit to the national exchequer and in subsequent improvement of services provided by the privatised companies to the general public. However, there are lingering doubts about how above board many of those privatisation deals really were.
The most important attempt being made by the present democratic government is to ensure a completely transparent and above board privatisation process. In Pakistan we have an independent and proactive judiciary and a very free and independent media that serve as a watchdog over all official activity. It is, therefore, extremely unlikely that any future transactions can proceed in a secret manner that can benefit any individual in the government.
Before going further, it is important to say that not all state-owned enterprises can or even should be privatised. Those enterprises that are of national interest clearly fall into this category. Then there are some that should not be sold to private investors since they are of sufficient importance that allowing them to fail is not an option. This is an important downside of all private enterprise that must always be kept in mind. Private ventures can and do fail.
Keeping the above in mind, many state owned entities can, however, be privatised safely. It is, therefore, important for the public to understand the concept and the reasons behind privatisation. In a developing country, while the economy is growing, the government has to invest in many enterprises since the private sector is not developed enough to do so. More importantly, the infrastructure does not exist to attract foreign investment.
Once the infrastructure becomes available and the private sector is sufficiently mature, then many state owned enterprises could be turned over to the private sector or foreign investors that can run these enterprises much more efficiently and profitably. By selling off the state-owned enterprises, especially if the government maintains a certain part of ownership, the government reaps a considerable amount of financial benefit.
Besides the initial benefit to the national exchequer, privatisation has multiple secondary advantages. If the privatised enterprise works well then by itself it stimulates further economic activity, creates new jobs and pays more taxes. As economic activity grows in the private sector, foreign investment is attracted to the country with further increase in industrial and economic growth. All this increases the number of well paying jobs producing a wider tax base that further improves the government's tax revenues.
A hidden cost of even so-called successful public sector enterprises is that they are usually profitable because they are government monopolies and have no competition. As such, first, they provide their services and products at a much higher price to the people, especially if we include the money that the government spends on them. Second, they are much less profitable than private sector companies of the same type. This causes considerable indirect loss to the national exchequer even though the general public does not appreciate this loss.
One of the more important reasons to privatise many different enterprises, especially the ones not involved in providing basic services to the people is that in the present state of globalisation where both goods and services are freely available across national borders, only a vibrant and well-run private sector is capable of competing.
Government-run companies controlled by bureaucrats are not capable of growing and becoming more profitable when in direct competition with private enterprise. The major reason being that bureaucracies are by nature risk averse while successful businesses require re-investment and expansion that might seem risky to the public sector managers.
There is, however, one important fact that must be remembered. Businessmen are in business to make a profit. To expect them to buy state-owned ventures that are running in loss and then pump in private investment without the possibility of significant return on their investment is unreasonable. Perhaps, it might be in the national interest to devise privatisation schemes where profits from privatisation are reinvested in Pakistan and not taken out of the country.
Finally, there are two important things that need to be understood. The first one being that the socialist model of state-ownership of all means of production has been universally discredited. For this reason privatisation of former state owned enterprises is now the accepted paradigm all over the world. And in those countries where this is being done successfully, significant expansion and improvement of the national economy is visible, along with better work environment, increased employment, better services and larger government tax base.
The second thing that needs to be pointed out is that in a traditionally feudal and agrarian based economy like Pakistan, many ordinary people still think that wealth is a finite quantity and is related to ownership of land. This is no longer true in modern economies where wealth is being generated in many different sectors from manufacturing and service industries, from telecommunications and the energy sectors along with many other areas.
In summary, privatisation of many state owned-enterprises is a beneficial process, both for the national exchequer, the country and for the private sector. However, those state-owned entities that are important to national security or else are too vital in the public interest to be left to the vagaries of the free markets should not be privatised.
(The writer is a consultant with Privatisation Commission) (ahmadwriaz@hotmail.com)
Source: http://www.brecorder.com/index.php?id=1060477&currPageNo=1&query=&search=&term=&supDate=
Friday, May 21, 2010
Principal constraints in economy By DR ZAFAR ALTAF
ARTICLE (May 22 2010): As I look back over the years that I have served Pakistan in the public domain, I have concern for my country in many areas but principally in the areas of decision-making and in the area of financial resources and how there is misallocation and misapplication of resources. Gresham's law does come in play 'bad intentions drive out good intentions'.
One could go further and seek what happens when criminal intentions are furthered in the public domain. The philosophies of old have been forgotten and in its place something sinister is developing. There is something or everything wrong where reason and decisions at the highest level have been distorted and misapplied. Leibenstein's x-efficiency theories have now to be radically modified in light of new evidence that is emerging. The decision making has been further thwarted by the 'deforms' undertaken by the Musharraf regime.
The understanding at the grassroots level was and is what is required and the only way that can be achieved is by the involvement of the root level. The World Bank and other institutions have given us the concept of 'stakeholder[s]' and then they go on to do anything they deem fit, or the stakeholders are persons that do not have any stake and numbers are filled in.
When the decision-making is supposed to be independently done through the board of governors the constituent members are generally the secretaries drawn in from the many ministries of the government of Pakistan and all of them bring their own peculiar regressive attitudes to the decision-making process. The end result is chaos.
Policy-making decisions are admittedly more difficult in as much as the nature of our societal development makes the going even more difficult. Economics and the constituent subjects are not exact science and require a considerable amount of judgement. The entire process is not procedural but meaningless overtones, and ambitious statements that have no meaning have overtaken one that is complex in its substantive nature for the decision-making domain.
Economic decisions are rarely outside the social and political domain and have an impact that may or may not be intentions of the policy making political system. The dictator, working on limited requirement that generally meet the requirements of those that are essential to keep the tyrannical forces in power, is always limited. That is why I have been advocating that the law of forces has to be differently stated. The law should include that policy [s] should be for the many rather than the few.
No practical economic question has simple answer and none in the developing world that is not a zero sum game. There is never in real life any decision that can be taken unhesitatingly. Abstract reasoning and elementary principles do not contribute in our case and the bureaucracy sourly supports the people that have to take these decisions.
Intentional actions are attributed to the weakest link by the strongest link in the system-not strongest in terms of reason, but in terms of power - the last three dictators have thirty plus years to their credit and the distortions that have caused in the working ethics of the majority are far worse than what is given by Gresham's law. For the right or objective decisions and solutions, the facts have to be known and the gray areas have to be minimised and yet the opinion-oriented forces make all kinds of interventions that not only perverts, but pollutes the decision making process, the louder the voice in a meeting the worse the basis for the opinion[s].
In an economy that is as diverse as Pakistan's, the factual ascertaining is difficult to determine. The structured bureaucracy is under fire and panicked individuals guarding their positions are hardly likely to give correct assessments in factual terms. The scientific basis breaks down and the 'humane base emerges'.
A humane base that takes into consideration not some defunct thinking from the West but something that comes from the localised zones of this country that reverberates from and with the local communities. It is as if the internal decency seeks to implement a decision that is worthwhile. The decision-maker then has to give of himself rather than take for himself. The function of economic theory is not to give pat decisions and hope that they will be right. Rather, it is to lead the way to discussion and the modification of that theory by the practical realities that come our way. The conflict between the specialist [?] and the political decision-maker is almost always given.
The tyrannical powers have no such problems because they can rough ride any option by virtue of the 'saving the country' syndrome. We have been saved so often by these undergrads that every time they go, they leave the country in a bigger mess. Accidental actions and inconclusive reasoning will mean the correctness to implement will be dependent on variables that lead to the conclusion that correct solutions will only happen by accident rather than by intent.
The discipline that is being taught in the universities is hopelessly out of context is now understood. What is not understood is what to do about it. Are the principles given by the academics of the west absolute? The strength of this society was its community feeling and the ability to give rather than take. That ability has been lost because inherently it was acquired from the attitudes and family nurturing, the academics as such had very little to do with it. The use of a developed mind was far more important than the policies fed to us by the very institutions that should have been discarded long ago. The 'do-nothing' policy is a safe one especially if one has a job for a lifetime and the chance of risk-taking is to be eliminated.
The strength of character that was supposed to have been in the bureaucracy has ebbed away basically because of the tinkering that has taken place over the years. Men who took cudgels for society have been systematically eliminated. The 'do-nothing' policy absolves the policy-maker of any mistake that he may have made the negative absolves the bureaucrat and put to rest the specialist-generalist controversy. There is no controversy and the facts that govern each will be discussed subsequently. A librarian, who has not issued a single book, has never lost one and that is not a bad formula to follow if the internal system is not so organised as to be in the service of Pakistan.
In current times, the exclusion of those that were not part of the development process has assumed some alarming proportions. These proportions are such that the people involved in decision making will have to double and triple their efforts if the position is to be retrieved. Scoundrels that have misguided the economic situation are not the biggest patriots. What has this to do with decent and equitable development?
The legacy [s] of the immediate past still linger on and these can be devastating in the sense that they distort decision making in economic matters and the opportunity cost of these distortions can be disastrous for the country. How can then there be a coherent economic policy? Think about it. Get involved with the policy makers in the reasoning for the economy. It is not a waste of time; it will be worthwhile for the country. Try it. Lazy!!
Source: http://www.brecorder.com/index.php?id=1060156&currPageNo=1&query=&search=&term=&supDate=
One could go further and seek what happens when criminal intentions are furthered in the public domain. The philosophies of old have been forgotten and in its place something sinister is developing. There is something or everything wrong where reason and decisions at the highest level have been distorted and misapplied. Leibenstein's x-efficiency theories have now to be radically modified in light of new evidence that is emerging. The decision making has been further thwarted by the 'deforms' undertaken by the Musharraf regime.
The understanding at the grassroots level was and is what is required and the only way that can be achieved is by the involvement of the root level. The World Bank and other institutions have given us the concept of 'stakeholder[s]' and then they go on to do anything they deem fit, or the stakeholders are persons that do not have any stake and numbers are filled in.
When the decision-making is supposed to be independently done through the board of governors the constituent members are generally the secretaries drawn in from the many ministries of the government of Pakistan and all of them bring their own peculiar regressive attitudes to the decision-making process. The end result is chaos.
Policy-making decisions are admittedly more difficult in as much as the nature of our societal development makes the going even more difficult. Economics and the constituent subjects are not exact science and require a considerable amount of judgement. The entire process is not procedural but meaningless overtones, and ambitious statements that have no meaning have overtaken one that is complex in its substantive nature for the decision-making domain.
Economic decisions are rarely outside the social and political domain and have an impact that may or may not be intentions of the policy making political system. The dictator, working on limited requirement that generally meet the requirements of those that are essential to keep the tyrannical forces in power, is always limited. That is why I have been advocating that the law of forces has to be differently stated. The law should include that policy [s] should be for the many rather than the few.
No practical economic question has simple answer and none in the developing world that is not a zero sum game. There is never in real life any decision that can be taken unhesitatingly. Abstract reasoning and elementary principles do not contribute in our case and the bureaucracy sourly supports the people that have to take these decisions.
Intentional actions are attributed to the weakest link by the strongest link in the system-not strongest in terms of reason, but in terms of power - the last three dictators have thirty plus years to their credit and the distortions that have caused in the working ethics of the majority are far worse than what is given by Gresham's law. For the right or objective decisions and solutions, the facts have to be known and the gray areas have to be minimised and yet the opinion-oriented forces make all kinds of interventions that not only perverts, but pollutes the decision making process, the louder the voice in a meeting the worse the basis for the opinion[s].
In an economy that is as diverse as Pakistan's, the factual ascertaining is difficult to determine. The structured bureaucracy is under fire and panicked individuals guarding their positions are hardly likely to give correct assessments in factual terms. The scientific basis breaks down and the 'humane base emerges'.
A humane base that takes into consideration not some defunct thinking from the West but something that comes from the localised zones of this country that reverberates from and with the local communities. It is as if the internal decency seeks to implement a decision that is worthwhile. The decision-maker then has to give of himself rather than take for himself. The function of economic theory is not to give pat decisions and hope that they will be right. Rather, it is to lead the way to discussion and the modification of that theory by the practical realities that come our way. The conflict between the specialist [?] and the political decision-maker is almost always given.
The tyrannical powers have no such problems because they can rough ride any option by virtue of the 'saving the country' syndrome. We have been saved so often by these undergrads that every time they go, they leave the country in a bigger mess. Accidental actions and inconclusive reasoning will mean the correctness to implement will be dependent on variables that lead to the conclusion that correct solutions will only happen by accident rather than by intent.
The discipline that is being taught in the universities is hopelessly out of context is now understood. What is not understood is what to do about it. Are the principles given by the academics of the west absolute? The strength of this society was its community feeling and the ability to give rather than take. That ability has been lost because inherently it was acquired from the attitudes and family nurturing, the academics as such had very little to do with it. The use of a developed mind was far more important than the policies fed to us by the very institutions that should have been discarded long ago. The 'do-nothing' policy is a safe one especially if one has a job for a lifetime and the chance of risk-taking is to be eliminated.
The strength of character that was supposed to have been in the bureaucracy has ebbed away basically because of the tinkering that has taken place over the years. Men who took cudgels for society have been systematically eliminated. The 'do-nothing' policy absolves the policy-maker of any mistake that he may have made the negative absolves the bureaucrat and put to rest the specialist-generalist controversy. There is no controversy and the facts that govern each will be discussed subsequently. A librarian, who has not issued a single book, has never lost one and that is not a bad formula to follow if the internal system is not so organised as to be in the service of Pakistan.
In current times, the exclusion of those that were not part of the development process has assumed some alarming proportions. These proportions are such that the people involved in decision making will have to double and triple their efforts if the position is to be retrieved. Scoundrels that have misguided the economic situation are not the biggest patriots. What has this to do with decent and equitable development?
The legacy [s] of the immediate past still linger on and these can be devastating in the sense that they distort decision making in economic matters and the opportunity cost of these distortions can be disastrous for the country. How can then there be a coherent economic policy? Think about it. Get involved with the policy makers in the reasoning for the economy. It is not a waste of time; it will be worthwhile for the country. Try it. Lazy!!
Source: http://www.brecorder.com/index.php?id=1060156&currPageNo=1&query=&search=&term=&supDate=
Coming out of 'debt prison' By HUZAIMA BUKHARI AND DR IKRAMUL HAQ
ARTICLE (May 21 2010): Value-Added Tax (VAT), even if imposed from July 1, 2010 and successfully implemented - there exist serious apprehensions about it - will not help us to break free from the 'debt prison' in which we are incarcerated. With the new tranche (US $1.13 billion) from International Monetary Fund (IMF), received on May 18, 2010, our total external debt has now touched the monstrous figure of US $55 billion.
Pakistan represents a classical example of "debt enslavement" in modern history - a nuclear state totally muzzled by foreign powers through the mechanism of economic subjugation.
According to the IMF estimates, our total external debt is to reach nearly $75 billion in 2015 from $57.1 billion by the end of the current fiscal year. It is estimated to increase by $7 billion or 12.3 percent to $64 billion by the end of the next fiscal year. These estimates suggest that the external debt will increase by another $2 billion in 2012 and cross the $74 billion-mark in 2015.
Pakistan caught in a deadly debt trap - burgeoning external loans of $55 billion and domestic debt of nearly Rs 5 trillion - is still begging for more, more and more money, not to invest for future betterment, but merely to meet its day to day requirements. Because of this vicious circle, where one has to borrow to meet debt servicing commitments, there remains little hope to come out of debt enslavement in the near future. There are no signs yet for the civil-military bureaucracy and public office-holders to stop squandering taxpayers' money, foreign funds, wasting public funds and plundering national wealth.
Pakistan represents a state where a trio of corrupt civil-military bureaucrats, crooked politicians and profit-hungry businessmen is very affluent, but the government is on the brink of bankruptcy. This state of affairs is the direct outcome of the state's policies that allow a free hand to forces of loot, corruption and terrorism. No other state in the world has undergone such a horrible experience.
Clearly, Pakistani rulers have destroyed the state through corruption and incompetence. Unfortunately, foreign-trained Pakistani economists are merely engaged in defending and serving their masters, instead of advising the concerned quarters to enforce financial discipline and better financial management.
It is an undisputed fact that conditions imposed by the IMF and other donors have aggravated the inequalities of income and wealth in Pakistan and resulted in more unemployment. These have caused more harm to us than doing anything really productive.
The rationale of seeking more and more loans for curing evils caused by the mounting debt itself is simply beyond comprehension. It is high time that we stop taking fresh loans. We must mobilise all our resources - our tax revenue potential alone is not less than Rs 4 trillion. If we manage to generate these resources, we will be able to meet not only our current and development expenditure but also pay off all the external loans within a span of five to ten years.
The continuous failure to tap actual tax potential has forced the country to rely more and more on external and internal borrowings. The persistence of large fiscal deficits, among other reasons, is one of the primary causes for the rising indebtedness and the major source of macroeconomic imbalances over the last four decades.
This year fiscal deficit will be more than Rs 800 billion. Our existing economic policy is the rootcause of all ills. Instead of aiming at growth, social welfare and employment generation, it is creating recession and income disparities through oppressive tax measures like VAT.
It is an admitted official position that despite resorting to all kinds of highhandedness, illogical policies and unjust indirect taxes, the Federal Board of Revenue (FBR), even after spending huge borrowed funds, has failed to improve the tax-to-GDP ratio. In 2008-09, it was just 8.8%. In 1991, our fiscal deficit was merely Rs 80 billion.
In fiscal year 2008-09, it crossed the figure of Rs 600 billion proving beyond any doubt that irrational taxes failed to avert fiscal disaster. To be more precise, it has pushed us on the verge of total economic collapse. Irrational tax measures have always played a decisive role in destroying civic society, paving the way for anarchy and economic retardation.
In 2004, the FBR promised 0.2 percent per annum growth in the tax-to-GDP ratio for the next five years while submitting 'tax projections' and 'revenue-to-GDP ratio' to the IMF on the conclusion of 9th review by the Fund under the Poverty Reduction Growth Facility (PRGF).The FBR informed the IMF that it would increase tax-to-GDP ratio from 9.2 percent to 10.3 percent in 2008-09. Interestingly, in 2008-2009 instead of improvement, there was a sharp decline!
It is a sad but incontrovertible fact that even the World Bank-IMF funding and "guidance" has failed to bring desired results and the FBR remains the inefficient and corrupt body. The failure of collecting taxes where due has culminated in the prevailing pathetic state of affairs: debt burden is increasing monstrously, fiscal deficit is now out of control, inflation is crushing the poor, taxes are evaded and avoided by the rich and whatsoever is collected is mercilessly wasted by those who matter in the land.
What a tragedy that the rich and the mighty not only evade taxes, but also thrive at the taxpayers' expense. They are the de facto beneficiaries of all the State's resources - generated mainly by the suppressed landless tillers and over-worked industrial labourers. The state's kitty is empty because of unwillingness of the rich to pay taxes, collossal wastage of taxpayers' money by the rulers and non-exploitation of natural resources.
The absentee landlords - they include mighty generals and bureaucrats who have been allotted state lands under one pretext or the other during the last many decades - have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people alliance of trio of indomitable civil-military bureaucrats, corrupt and inefficient politicians and greedy businessmen - controlling and enjoying at least 90% of the state resources - contribute below 2% towards national revenue collection.
The armies of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) are not willing to cut down their perquisites and privileges. They are not prepared to live like the common man. The government should monetize their perks and privileges.
It will save billions of rupees of the taxpayers. Like other citizens, they should travel by public transport and send their children to government schools. Soon they will improve after experiencing their pathetic conditions. Unless the ruling classes are deprived of their luxurious life nothing will change. They resist change because they are the beneficiaries of the present exploitative system. Change will only take place once these benefits are withdrawn.
The existing exploitative tax system is rapidly widening the divide between the rich and the poor. Sole stress on regressive indirect taxes [even under the garb of direct taxation through presumptive tax regime on goods and services] without evaluating its impact on the economy and lives of poor masses and lack of political will to tax the rich and the mighty, remains our dilemma.
There is no scarcity of resources. Even the propaganda about narrow tax base is malicious only to conceal their own inefficiency and corruption. People are paying exorbitant sales tax of 16% [its real impact on imported goods is over 35% after taking into consideration compulsory value addition and income tax at source etc). There is excise duty on goods and services.
Poor people are subjected to host of taxes, but rich and might pay no tax on enormous wealth and income under one pretext or the other. Their wealth keeps on increasing by way of loan write offs, rent-seeking and price hikes (they snatch money from the poor by selling even flour and sugar at rates they choose). They even do not pay taxes on these windfall gains!
Equity demands higher taxes from those, who have higher income and wealth, but in Pakistan gradually all the progressives taxes like, estate duty, gift tax, capital gain tax and wealth tax were abolished decreasing tax burden on the rich. These were replaced with indirect taxes shifting incidence on the poor.
The entire debate about low tax-to-GDP ratio misses the point that it is direct tax-to-GDP ratio that is pathetically low at 3% and has decreased substantially over the period of time. The agriculture sector, having 22% share in the GDP, contributes just 1% towards direct taxes.
This means it should be taken out of the GDP to calculate the tax-to-GDP ratio. If we do so the current tax-to-GDP ratio will be around 15%. Why does the FBR hide this fact from the people? Obviously, the landed aristocracy is its master and servants have to look after the interests of the master. This confirms why the VAT is being advocated and personal taxation of the landed classes ignored. The government is using the VAT as smokescreen to hide the crime it is committing by not taxing the rich and mighty.
If the following measures are taken our tax-to-GDP ratio will go up 20% in one year:
-- Absentee landlords and so-called pirs should be taxed heavily as they earn millions by exploiting landless tillers and mureeds
-- Capital gains arising from movable and immovable assets should be taxed
-- Assets created out of untaxed money should be confiscated and sold through public auction by the FBR
-- All kinds of tax exemptions and tax amnesty schemes should be withdrawn at once
-- Provisions facilitating whitening of black money eg section 111(4) of the Income Tax Ordinance, 2001 should be abolished forthwith
-- Progressive taxes eg wealth tax, estate duty, gift tax etc should be re-introduced
-- Stringent measures should be taken to counter tax evasion, corruption, money laundering and rent-seeking.
We can easily generate taxes of Rs 4 trillion if above measures are taken. The government can easily meet all the current and development expenditure and there will be no need to borrow funds. At the same time we need to boost the economic activity by accelerating industrialisation. Once the government starts spending taxes for the benefit of the poor and needy, people will start paying taxes diligently.
The dire need in today's Pakistan is rapid economic growth, coupled with reducing inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means that can be adopted for achieving these ends as has been done in many democratic countries.
For socio-economic justice and economic development, the government, through tax policies, must discourage certain activities, which are considered undesirable, for example, heavy duties on liquor (remove prohibition which is just an eyewash as the commodity is freely available everywhere), tobacco and special levies on luxury and semi-luxury goods. Such measures act as deterrents in avoiding a spillover of these items that create disturbance in the society as a consequence.
For achieving the cherished goal of establishing an egalitarian welfare state, a leadership is needed that can tax the privileged classes and vested interests (mafias is the better word). They are the culprits who, by amassing immense wealth control the organs of state and exploit the masses. Not only they do not pay personal taxes, but are beneficiaries of taxpayers' money and huge loans write-offs. They are guilty of plundering and wasting national wealth generated by common people.
The rulers have become so callous that the people living under the poverty line are also subjected to tax on the purchase of salt, being sold under brand names but people who have wealth of billions of rupees are leading tax-free lives. In the coming VAT, more and more goods and services - consumed by the poor - will be taxed.
But no tax will be levied on enormous wealth possessed by the ruling elite. People are dying of hunger, abandoning and selling their children but the President, Prime Minister, Governors, Chief Ministers, the army of ministers, state ministers and their lackeys in bureaucracy are wasting millions on personal comfort and "security", lunches, dinners and foreign visits. Improving tax-to-GDP ratio through the VAT is a hoax. It is a ploy of ruling elite to divert the attention of the masses from the real issue. The real issue is how to break the shackles of economic subjugation, come out of the "debt prison" and make Pakistan a truly democratic welfare state.
The so-called experts, hired by the FBR on the recommendation of foreign donors, can never be our savious. They want continuation of the existing exploitative system. We need to tax the rich and mighty, generate sufficient resources and spend them for the welfare of society and not for the few chosen ones.
(The writers, tax lawyers and authors of many books, are visiting professors at the Lahore University of Management Sciences.)
Source: http://www.brecorder.com/index.php?id=1059809&currPageNo=1&query=&search=&term=&supDate=
Pakistan represents a classical example of "debt enslavement" in modern history - a nuclear state totally muzzled by foreign powers through the mechanism of economic subjugation.
According to the IMF estimates, our total external debt is to reach nearly $75 billion in 2015 from $57.1 billion by the end of the current fiscal year. It is estimated to increase by $7 billion or 12.3 percent to $64 billion by the end of the next fiscal year. These estimates suggest that the external debt will increase by another $2 billion in 2012 and cross the $74 billion-mark in 2015.
Pakistan caught in a deadly debt trap - burgeoning external loans of $55 billion and domestic debt of nearly Rs 5 trillion - is still begging for more, more and more money, not to invest for future betterment, but merely to meet its day to day requirements. Because of this vicious circle, where one has to borrow to meet debt servicing commitments, there remains little hope to come out of debt enslavement in the near future. There are no signs yet for the civil-military bureaucracy and public office-holders to stop squandering taxpayers' money, foreign funds, wasting public funds and plundering national wealth.
Pakistan represents a state where a trio of corrupt civil-military bureaucrats, crooked politicians and profit-hungry businessmen is very affluent, but the government is on the brink of bankruptcy. This state of affairs is the direct outcome of the state's policies that allow a free hand to forces of loot, corruption and terrorism. No other state in the world has undergone such a horrible experience.
Clearly, Pakistani rulers have destroyed the state through corruption and incompetence. Unfortunately, foreign-trained Pakistani economists are merely engaged in defending and serving their masters, instead of advising the concerned quarters to enforce financial discipline and better financial management.
It is an undisputed fact that conditions imposed by the IMF and other donors have aggravated the inequalities of income and wealth in Pakistan and resulted in more unemployment. These have caused more harm to us than doing anything really productive.
The rationale of seeking more and more loans for curing evils caused by the mounting debt itself is simply beyond comprehension. It is high time that we stop taking fresh loans. We must mobilise all our resources - our tax revenue potential alone is not less than Rs 4 trillion. If we manage to generate these resources, we will be able to meet not only our current and development expenditure but also pay off all the external loans within a span of five to ten years.
The continuous failure to tap actual tax potential has forced the country to rely more and more on external and internal borrowings. The persistence of large fiscal deficits, among other reasons, is one of the primary causes for the rising indebtedness and the major source of macroeconomic imbalances over the last four decades.
This year fiscal deficit will be more than Rs 800 billion. Our existing economic policy is the rootcause of all ills. Instead of aiming at growth, social welfare and employment generation, it is creating recession and income disparities through oppressive tax measures like VAT.
It is an admitted official position that despite resorting to all kinds of highhandedness, illogical policies and unjust indirect taxes, the Federal Board of Revenue (FBR), even after spending huge borrowed funds, has failed to improve the tax-to-GDP ratio. In 2008-09, it was just 8.8%. In 1991, our fiscal deficit was merely Rs 80 billion.
In fiscal year 2008-09, it crossed the figure of Rs 600 billion proving beyond any doubt that irrational taxes failed to avert fiscal disaster. To be more precise, it has pushed us on the verge of total economic collapse. Irrational tax measures have always played a decisive role in destroying civic society, paving the way for anarchy and economic retardation.
In 2004, the FBR promised 0.2 percent per annum growth in the tax-to-GDP ratio for the next five years while submitting 'tax projections' and 'revenue-to-GDP ratio' to the IMF on the conclusion of 9th review by the Fund under the Poverty Reduction Growth Facility (PRGF).The FBR informed the IMF that it would increase tax-to-GDP ratio from 9.2 percent to 10.3 percent in 2008-09. Interestingly, in 2008-2009 instead of improvement, there was a sharp decline!
It is a sad but incontrovertible fact that even the World Bank-IMF funding and "guidance" has failed to bring desired results and the FBR remains the inefficient and corrupt body. The failure of collecting taxes where due has culminated in the prevailing pathetic state of affairs: debt burden is increasing monstrously, fiscal deficit is now out of control, inflation is crushing the poor, taxes are evaded and avoided by the rich and whatsoever is collected is mercilessly wasted by those who matter in the land.
What a tragedy that the rich and the mighty not only evade taxes, but also thrive at the taxpayers' expense. They are the de facto beneficiaries of all the State's resources - generated mainly by the suppressed landless tillers and over-worked industrial labourers. The state's kitty is empty because of unwillingness of the rich to pay taxes, collossal wastage of taxpayers' money by the rulers and non-exploitation of natural resources.
The absentee landlords - they include mighty generals and bureaucrats who have been allotted state lands under one pretext or the other during the last many decades - have been resisting proper personal taxation on their enormous income and wealth. An unholy anti-people alliance of trio of indomitable civil-military bureaucrats, corrupt and inefficient politicians and greedy businessmen - controlling and enjoying at least 90% of the state resources - contribute below 2% towards national revenue collection.
The armies of ministers, state ministers, advisers, consultants, high-ranking government servants (sic) are not willing to cut down their perquisites and privileges. They are not prepared to live like the common man. The government should monetize their perks and privileges.
It will save billions of rupees of the taxpayers. Like other citizens, they should travel by public transport and send their children to government schools. Soon they will improve after experiencing their pathetic conditions. Unless the ruling classes are deprived of their luxurious life nothing will change. They resist change because they are the beneficiaries of the present exploitative system. Change will only take place once these benefits are withdrawn.
The existing exploitative tax system is rapidly widening the divide between the rich and the poor. Sole stress on regressive indirect taxes [even under the garb of direct taxation through presumptive tax regime on goods and services] without evaluating its impact on the economy and lives of poor masses and lack of political will to tax the rich and the mighty, remains our dilemma.
There is no scarcity of resources. Even the propaganda about narrow tax base is malicious only to conceal their own inefficiency and corruption. People are paying exorbitant sales tax of 16% [its real impact on imported goods is over 35% after taking into consideration compulsory value addition and income tax at source etc). There is excise duty on goods and services.
Poor people are subjected to host of taxes, but rich and might pay no tax on enormous wealth and income under one pretext or the other. Their wealth keeps on increasing by way of loan write offs, rent-seeking and price hikes (they snatch money from the poor by selling even flour and sugar at rates they choose). They even do not pay taxes on these windfall gains!
Equity demands higher taxes from those, who have higher income and wealth, but in Pakistan gradually all the progressives taxes like, estate duty, gift tax, capital gain tax and wealth tax were abolished decreasing tax burden on the rich. These were replaced with indirect taxes shifting incidence on the poor.
The entire debate about low tax-to-GDP ratio misses the point that it is direct tax-to-GDP ratio that is pathetically low at 3% and has decreased substantially over the period of time. The agriculture sector, having 22% share in the GDP, contributes just 1% towards direct taxes.
This means it should be taken out of the GDP to calculate the tax-to-GDP ratio. If we do so the current tax-to-GDP ratio will be around 15%. Why does the FBR hide this fact from the people? Obviously, the landed aristocracy is its master and servants have to look after the interests of the master. This confirms why the VAT is being advocated and personal taxation of the landed classes ignored. The government is using the VAT as smokescreen to hide the crime it is committing by not taxing the rich and mighty.
If the following measures are taken our tax-to-GDP ratio will go up 20% in one year:
-- Absentee landlords and so-called pirs should be taxed heavily as they earn millions by exploiting landless tillers and mureeds
-- Capital gains arising from movable and immovable assets should be taxed
-- Assets created out of untaxed money should be confiscated and sold through public auction by the FBR
-- All kinds of tax exemptions and tax amnesty schemes should be withdrawn at once
-- Provisions facilitating whitening of black money eg section 111(4) of the Income Tax Ordinance, 2001 should be abolished forthwith
-- Progressive taxes eg wealth tax, estate duty, gift tax etc should be re-introduced
-- Stringent measures should be taken to counter tax evasion, corruption, money laundering and rent-seeking.
We can easily generate taxes of Rs 4 trillion if above measures are taken. The government can easily meet all the current and development expenditure and there will be no need to borrow funds. At the same time we need to boost the economic activity by accelerating industrialisation. Once the government starts spending taxes for the benefit of the poor and needy, people will start paying taxes diligently.
The dire need in today's Pakistan is rapid economic growth, coupled with reducing inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means that can be adopted for achieving these ends as has been done in many democratic countries.
For socio-economic justice and economic development, the government, through tax policies, must discourage certain activities, which are considered undesirable, for example, heavy duties on liquor (remove prohibition which is just an eyewash as the commodity is freely available everywhere), tobacco and special levies on luxury and semi-luxury goods. Such measures act as deterrents in avoiding a spillover of these items that create disturbance in the society as a consequence.
For achieving the cherished goal of establishing an egalitarian welfare state, a leadership is needed that can tax the privileged classes and vested interests (mafias is the better word). They are the culprits who, by amassing immense wealth control the organs of state and exploit the masses. Not only they do not pay personal taxes, but are beneficiaries of taxpayers' money and huge loans write-offs. They are guilty of plundering and wasting national wealth generated by common people.
The rulers have become so callous that the people living under the poverty line are also subjected to tax on the purchase of salt, being sold under brand names but people who have wealth of billions of rupees are leading tax-free lives. In the coming VAT, more and more goods and services - consumed by the poor - will be taxed.
But no tax will be levied on enormous wealth possessed by the ruling elite. People are dying of hunger, abandoning and selling their children but the President, Prime Minister, Governors, Chief Ministers, the army of ministers, state ministers and their lackeys in bureaucracy are wasting millions on personal comfort and "security", lunches, dinners and foreign visits. Improving tax-to-GDP ratio through the VAT is a hoax. It is a ploy of ruling elite to divert the attention of the masses from the real issue. The real issue is how to break the shackles of economic subjugation, come out of the "debt prison" and make Pakistan a truly democratic welfare state.
The so-called experts, hired by the FBR on the recommendation of foreign donors, can never be our savious. They want continuation of the existing exploitative system. We need to tax the rich and mighty, generate sufficient resources and spend them for the welfare of society and not for the few chosen ones.
(The writers, tax lawyers and authors of many books, are visiting professors at the Lahore University of Management Sciences.)
Source: http://www.brecorder.com/index.php?id=1059809&currPageNo=1&query=&search=&term=&supDate=
VAT to affect SMEs By ENGINEER HUSSAIN AHMAD SIDDIQUI
ARTICLE (May 20 2010): Yet another structural weakness of the Small and Medium Enterprises (SMEs) sector has come to light, as it is reported that the exporters have recently suffered huge financial losses at the hands of overseas buyers of their products in countries like Bangladesh, the US and Canada.
Despite shipments having made against letters of credit, and supplies done in accordance with the purchase orders, the buyers, in many cases, would obtain stay orders from the courts against remittances of proceeds, on one pretext or the other. Thus, not only the payments are withheld for long, the Pakistani sellers are also forced to allow significant price discounts at that time, to settle the issue.
This may be one-sided story. But the fact remains that the SMEs in Pakistan, which contribute about USD 2 billion to annual exports, lack business support mechanism and financial management, and resultantly, their interests are compromised. There are over three million business houses, including 500,000 manufacturing units, with 30 percent share in the GDP and accounting for 25 percent of exports of manufactured goods.
Like most of the developing countries, the SMEs sector in Pakistan too is the mainstay of the national economy. It plays a catalytic role in low-cost employment generation, poverty alleviation and economic development. Efforts have been made in recent past to invigorate and promote the SMEs' sector aiming at exploiting its optimum potential.
Nonetheless, the progress is slow and a lot more is desired to be done, primarily by the government. The chronology of events is reflective of the situation. It was in 1998 that the potential of the SMEs for economic growth was recognised and the Small and Medium Enterprises Development Authority (SMEDA) was created in October. But it was not before January 2004 that drafting an SME policy was entrusted to the SME task force.
Finally, the SME Policy was approved by the government after a lapse of another three years-in January 2007. The Smeda, mandated to developing the SMEs through serving as key resource base and facilitating necessary support services, has done significant work during the last 12 years, particularly in developing human resources and devising marketing strategy.
But it has not been successful in achieving desired agenda, targets and objectives, in spite of support of international agencies such as Asian Development Bank (ADB), UN Industrial Development Organisation (UNIDO) and Asian Productivity Organisation (APO). These agencies and industrialised countries like Germany and Japan are supporting programmes of the SME projects, products and processes through transfer of technology arrangements.
In the absence of overall enabling environment, the sector could not show the requisite dynamism. In recent years, acute energy shortages, adverse security concerns and periodic spiral increases of the POL, gas and electricity have caused generation of low production at high cost, adding to the sector's sufferings.
The imposition of value-added tax (VAT) will adversely affect development of the SMEs. Currently, a small fraction of the SMEs are exporters, whereas the SMEs, which remain a driving force behind many innovations, have ability to expand markets abroad.
There are 16 on-going projects under the umbrella of the SMEDA. Funds for launching another 16 approved projects, however, could not be launched due to paucity of funds and may be undertaken now under public-private partnership programme. A critical component for growth of the sector is specialised credit financing to cater to the needs of the SMEs, which has not yet been promoted effectively, and lack of provision of adequate and timely long-term credit facility is an impediment.
Initially, in February 1999, it was decided to focus ten sub-sectors, namely information technology, light engineering, sports, fisheries, transport, fruits & vegetable processing, marble & granite, gems & jewellery, horticulture and pharmaceutical products. Khushali Bank was created and the small-credit regional bank was converted into SME Bank in 2002. The State Bank of Pakistan presented a roadmap to the commercial banks in May 2005.
The SME Business Support Fund was created in 2006 for enhancement of competitiveness and profitability. Still some 78% SMEs do not have access to credit from the formal sector, as the banks consider it a high-risk area for extending credit facilities, besides other factors and constraints that have hampered the SMEs growth. The SMEs financing of banks, which was PKR 437 billion in December 2007 has drastically declined to PKR 348 billion in December 2009. Likewise, the share of the SMEs financing in total banks' financing has also been reduced from 16.2% to present 10%.
It is heartening that the State Bank of Pakistan has recently announced developing a multi-dimensional strategy for the SMEs financing. It will arrange international resources, including that of the World Bank and the USAID, to meet the requirements of capital forr developing the SME projects To regain economic momentum, it is imperative that the agenda for the development of the SMEs sector be pursued in real earnest, and on priority.
(The writer is retired Chairman of the State Engineering Corporation, Ministry of Industries and Production)
Source: http://www.brecorder.com/index.php?id=1059461&currPageNo=1&query=&search=&term=&supDate=
Despite shipments having made against letters of credit, and supplies done in accordance with the purchase orders, the buyers, in many cases, would obtain stay orders from the courts against remittances of proceeds, on one pretext or the other. Thus, not only the payments are withheld for long, the Pakistani sellers are also forced to allow significant price discounts at that time, to settle the issue.
This may be one-sided story. But the fact remains that the SMEs in Pakistan, which contribute about USD 2 billion to annual exports, lack business support mechanism and financial management, and resultantly, their interests are compromised. There are over three million business houses, including 500,000 manufacturing units, with 30 percent share in the GDP and accounting for 25 percent of exports of manufactured goods.
Like most of the developing countries, the SMEs sector in Pakistan too is the mainstay of the national economy. It plays a catalytic role in low-cost employment generation, poverty alleviation and economic development. Efforts have been made in recent past to invigorate and promote the SMEs' sector aiming at exploiting its optimum potential.
Nonetheless, the progress is slow and a lot more is desired to be done, primarily by the government. The chronology of events is reflective of the situation. It was in 1998 that the potential of the SMEs for economic growth was recognised and the Small and Medium Enterprises Development Authority (SMEDA) was created in October. But it was not before January 2004 that drafting an SME policy was entrusted to the SME task force.
Finally, the SME Policy was approved by the government after a lapse of another three years-in January 2007. The Smeda, mandated to developing the SMEs through serving as key resource base and facilitating necessary support services, has done significant work during the last 12 years, particularly in developing human resources and devising marketing strategy.
But it has not been successful in achieving desired agenda, targets and objectives, in spite of support of international agencies such as Asian Development Bank (ADB), UN Industrial Development Organisation (UNIDO) and Asian Productivity Organisation (APO). These agencies and industrialised countries like Germany and Japan are supporting programmes of the SME projects, products and processes through transfer of technology arrangements.
In the absence of overall enabling environment, the sector could not show the requisite dynamism. In recent years, acute energy shortages, adverse security concerns and periodic spiral increases of the POL, gas and electricity have caused generation of low production at high cost, adding to the sector's sufferings.
The imposition of value-added tax (VAT) will adversely affect development of the SMEs. Currently, a small fraction of the SMEs are exporters, whereas the SMEs, which remain a driving force behind many innovations, have ability to expand markets abroad.
There are 16 on-going projects under the umbrella of the SMEDA. Funds for launching another 16 approved projects, however, could not be launched due to paucity of funds and may be undertaken now under public-private partnership programme. A critical component for growth of the sector is specialised credit financing to cater to the needs of the SMEs, which has not yet been promoted effectively, and lack of provision of adequate and timely long-term credit facility is an impediment.
Initially, in February 1999, it was decided to focus ten sub-sectors, namely information technology, light engineering, sports, fisheries, transport, fruits & vegetable processing, marble & granite, gems & jewellery, horticulture and pharmaceutical products. Khushali Bank was created and the small-credit regional bank was converted into SME Bank in 2002. The State Bank of Pakistan presented a roadmap to the commercial banks in May 2005.
The SME Business Support Fund was created in 2006 for enhancement of competitiveness and profitability. Still some 78% SMEs do not have access to credit from the formal sector, as the banks consider it a high-risk area for extending credit facilities, besides other factors and constraints that have hampered the SMEs growth. The SMEs financing of banks, which was PKR 437 billion in December 2007 has drastically declined to PKR 348 billion in December 2009. Likewise, the share of the SMEs financing in total banks' financing has also been reduced from 16.2% to present 10%.
It is heartening that the State Bank of Pakistan has recently announced developing a multi-dimensional strategy for the SMEs financing. It will arrange international resources, including that of the World Bank and the USAID, to meet the requirements of capital forr developing the SME projects To regain economic momentum, it is imperative that the agenda for the development of the SMEs sector be pursued in real earnest, and on priority.
(The writer is retired Chairman of the State Engineering Corporation, Ministry of Industries and Production)
Source: http://www.brecorder.com/index.php?id=1059461&currPageNo=1&query=&search=&term=&supDate=
Euro crisis and Europe By ASAD RIZVI
ARTICLE (May 20 2010): In 1991, after the successful gathering of the European leaders in Maastricht, Netherlands, the launch of euro became a strong possibility. Those days, the then German Chancellor, Helmut Kohl, must be feeling very proud as Germany's dream of European monetary integration started looking like a reality.
About two decades later, however, Germany said that 'Europe faces historic test in Euro crisis'. On May 19, 2010, Chancellor Angela was telling the German lawmakers that Europe faces an "existential" test as it works to shore up euro.
It was initially thought that the introduction of euro would bring a meaningful change in world's monetary landscape, bring transparency and lower transaction cost. As in past when US dollar was in trouble the global shift in currency was towards German mark and Swiss franc. The presence of euro also helped in shielding third currencies from too much volatility caused by a turbulent dollar. As the time passed it all started proving to be true.
But the cost of birth and monetary integration is proving to be too high, as it came into existence due to some political reasons. After fighting two World Wars, the Germans were desperately looking for European economic integration, as they wanted to become part of the European family.
Bundesbank, which is one of the most reputed central banks and known for its tougher stance, also learnt lessons from 1920s' hyperinflation. It had to compromise on many weak issues. Germany eased qualification rules to the 16-European nations to increase its exports.
The integration of a larger group of countries with high deficits became possible after Italian PM Romano Prodi's visit to Germany in 1996. He offered Kohl to lay pipeline and buy milk in exchange of support to Italy for euro membership that was having a budget deficit of over 10 percent. It also paved way for countries with weak economies.
The most difficult part for Euro is that there is no ownership of this currency or one would not be wrong to say that euro is without a state as the European member countries commonly use single currency, but every country has its own economic policy and each country's policy differs from other's. There is no back up available for the failing countries. ECB only manages inflation.
Since the birth of euro, the recent crisis is the worst economic condition faced by the Euro-zone. Quite a few countries have breached three percent deficit limits and the biggest problem is that instead of finding a permanent solution, Europe is entangled in a web of debt and therefore, debt is created to settle debt. This is why the market has lost confidence despite announcement of a USD 1 trillion Euro-zone rescue package.
Hence, ECB's independence is now being questioned, as it is not supposed to lend to junk grade. It is not supposed to purchase bonds directly and can only buy bonds from secondary market. Euro zone rules do not allow assistance to governments to finance deficit. The purchase of bonds by ECB also means it is likely to push inflation higher.
Euro that dived to a crucial 1.2145 levels, its lowest since April 16, 2006 after the announcement by Germany's market regulator BaFin to apply ban on naked short selling of Euro zone government bonds and shares in Germany's 10 biggest financial institutions. It has also banned naked default swap on Euro-zone government bonds. However, France said it was not considering a ban on European debt. It also said that it had not been consulted. Short selling is a trade that bets a price will fall. Naked short selling is when a trader sells a financial instrument without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sell.
The timing of a halt to sale of naked short sell is very crucial for two reasons as the dumping of euro is thought to be executed by the speculators and this could be a message for to the speculators. The other factor could be that it is the German government's response to speculators and to convince its parliament to allow bail package, as it is ready to defend Euro. But what could be more concerning for the market is the timing to ban naked short selling, which could also mean that there is more trouble in the pipeline.
However, based on above arguments, euro could witness a roller coaster journey, a possibility of a dip to 1.2080 cannot be ruled out, but our research suggests that Friday's New York closing will be the key to watch. If euro manages to close above 1.2280, a correction may occur, which could see Euro raring towards 1.2850. Or else test and break of 1.1910 cannot be ruled out.
Source: http://www.brecorder.com/index.php?id=1059411&currPageNo=1&query=&search=&term=&supDate=
About two decades later, however, Germany said that 'Europe faces historic test in Euro crisis'. On May 19, 2010, Chancellor Angela was telling the German lawmakers that Europe faces an "existential" test as it works to shore up euro.
It was initially thought that the introduction of euro would bring a meaningful change in world's monetary landscape, bring transparency and lower transaction cost. As in past when US dollar was in trouble the global shift in currency was towards German mark and Swiss franc. The presence of euro also helped in shielding third currencies from too much volatility caused by a turbulent dollar. As the time passed it all started proving to be true.
But the cost of birth and monetary integration is proving to be too high, as it came into existence due to some political reasons. After fighting two World Wars, the Germans were desperately looking for European economic integration, as they wanted to become part of the European family.
Bundesbank, which is one of the most reputed central banks and known for its tougher stance, also learnt lessons from 1920s' hyperinflation. It had to compromise on many weak issues. Germany eased qualification rules to the 16-European nations to increase its exports.
The integration of a larger group of countries with high deficits became possible after Italian PM Romano Prodi's visit to Germany in 1996. He offered Kohl to lay pipeline and buy milk in exchange of support to Italy for euro membership that was having a budget deficit of over 10 percent. It also paved way for countries with weak economies.
The most difficult part for Euro is that there is no ownership of this currency or one would not be wrong to say that euro is without a state as the European member countries commonly use single currency, but every country has its own economic policy and each country's policy differs from other's. There is no back up available for the failing countries. ECB only manages inflation.
Since the birth of euro, the recent crisis is the worst economic condition faced by the Euro-zone. Quite a few countries have breached three percent deficit limits and the biggest problem is that instead of finding a permanent solution, Europe is entangled in a web of debt and therefore, debt is created to settle debt. This is why the market has lost confidence despite announcement of a USD 1 trillion Euro-zone rescue package.
Hence, ECB's independence is now being questioned, as it is not supposed to lend to junk grade. It is not supposed to purchase bonds directly and can only buy bonds from secondary market. Euro zone rules do not allow assistance to governments to finance deficit. The purchase of bonds by ECB also means it is likely to push inflation higher.
Euro that dived to a crucial 1.2145 levels, its lowest since April 16, 2006 after the announcement by Germany's market regulator BaFin to apply ban on naked short selling of Euro zone government bonds and shares in Germany's 10 biggest financial institutions. It has also banned naked default swap on Euro-zone government bonds. However, France said it was not considering a ban on European debt. It also said that it had not been consulted. Short selling is a trade that bets a price will fall. Naked short selling is when a trader sells a financial instrument without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sell.
The timing of a halt to sale of naked short sell is very crucial for two reasons as the dumping of euro is thought to be executed by the speculators and this could be a message for to the speculators. The other factor could be that it is the German government's response to speculators and to convince its parliament to allow bail package, as it is ready to defend Euro. But what could be more concerning for the market is the timing to ban naked short selling, which could also mean that there is more trouble in the pipeline.
However, based on above arguments, euro could witness a roller coaster journey, a possibility of a dip to 1.2080 cannot be ruled out, but our research suggests that Friday's New York closing will be the key to watch. If euro manages to close above 1.2280, a correction may occur, which could see Euro raring towards 1.2850. Or else test and break of 1.1910 cannot be ruled out.
Source: http://www.brecorder.com/index.php?id=1059411&currPageNo=1&query=&search=&term=&supDate=
Indo-Pak Tade By Dr. Mirza Ikhtiar Baig
Source: http://jang.com.pk/jang/may2010-daily/17-05-2010/col5.htm
Indo-Pak Tade By Dr. Mirza Ikhtiar Baig
Tuesday, May 18, 2010
Is it cost-push inflation? By Nasir Jamal
Pakistan’s chance of containing inflation in the 11 to 12 per cent band, as forecast by the State Bank of Pakistan (SBP) in its last monetary policy review, looks quite dim with the consumer price index (CPI) hitting 13.26 per cent, a three-month high, in April from a year ago.
The CPI inflation during the year will be nearly 12 per cent, down from 20.77 per cent a year earlier, the SBP said towards end of March. On a monthly basis, inflation escalated 1.73 per cent from 1.3 per cent in March.
The headline inflation has breached the government’s budgetary target of nine per cent for the current financial year by a wide margin with CPI already spiking 11.8 per cent for the first ten months of the fiscal year to April. The average CPI inflation for the same period last year stood at 22.35 per cent.
Monthly core (non-food, non-energy) inflation also soared 10.6 per cent from 9.9 per cent in March.
“The (recent) rise in inflation is serious in nature,” Asad Farid Khawaja, an economist at AKD Securities tells Dawn. “Inflation will remain a major concern for the central bank, which will at best leave its key discount rate unchanged at current level of 12.5 per cent in its next monetary policy review later this month even if it does not raise the credit cost.”
The SBP has been delaying monetary easing on the back of resurging inflation since November amidst worries about price pressures and expansion in fiscal deficit. Before that it had reduced its discount rate by 150bps to 12.50 per cent since July 2009. The bank had embarked upon monetary easing in April 2009 as inflation came down after peaking to above 25 per cent in October the previous year.
Some economists insist the current bout of inflationary pressures is cost-push, spawned by increasing prices of fuel, food, raw materials, transportation, construction materials, elimination of energy subsidies, etc as indicated by the spike the wholesale price index (WPI) for the last month. The WPI rose 21.99 per cent in April from a year earlier. The WPI was up 1.84 per cent from March.
“With electricity tariff set to hike by six per cent from last month and little likelihood of the government passing on the reduction in global commodity prices, especially oil, to domestic consumers, the chances of prices coming down over the remaining two months of the fiscal year are slimmer,” says Sayem Ali, economist for the Standard Chartered Bank in Pakistan.
“With the government printing money for financing its budgetary deficit – the SBP has printed Rs171 billion since January onwards –, it is fair to assume that the headline inflation will breach the State Bank’s 12 per cent target by the end of this fiscal,” Sayem said.
The findings of a survey by the Pakistan Institute of Development Economist (PIDE) last week estimated the average CPI inflation to be above 14.50 per cent for the current financial year. Economists argue that it is imperative for the government to control its deficit financing needs in order to contain inflationary pressures in the economy. “It (the government’s borrowings from the central bank) does not look good,” Sayem said, adding internal factors had set off the current spurt of inflation.
The implications for the economy of high inflation over a longer period of time are quite obvious. It raises the credit price and stalls fresh investments in the economy, making a country’s exports uncompetitive in the international markets. At the same time, it also spawns deep uncertainty about future of the economy and affects consumer spending. “People living off fixed-income find their purchasing power and their quality of life declining,” says Asad. “Apart from that it results in job losses and increased incidence of poverty.”
Rising inflation in spite of a tight monetary stance being pursued by the central bank and implementation of an economic stabilisation programme has led to calls for easing monetary policy to push growth. “What we need right now is growth. But that cannot be achieved unless we bring down the cost of credit to encourage fresh investments in the economy for job creation and poverty reduction,” says Shahzad Azam Khan, a leading businessman from Lahore.
He is critical of the government’s economic policies that are “suffocating” the industry and making exports uncompetitive in the world. “We have been taking dictation from the International Monetary Fund (IMF) for far too long and pursuing unfriendly business policies under its pressure that are stifling our industry. Its time we shifted our focus to growth from stabilisation and cut the credit cost and reduce utility rates for encouraging investments and protecting jobs, industry and exports,” he added. “Unless you increase supply you cannot really hope to rein in cost-push inflation. We have tried it for the last three years and failed.”
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/is-it-costpush-inflation-750
The CPI inflation during the year will be nearly 12 per cent, down from 20.77 per cent a year earlier, the SBP said towards end of March. On a monthly basis, inflation escalated 1.73 per cent from 1.3 per cent in March.
The headline inflation has breached the government’s budgetary target of nine per cent for the current financial year by a wide margin with CPI already spiking 11.8 per cent for the first ten months of the fiscal year to April. The average CPI inflation for the same period last year stood at 22.35 per cent.
Monthly core (non-food, non-energy) inflation also soared 10.6 per cent from 9.9 per cent in March.
“The (recent) rise in inflation is serious in nature,” Asad Farid Khawaja, an economist at AKD Securities tells Dawn. “Inflation will remain a major concern for the central bank, which will at best leave its key discount rate unchanged at current level of 12.5 per cent in its next monetary policy review later this month even if it does not raise the credit cost.”
The SBP has been delaying monetary easing on the back of resurging inflation since November amidst worries about price pressures and expansion in fiscal deficit. Before that it had reduced its discount rate by 150bps to 12.50 per cent since July 2009. The bank had embarked upon monetary easing in April 2009 as inflation came down after peaking to above 25 per cent in October the previous year.
Some economists insist the current bout of inflationary pressures is cost-push, spawned by increasing prices of fuel, food, raw materials, transportation, construction materials, elimination of energy subsidies, etc as indicated by the spike the wholesale price index (WPI) for the last month. The WPI rose 21.99 per cent in April from a year earlier. The WPI was up 1.84 per cent from March.
“With electricity tariff set to hike by six per cent from last month and little likelihood of the government passing on the reduction in global commodity prices, especially oil, to domestic consumers, the chances of prices coming down over the remaining two months of the fiscal year are slimmer,” says Sayem Ali, economist for the Standard Chartered Bank in Pakistan.
“With the government printing money for financing its budgetary deficit – the SBP has printed Rs171 billion since January onwards –, it is fair to assume that the headline inflation will breach the State Bank’s 12 per cent target by the end of this fiscal,” Sayem said.
The findings of a survey by the Pakistan Institute of Development Economist (PIDE) last week estimated the average CPI inflation to be above 14.50 per cent for the current financial year. Economists argue that it is imperative for the government to control its deficit financing needs in order to contain inflationary pressures in the economy. “It (the government’s borrowings from the central bank) does not look good,” Sayem said, adding internal factors had set off the current spurt of inflation.
The implications for the economy of high inflation over a longer period of time are quite obvious. It raises the credit price and stalls fresh investments in the economy, making a country’s exports uncompetitive in the international markets. At the same time, it also spawns deep uncertainty about future of the economy and affects consumer spending. “People living off fixed-income find their purchasing power and their quality of life declining,” says Asad. “Apart from that it results in job losses and increased incidence of poverty.”
Rising inflation in spite of a tight monetary stance being pursued by the central bank and implementation of an economic stabilisation programme has led to calls for easing monetary policy to push growth. “What we need right now is growth. But that cannot be achieved unless we bring down the cost of credit to encourage fresh investments in the economy for job creation and poverty reduction,” says Shahzad Azam Khan, a leading businessman from Lahore.
He is critical of the government’s economic policies that are “suffocating” the industry and making exports uncompetitive in the world. “We have been taking dictation from the International Monetary Fund (IMF) for far too long and pursuing unfriendly business policies under its pressure that are stifling our industry. Its time we shifted our focus to growth from stabilisation and cut the credit cost and reduce utility rates for encouraging investments and protecting jobs, industry and exports,” he added. “Unless you increase supply you cannot really hope to rein in cost-push inflation. We have tried it for the last three years and failed.”
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/is-it-costpush-inflation-750
Monday, May 17, 2010
VAT: One step forward and two steps back? - III By MUHAMMAD SHAHID BAIG
ARTICLE (May 16 2010): Recently, a Notification No SRO 278(1) 2010 dated 28th July, 2010, has been issued by the Federal Board of Revenue to insert Rule 14A in the existing Sales Tax Rules, 2006, to provide that approval of the commissioner would not be required to file revised return if more tax is required to be paid and the limitation of 120 days prescribed in sub-Section (3) of Section 26 would not be applicable.
Although this insertion is beneficial to the taxpayers as well as the national exchequer, yet this is the sole prerogative of the Parliament to make amendment in the law. However, powers of subordinate legislation are there with the FBR, but it does not mean that the FBR should over-rule the provisions of the existing law framed by the competent legislature as has happened in the shape of this SRO.
The Section 26 is, in fact, a part of the Sales Tax Act, 1990, which was made by the legislature and it has been over-ruled by the FBR in exercise of the powers vested by the Parliament in it to make subordinate legislation. So, it would be better to insert the proper provision in the proposed law instead of making additions, deletions, adjustments etc after the promulgation/approval of the proposed law.
There is a new concept contained in Section 57 of the proposed law providing for minor corrections which says that the FBR may allow minor corrections in the subsequent returns without imposition of penalties/default surcharge/interest. The word "interest" is infructuous here. This concept does not relate to the proposed VAT law.
However, this phrase is defined in the UK VAT law. So this word should be deleted from this provision. This new Section is meant only to make minor corrections and relates to the cases, where additional tax payable does not exceed Rs 1000. This provision has not been seriously drafted and needs re-appraisal and reconsideration by the drafters.
As per Section 58, the FBR may require filing of additional tax returns. This provision seems to be the pari-materia of Sections 27 and 28 of the Sales Tax Act, 1990. It is being claimed by the FBR that the invoice-based documentation is the key idea for implementation of the VAT. Almost 50-60% economy in the country is undocumented and revenue could be doubled by bringing it into the tax-net.
This, in fact, is not a new idea. The basic objective of every statute is always to collect revenue as well as the documentation of national economy. The VAT is not going to be the first ever in this regard; rather, this is the prime objective of other fiscal statutes as well. If, we talk about the present sales tax law, it also contains the same mechanism.
As per Section 23, invoice has to be issued for every transaction and as per Section 22, every transaction is to be recorded in the books of accounts. Further, sales tax is being paid on self-assessment and self-clearance basis. So, the VAT is not bringing a new concept. This is already there.
It is relevant to mention that in the year 2000, a special piece of legislation was issued titled as "Documentation of National Economy Ordinance, 2000". The basic objective of this law was that our economy could be brought under the documentation regime. Despite hectic efforts of the stakeholders, this could not be a successful attempt.
So, we cannot say that no law or idea is not in force previously in our society. Law is there in proper shape, but the question relates to the rule of law. It would not be advantageous to change the law again and again and it would not be sufficient just to substitute the nomenclature of any fiscal statute, but the need is to evolve a proper mechanism to properly implement the law in letter and spirit in accordance with the prevailing circumstances, norms, standards and specific circumstances of our society.
There is another provision, ie Section 87 which, inter alia, provides that no suit shall lie to the high court in its original jurisdiction against any action of the department. Such like efforts are usually made by the lawmakers, but have never been approved and ultimately struck down by the judiciary.
There is a Constitution effectively prevailing in Pakistan and the jurisdiction of the superior courts cannot be barred by making laws, which after all are subservient to the Constitution. The Senate Committee has also expressed its reservations on this scenario and there is a news that the FBR has agreed to delete these words, ie "High Court", to appropriately amend this provision.
As far as the mechanism of refund is concerned, there are various provisions in the proposed law like Sections 37, 38, 39, 40, 82 and 93. Excessive input tax shall be carried forward to the following six months and if residual credit is not more than 1000 it may continue after the six months; otherwise refund shall be issued by the Department within 45 days of the application of the tax payer.
There are certain situations provided in Section 38 where refund could be issued without carrying forward. In fact, this is an over-riding provision and says that if the FBR is satisfied that 50% of the turnover of the taxpayer is zero-rated or 50% purchase/import is meant for zero-rated export. In other situation, where the FBR is satisfied that the specific nature of business of the taxpayer would result in excessive input tax; the FBR may allow the issuance of refund within 45 days of the receipt of the application.
As per Section 39, refund shall not be issued, if up-to-date returns are not filed by the taxpayer and all the arrears have not been adjusted and refund is not more than 1000 rupees. However, where documents furnished by the taxpayer are not genuine, then the refund claim shall be rejected through proper adjudication process provided in Section 82.
As per Section 93, compensation as per annual KIBOR rate shall be allowed for delayed refund. There is another provision likely to be inserted in the draft law, which would allow the adjustment of input tax paid on fixed assets within a period of two months instead of 12 months as is prevailing presently as part of the current Sales Tax Act, 1990.
The subject of audit is also very important under the present Sales Tax Act, 1990 as well as the proposed Federal VAT Bill, 2010. In the proposed law, there are three Sections, ie Sections 69, 70 and 71. As per the present law, audit of any registered person can be conducted once a year as provided in Section 25 of the Sales Tax Act, 1990. However, in case of any tax fraud by the taxpayer, the collector is authorised to conduct inquiry/investigation under Section 38 of the Sales Tax Act, 1990.
As per recent amendment, a provision was also inserted to over-rule the audit conducted by the Auditor General of Pakistan. So, regular audit can now be conducted irrespective of the fact, whether or not, audit has been conducted by the Auditor General. Then, there is another provision regarding special audit, which can be conducted through chartered accountant/ACMA as provided in Section 32A of the Sales Tax Act, 1990.
In the proposed bill, Section 69 provides that audit can be conducted after issuance of notice and the audit includes forensic audit. The service of notice may be dispensed with where tax fraud is suspected. The concept 'forensic audit' has not been defined so it would be difficult to invoke this provision as this is a new concept. Earlier, audit has not been defined in the present Sales Tax Act, Federal Excise Act or Income Tax Ordinance, 2001. Likewise, in the proposed draft, again the term "audit" has not been defined. The concept of forensic audit has been introduced but it has not been defined any where.
However, as per dictionary, meaning "forensic audit" is the method of the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud. It also calls forensic accounting. The concept of adjudication has been duly incorporated in the draft law, which was earlier omitted from the present law. The special audit is also provided in Section 70. However, Section 71 prohibits multiple departmental audit in normal circumstances. However, if the commissioner has reliable information about the tax fraud, he can issue orders for re-audit.
The Section 89 of the draft bill deals with offences and penalties and in the Third Schedule, 17 penalties have been prescribed for different situations. On comparison of the present provision, ie Section 33 of the Sales Tax Act, 1990, it may appear that there are four prominent changes:-
As per first change a minim penalty of 100,000 has been provided for non-compliance of the compulsory registration. This appears to be a very harsh provision and it would not be justified to invoke the same without providing an opportunity of filing appeal against this penalty order.
In the second situation, penalty has been enhanced from 25,000 to 500,000 in tax fraud cases. Yes, of course, the persons who are committing fraud with the revenue as well as the state must be handled with iron hands and in established tax fraud cases maximum penalty should be levied as every law applies under the threat of penalty and not otherwise.
As per third situation, in case of issuance of false and forged documents, penalty of Rs 25,000 or 100% of the tax, whichever is higher, has been proposed. As per fourth situation, submission of false documents for claiming refund would entail penalty of Rs 50,000/- or 50% of the tax, whichever is higher.
In the present law, Serial No 18 of Section 33, provides that where an officer acts or omits or attempts to act or omit in a manner causing loss to the sales tax revenue or otherwise abets or connives in any such act, he shall, after trial by the special judge, be imprisoned for three years after conviction or fined equal to the tax involved or both the punishments can simultaneously be awarded.
It is very distressing to point out that this provision has totally been omitted from the proposed law and there is no pari-materia provision incorporated in the VAT Bill, 2010. This omission seems to be a deliberate attempt on the part of the government to protect and safeguard the illegal and criminal actions of the beaurucrats. It cannot be said with certainty that only one sector of the society can cause injury to the revenue and all the revenue collectors are supposed to be honest and trust-worthy. It is more than evident that deficiencies, problems and evils are always there, on both the sides. So, the department should also be made accountable for its violations, negligence and wrongdoings. Therefore, it is strongly suggested that an identical provision should definitely be incorporated in the proposed VAT Bill.
The mechanism of adjudication is provided in Sections 76, 77 and 78 of the proposed bill, which is self-speaking. However, in sub-Section (6) of Section 77, it is provided that limitation provisions prescribed in Section 91(3) should be applicable for the purpose of limitation. This appears to be a mistake on the part of the drafters. The limitation is provided in sub-section (3) of Section 90 and not in sub-Section (3) of Section 91.
The mechanism for appeals, including first appeal, second appeal, reference to high court and alternative dispute resolution; is also duly provided as per Sections 79, 80, 81 and 83 of the proposed bill. There is no phenomenal change in the hierarchy of appeals and it would not be advantageous to further discuss this matter.
On account of advance payment, it is provided in Section 35 that advance payment equivalent to 25% of the VAT rate shall be collected under Section 9 at import stage for prospective value-addition. Presently, importers are paying 2% excess tax as compared to the others tax payers who are paying sales tax at the rate of 16%.
The Senate Standing Committee recommended that advance payment of tax on prospective value-addition is not justified. The FBR has responded that advance tax payment in supply regime is an international VAT practice, especially in countries where state expenditures are met mostly from tax revenue. However, such tools are applied not as general measure but as special measures to ensure compliance of down stream suggests of the supply chain.
As per Section 36, the concept of withholding by government and large taxpayer units, has again been provided which should not exceed 25% of the VAT rate under Section 9, on purchases. Both these appear to be the violations of the pure form of VAT. This practice is not prevailing in any developed country where the VAT is successfully implemented. The drafters claim that VAT is being introduced in its pure form but the deviations, already made and inserted in the present Sales Tax Act, 1990, are being repeated.
Besides, Federal proposed bill, four provincial VAT bills have also been drafted and all the provinces have placed them in their respective provincial assemblies for approval. There are 22 sections and two schedules in the provincial VAT bills.
The Schedule I provide for exemptions and the Second Schedule has provided a brief list of zero-rated supplies. Only six categories of services have been declared exempt, like funeral services, religious services, financial services, educational services, supplies of certain immovable properties and services of NGOs.
As per Second Schedule, transfer of economic activity, as an on-going concern, has been declared as zero-rated. It is relevant to add that for the territory of Islamabad, as earlier discussed with reference to Article 142 of the Constitution, this is the sole prerogative of the Parliament to make legislation for collection of sales tax on services, but no draft has so far been prepared for collection of sales tax on services in respect of the areas which do not fall within the jurisdiction of the provinces. As per earlier experience, four provincial ordinances were made in 2000 whereas ordinance for Islamabad Capital Territory was issued one year later, ie in 2001.
Apparently previous practice is going to be repeated. In fact, it was better to frame a model law to collect sales tax on services from those areas where the jurisdiction is duly vested in the Federal government. It was also possible to draft the Federal bill in such a way that the VAT on services could also be levied in respect of the areas, the jurisdiction over which does not fall with the Provinces.
As per the present provincial ordinances, there are only 8 services, which are subjected to the sales tax, ie, hotels, clubs, caterers, advertisements on TV and radio, customs agents, ship chandeliers, stevedores and courier services.
At the time of promulgation of provincial ordinances, there were 14 services, which were subjected to sales tax. Later, few entries were omitted from the Schedule. Now surprisingly all the services are proposed to be brought under the VAT-net excluding very few.
In the last 10 years, none of the government could dare to increase the list of services for levying sales tax on services. How this U-turn will be taken, especially when the provincial governments are not convinced to charge this levy on the services. If, we look at the proposed law, the phenomenal changes include reduction of tax rate from 16% to 15%. Increase in threshold from 5 million to 7.5 million, omission of Third Schedule, inclusion of Federal List Services for levying the VAT on carriage of goods or passengers by railway, sea or air, omission of exemption, reduction in zero-rated items, enhancement of penalties, granting the power of exemption to Parliament, addition of services in the tax net, introduction of 26 new concepts, strengthening of recovery measures. No other phenomenal change appears to be made in the newly proposed law except as enlisted above. If this is the only object of the Government to bring all these changes then there was no harm to change and modify the existing law. Even the nomenclature of the law could have also been changed and it is also not essential to change the nomenclature. In Australia this tax is being collected successfully under the title of "GST" and not as "VAT".
However, without going further into the technicalities, it is rightly pointed out by the government that tax-to-GDP ratio in Pakistan is very low in the region and we need to increase this ratio without burdening the existing taxpayers and the VAT is the best way to achieve the desired targets.
Our country needs VAT but its design needs to be tailored around to meet the local economic and Constitutional conditions, otherwise this would be a failed attempt and will mar the current administration with this policy of taking one step forward and two steps back.
(Concluded)
Source: http://www.brecorder.com/index.php?id=1057091&currPageNo=1&query=&search=&term=&supDate=
Although this insertion is beneficial to the taxpayers as well as the national exchequer, yet this is the sole prerogative of the Parliament to make amendment in the law. However, powers of subordinate legislation are there with the FBR, but it does not mean that the FBR should over-rule the provisions of the existing law framed by the competent legislature as has happened in the shape of this SRO.
The Section 26 is, in fact, a part of the Sales Tax Act, 1990, which was made by the legislature and it has been over-ruled by the FBR in exercise of the powers vested by the Parliament in it to make subordinate legislation. So, it would be better to insert the proper provision in the proposed law instead of making additions, deletions, adjustments etc after the promulgation/approval of the proposed law.
There is a new concept contained in Section 57 of the proposed law providing for minor corrections which says that the FBR may allow minor corrections in the subsequent returns without imposition of penalties/default surcharge/interest. The word "interest" is infructuous here. This concept does not relate to the proposed VAT law.
However, this phrase is defined in the UK VAT law. So this word should be deleted from this provision. This new Section is meant only to make minor corrections and relates to the cases, where additional tax payable does not exceed Rs 1000. This provision has not been seriously drafted and needs re-appraisal and reconsideration by the drafters.
As per Section 58, the FBR may require filing of additional tax returns. This provision seems to be the pari-materia of Sections 27 and 28 of the Sales Tax Act, 1990. It is being claimed by the FBR that the invoice-based documentation is the key idea for implementation of the VAT. Almost 50-60% economy in the country is undocumented and revenue could be doubled by bringing it into the tax-net.
This, in fact, is not a new idea. The basic objective of every statute is always to collect revenue as well as the documentation of national economy. The VAT is not going to be the first ever in this regard; rather, this is the prime objective of other fiscal statutes as well. If, we talk about the present sales tax law, it also contains the same mechanism.
As per Section 23, invoice has to be issued for every transaction and as per Section 22, every transaction is to be recorded in the books of accounts. Further, sales tax is being paid on self-assessment and self-clearance basis. So, the VAT is not bringing a new concept. This is already there.
It is relevant to mention that in the year 2000, a special piece of legislation was issued titled as "Documentation of National Economy Ordinance, 2000". The basic objective of this law was that our economy could be brought under the documentation regime. Despite hectic efforts of the stakeholders, this could not be a successful attempt.
So, we cannot say that no law or idea is not in force previously in our society. Law is there in proper shape, but the question relates to the rule of law. It would not be advantageous to change the law again and again and it would not be sufficient just to substitute the nomenclature of any fiscal statute, but the need is to evolve a proper mechanism to properly implement the law in letter and spirit in accordance with the prevailing circumstances, norms, standards and specific circumstances of our society.
There is another provision, ie Section 87 which, inter alia, provides that no suit shall lie to the high court in its original jurisdiction against any action of the department. Such like efforts are usually made by the lawmakers, but have never been approved and ultimately struck down by the judiciary.
There is a Constitution effectively prevailing in Pakistan and the jurisdiction of the superior courts cannot be barred by making laws, which after all are subservient to the Constitution. The Senate Committee has also expressed its reservations on this scenario and there is a news that the FBR has agreed to delete these words, ie "High Court", to appropriately amend this provision.
As far as the mechanism of refund is concerned, there are various provisions in the proposed law like Sections 37, 38, 39, 40, 82 and 93. Excessive input tax shall be carried forward to the following six months and if residual credit is not more than 1000 it may continue after the six months; otherwise refund shall be issued by the Department within 45 days of the application of the tax payer.
There are certain situations provided in Section 38 where refund could be issued without carrying forward. In fact, this is an over-riding provision and says that if the FBR is satisfied that 50% of the turnover of the taxpayer is zero-rated or 50% purchase/import is meant for zero-rated export. In other situation, where the FBR is satisfied that the specific nature of business of the taxpayer would result in excessive input tax; the FBR may allow the issuance of refund within 45 days of the receipt of the application.
As per Section 39, refund shall not be issued, if up-to-date returns are not filed by the taxpayer and all the arrears have not been adjusted and refund is not more than 1000 rupees. However, where documents furnished by the taxpayer are not genuine, then the refund claim shall be rejected through proper adjudication process provided in Section 82.
As per Section 93, compensation as per annual KIBOR rate shall be allowed for delayed refund. There is another provision likely to be inserted in the draft law, which would allow the adjustment of input tax paid on fixed assets within a period of two months instead of 12 months as is prevailing presently as part of the current Sales Tax Act, 1990.
The subject of audit is also very important under the present Sales Tax Act, 1990 as well as the proposed Federal VAT Bill, 2010. In the proposed law, there are three Sections, ie Sections 69, 70 and 71. As per the present law, audit of any registered person can be conducted once a year as provided in Section 25 of the Sales Tax Act, 1990. However, in case of any tax fraud by the taxpayer, the collector is authorised to conduct inquiry/investigation under Section 38 of the Sales Tax Act, 1990.
As per recent amendment, a provision was also inserted to over-rule the audit conducted by the Auditor General of Pakistan. So, regular audit can now be conducted irrespective of the fact, whether or not, audit has been conducted by the Auditor General. Then, there is another provision regarding special audit, which can be conducted through chartered accountant/ACMA as provided in Section 32A of the Sales Tax Act, 1990.
In the proposed bill, Section 69 provides that audit can be conducted after issuance of notice and the audit includes forensic audit. The service of notice may be dispensed with where tax fraud is suspected. The concept 'forensic audit' has not been defined so it would be difficult to invoke this provision as this is a new concept. Earlier, audit has not been defined in the present Sales Tax Act, Federal Excise Act or Income Tax Ordinance, 2001. Likewise, in the proposed draft, again the term "audit" has not been defined. The concept of forensic audit has been introduced but it has not been defined any where.
However, as per dictionary, meaning "forensic audit" is the method of the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud. It also calls forensic accounting. The concept of adjudication has been duly incorporated in the draft law, which was earlier omitted from the present law. The special audit is also provided in Section 70. However, Section 71 prohibits multiple departmental audit in normal circumstances. However, if the commissioner has reliable information about the tax fraud, he can issue orders for re-audit.
The Section 89 of the draft bill deals with offences and penalties and in the Third Schedule, 17 penalties have been prescribed for different situations. On comparison of the present provision, ie Section 33 of the Sales Tax Act, 1990, it may appear that there are four prominent changes:-
As per first change a minim penalty of 100,000 has been provided for non-compliance of the compulsory registration. This appears to be a very harsh provision and it would not be justified to invoke the same without providing an opportunity of filing appeal against this penalty order.
In the second situation, penalty has been enhanced from 25,000 to 500,000 in tax fraud cases. Yes, of course, the persons who are committing fraud with the revenue as well as the state must be handled with iron hands and in established tax fraud cases maximum penalty should be levied as every law applies under the threat of penalty and not otherwise.
As per third situation, in case of issuance of false and forged documents, penalty of Rs 25,000 or 100% of the tax, whichever is higher, has been proposed. As per fourth situation, submission of false documents for claiming refund would entail penalty of Rs 50,000/- or 50% of the tax, whichever is higher.
In the present law, Serial No 18 of Section 33, provides that where an officer acts or omits or attempts to act or omit in a manner causing loss to the sales tax revenue or otherwise abets or connives in any such act, he shall, after trial by the special judge, be imprisoned for three years after conviction or fined equal to the tax involved or both the punishments can simultaneously be awarded.
It is very distressing to point out that this provision has totally been omitted from the proposed law and there is no pari-materia provision incorporated in the VAT Bill, 2010. This omission seems to be a deliberate attempt on the part of the government to protect and safeguard the illegal and criminal actions of the beaurucrats. It cannot be said with certainty that only one sector of the society can cause injury to the revenue and all the revenue collectors are supposed to be honest and trust-worthy. It is more than evident that deficiencies, problems and evils are always there, on both the sides. So, the department should also be made accountable for its violations, negligence and wrongdoings. Therefore, it is strongly suggested that an identical provision should definitely be incorporated in the proposed VAT Bill.
The mechanism of adjudication is provided in Sections 76, 77 and 78 of the proposed bill, which is self-speaking. However, in sub-Section (6) of Section 77, it is provided that limitation provisions prescribed in Section 91(3) should be applicable for the purpose of limitation. This appears to be a mistake on the part of the drafters. The limitation is provided in sub-section (3) of Section 90 and not in sub-Section (3) of Section 91.
The mechanism for appeals, including first appeal, second appeal, reference to high court and alternative dispute resolution; is also duly provided as per Sections 79, 80, 81 and 83 of the proposed bill. There is no phenomenal change in the hierarchy of appeals and it would not be advantageous to further discuss this matter.
On account of advance payment, it is provided in Section 35 that advance payment equivalent to 25% of the VAT rate shall be collected under Section 9 at import stage for prospective value-addition. Presently, importers are paying 2% excess tax as compared to the others tax payers who are paying sales tax at the rate of 16%.
The Senate Standing Committee recommended that advance payment of tax on prospective value-addition is not justified. The FBR has responded that advance tax payment in supply regime is an international VAT practice, especially in countries where state expenditures are met mostly from tax revenue. However, such tools are applied not as general measure but as special measures to ensure compliance of down stream suggests of the supply chain.
As per Section 36, the concept of withholding by government and large taxpayer units, has again been provided which should not exceed 25% of the VAT rate under Section 9, on purchases. Both these appear to be the violations of the pure form of VAT. This practice is not prevailing in any developed country where the VAT is successfully implemented. The drafters claim that VAT is being introduced in its pure form but the deviations, already made and inserted in the present Sales Tax Act, 1990, are being repeated.
Besides, Federal proposed bill, four provincial VAT bills have also been drafted and all the provinces have placed them in their respective provincial assemblies for approval. There are 22 sections and two schedules in the provincial VAT bills.
The Schedule I provide for exemptions and the Second Schedule has provided a brief list of zero-rated supplies. Only six categories of services have been declared exempt, like funeral services, religious services, financial services, educational services, supplies of certain immovable properties and services of NGOs.
As per Second Schedule, transfer of economic activity, as an on-going concern, has been declared as zero-rated. It is relevant to add that for the territory of Islamabad, as earlier discussed with reference to Article 142 of the Constitution, this is the sole prerogative of the Parliament to make legislation for collection of sales tax on services, but no draft has so far been prepared for collection of sales tax on services in respect of the areas which do not fall within the jurisdiction of the provinces. As per earlier experience, four provincial ordinances were made in 2000 whereas ordinance for Islamabad Capital Territory was issued one year later, ie in 2001.
Apparently previous practice is going to be repeated. In fact, it was better to frame a model law to collect sales tax on services from those areas where the jurisdiction is duly vested in the Federal government. It was also possible to draft the Federal bill in such a way that the VAT on services could also be levied in respect of the areas, the jurisdiction over which does not fall with the Provinces.
As per the present provincial ordinances, there are only 8 services, which are subjected to the sales tax, ie, hotels, clubs, caterers, advertisements on TV and radio, customs agents, ship chandeliers, stevedores and courier services.
At the time of promulgation of provincial ordinances, there were 14 services, which were subjected to sales tax. Later, few entries were omitted from the Schedule. Now surprisingly all the services are proposed to be brought under the VAT-net excluding very few.
In the last 10 years, none of the government could dare to increase the list of services for levying sales tax on services. How this U-turn will be taken, especially when the provincial governments are not convinced to charge this levy on the services. If, we look at the proposed law, the phenomenal changes include reduction of tax rate from 16% to 15%. Increase in threshold from 5 million to 7.5 million, omission of Third Schedule, inclusion of Federal List Services for levying the VAT on carriage of goods or passengers by railway, sea or air, omission of exemption, reduction in zero-rated items, enhancement of penalties, granting the power of exemption to Parliament, addition of services in the tax net, introduction of 26 new concepts, strengthening of recovery measures. No other phenomenal change appears to be made in the newly proposed law except as enlisted above. If this is the only object of the Government to bring all these changes then there was no harm to change and modify the existing law. Even the nomenclature of the law could have also been changed and it is also not essential to change the nomenclature. In Australia this tax is being collected successfully under the title of "GST" and not as "VAT".
However, without going further into the technicalities, it is rightly pointed out by the government that tax-to-GDP ratio in Pakistan is very low in the region and we need to increase this ratio without burdening the existing taxpayers and the VAT is the best way to achieve the desired targets.
Our country needs VAT but its design needs to be tailored around to meet the local economic and Constitutional conditions, otherwise this would be a failed attempt and will mar the current administration with this policy of taking one step forward and two steps back.
(Concluded)
Source: http://www.brecorder.com/index.php?id=1057091&currPageNo=1&query=&search=&term=&supDate=
VAT: One step forward and two steps back? - II By MUHAMMAD SHAHID BAIG
ARTICLE (May 15 2010): The Chairman, Revenue Advisory Council, Dr Hafeez Pasha, has highlighted the importance of an integrated VAT at the level of provinces. He emphasised that there would be a major breakdown in the national integration of the VAT plan in case the Sindh government insisted on collecting VAT on services.
A uniform collection mechanism is needed for all provinces for implementation of an integrated VAT in all provinces. The Finance Ministry is trying to convince the Sindh government to allow the federation to collect the VAT on services till such time the provincial government is able to develop infrastructure and enough capacity to effectively collect the levy on services.
The Prime Minister has also constituted a committee, comprising of Advisor to Prime Minister on Finance, Secretary Finance and four provincial chief secretaries. If Sindh or other provinces declined to implement the VAT, then it would not be possible to invoke integrated VAT and a major portion of the Federal Draft Bill will be required to be modified/amended.
As per present Sales Tax Act, 1990, Section 13 deals with exemptions. As per 6th Schedule, there are 71 Entries in Table I and 11 Entries of Exemption are contained in Table II. There are about 30 SROs of Exemptions.
In the proposed draft law, Section 11 provides for certain exemptions and in the 1st Schedule, 14 entries of exemption have been given like wheat, wheat flour, unprocessed peas, ice and water, table/iodised) salt, books, newspapers, Holy Qura'n, ambulances, fire fighting trucks, artificial parts of the body, infra ocular lenses and glucose testing equipment etc.
The FBR has been examining a proposal to levy lower rate of the VAT on food items and essential commodities where exemptions would be withdrawn under the 6th Schedule from 2010-11. In this way, the inflationary impact could have been avoided by imposing reduced rate of the VAT on basic consumer items and food commodities.
There was a news that the FBR may propose 5-6% VAT on supply of consumer items sold in Pakistan on which presently sales tax is charged on the basis of printed sale price, eg fruit juices, vegetable juices, ice cream, aerated water or beverages, syrups and squashes, cigarettes, toilet soap, detergents, shampoos, tooth paste, shaving cream, perfumery and cosmetics, tea, powder drinks, milky drinks, toilet paper and tissue paper, spices, sold in retail packing, bearing brand names and trade marks and shoe polish and shaving cream.
However, the final decision would be taken in view of analysing the revenue implications by the Revenue Advisory Council and the FBR. In the EU countries, supply of food items, medical and educational services and materials are exempt from the VAT. They have not specified items, but have given blanket exemption on all such food, health and educational services and material. In fact, all activities relating to day-to-day life, needed goods and those, which are required for the Socio-Economic development of the society are exempt from the VAT. In all these 27 countries, tax-to-GDP ratio is higher than 20%.
In the UK, food of all kinds used for human consumption, including products eaten as part of a meal or as snacks and products like flour are exempt. The food items for human consumption are not only exempt but entitled to input tax credit. Likewise, all unprocessed foodstuffs, such as raw meat and fish, vegetable and fruits, cereals, nuts and pulses etc are zero-rated, so almost all the agricultural Products are exempt from the VAT and entitled to tax credit paid on any goods and services used in their Production.
The exemptions available to farm products are world-over just to attract investment in this core activity of life. The GST in Australia is proving a very smooth growth engine for the Economy. Basic food, education courses, medical, health and care services, medicines, exports, childcare, religious services, charitable activities etc are exempt.
Australia has not only exempted agri products, food items and socio-economic services, but allows refund or input credit adjustment to the suppliers. This, in return, keeps them cost free of any taxes hidden or otherwise. In one decade, since the GST was introduced in Australia, it has become a success story.
There is no VAT in the US. However, in the US federating units, there is unadjustable GST. In California (largest state), grocery stores, un-prepared food items are not taxed. All other food items, eg fruits and vegetables are exempt from sales tax. The US states rely upon GST as internal revenue, ie with the federal government. For this reason, the states are continuing with non-adjustable GST instead of adopting the VAT. Despite such heavy reliance on GST, the list of exemptions is not different from European Union, UK and Australia.
Almost all food items, medicines, supplies to federal government, educational institutions are exempt from GST. The list of exemptions in the US may be very relevant to our government as we have very strong strategic partnership with the US. The Indian exemptions list is also very exhaustive. It has even exempted the supply of electrical energy and textile as well as sugar sector. None of their agri products are subjected to VAT.
Once the VAT becomes operational, (In the present shape), almost every commodity other than peas, Wheat and Wheat Floor shall be changeable to the VAT. What would happen to a common person in a country where 40% of its population lives below the poverty line?
As per Section 12, following local supplies would be Zero rated:
(i) Sale/transfer of an economic activity or part as an on-going concern by a registered person to another registered person (ii) Supply of stores and provisions for consumption aboard a conveyance proceeding abroad (iii) Basic Pharmaceuticals or medical supplies Specified by FBR (iv) Supply of Precious metals (v) Supply of international transport services.
As per the present Law, Section 4 deals with Zero rating. Besides all exports, there are 8 entries in the 5th Schedule where zero-rating has been allowed. About 32 SROs relating to zero-rated items are being abolished along with the 3rd Schedule. The zero-rating is being confined to exports only as per Section 23 of the proposed draft bill.
However, Section 13 provides that the new law would withdraw the powers of the FBR as well as the Ministry of Finance, regarding the exemptions through SRO or special orders and it will be the sole prerogative of the Parliament to grant exemptions whatsoever. This appears to be a positive change as the present Sales Tax Act, 1990, was also promulgated in the VAT mode but due to continuous violations, deviations and departures from the basic spirit of the VAT by the FBR as well as the Federal government, its shape has been entirely changed which has resulted into promulgation of a new law in the shape of proposed draft VAT Bill.
None is happy on proposed plan of the government regarding withdrawal of all exemptions. Recently, the Pakistan Dairy Association has tendered an appeal to the Prime Minister of Pakistan, demanding that let the milk industry survive and let Pakistan grow its dairy sector through the white revolution. The government will only get revenue if the industry survives. Continue the zero-rating for dairy and this is the part of engine of growth in the country and the market link for thousands of small farmers associated with this industry.
As per Section 95, sub-Section (4), old registrations shall be deemed to have been effected under the new law and there will be no need for any fresh registration on coming into force of the new law. The concept of voluntary registration has been introduced through Section 41. However, voluntary registration once obtained cannot be withdrawn before 12 months at least, as per sub-Section (4) of Section 46. The list of registered persons shall be published by the FBR on 1st July, 2010 and as per Section 48, it shall be available on the website of the Board.
As per Section 41, threshold has been enhanced from 5 million to 7.5 million and the decision regarding the registration or refusal will be issued within 15 days. This Section provides right of appeal against the refusal order. However, Section 79, dealing with the appeals does not provide the right of appeal to the persons whose applications for registration are refused. This anomaly is required to be redressed.
Furthermore, en-block exemption threshold of Rs 7.5 million has been provided whereas in the present law, there is no threshold for the importers, whole-sellers and exporters. Now the Government may find it difficult to collect the VAT from the importers at the import stage, if their total imports for the last 12 months remain below the threshold of 7.5 million. So, it would be better, if no threshold is provided to the importers.
The Section 9 of the proposed VAT Bill speaks about the imposition of the VAT. Only two tax rates are provided ie 0% and 15%. As per sub-section (3), the VAT will be charged on ad valorem basis. The Section 7 defines taxable supplies including supply of goods and Federal List Services. Different rates of sales tax presently prevailing would be abolished to apply a standard rate of 15% on all the taxable supplies, including retail sector abolishing multiple sales tax rates. There would be no fixed tax, reduced tax or enhanced tax, retail price based tax, or any special tax scheme.
As earlier discussed about the VAT on Federal List Services, it may be reiterated that as per present Federal Excise Act, 2005, the FED is being already paid on services by terminal operators at the rate of 16% and likewise shipping agents, inland carriage of goods by air and facilities for travel are being also taxed under the Federal Excise Act, 2005, which is being paid in the VAT mode as provided in Section 7 read with SRO 550(1)/2006 dated 5-6-2006.
As earlier stated, Entry No 53 of the Federal Legislative List of the Constitution has been incorporated in the preamble of the proposed VAT law to levy the VAT on all these services in lieu of Federal Excise Duty, despite the fact that there is no constitutional guarantee for the levy of sales tax on services by the Federal government.
In Sections 55, 56, 57 and 58 dealing with filing of returns and declarations, the taxpayers would be allowed to file their returns manually or electronically. However, FBR's permission would be required to file the return after the due date or to file revised/amended return. The time limit for furnishing amended return has been extended to three years, which was 120 days as per the present law, ie Section 26(3). However, there is a news that a provision is going to be added in the proposed law to remove the restriction of the FBR permission for furnishing the revised return.
(To be continued)
Source: http://www.brecorder.com/index.php?id=1056813&currPageNo=1&query=&search=&term=&supDate=
A uniform collection mechanism is needed for all provinces for implementation of an integrated VAT in all provinces. The Finance Ministry is trying to convince the Sindh government to allow the federation to collect the VAT on services till such time the provincial government is able to develop infrastructure and enough capacity to effectively collect the levy on services.
The Prime Minister has also constituted a committee, comprising of Advisor to Prime Minister on Finance, Secretary Finance and four provincial chief secretaries. If Sindh or other provinces declined to implement the VAT, then it would not be possible to invoke integrated VAT and a major portion of the Federal Draft Bill will be required to be modified/amended.
As per present Sales Tax Act, 1990, Section 13 deals with exemptions. As per 6th Schedule, there are 71 Entries in Table I and 11 Entries of Exemption are contained in Table II. There are about 30 SROs of Exemptions.
In the proposed draft law, Section 11 provides for certain exemptions and in the 1st Schedule, 14 entries of exemption have been given like wheat, wheat flour, unprocessed peas, ice and water, table/iodised) salt, books, newspapers, Holy Qura'n, ambulances, fire fighting trucks, artificial parts of the body, infra ocular lenses and glucose testing equipment etc.
The FBR has been examining a proposal to levy lower rate of the VAT on food items and essential commodities where exemptions would be withdrawn under the 6th Schedule from 2010-11. In this way, the inflationary impact could have been avoided by imposing reduced rate of the VAT on basic consumer items and food commodities.
There was a news that the FBR may propose 5-6% VAT on supply of consumer items sold in Pakistan on which presently sales tax is charged on the basis of printed sale price, eg fruit juices, vegetable juices, ice cream, aerated water or beverages, syrups and squashes, cigarettes, toilet soap, detergents, shampoos, tooth paste, shaving cream, perfumery and cosmetics, tea, powder drinks, milky drinks, toilet paper and tissue paper, spices, sold in retail packing, bearing brand names and trade marks and shoe polish and shaving cream.
However, the final decision would be taken in view of analysing the revenue implications by the Revenue Advisory Council and the FBR. In the EU countries, supply of food items, medical and educational services and materials are exempt from the VAT. They have not specified items, but have given blanket exemption on all such food, health and educational services and material. In fact, all activities relating to day-to-day life, needed goods and those, which are required for the Socio-Economic development of the society are exempt from the VAT. In all these 27 countries, tax-to-GDP ratio is higher than 20%.
In the UK, food of all kinds used for human consumption, including products eaten as part of a meal or as snacks and products like flour are exempt. The food items for human consumption are not only exempt but entitled to input tax credit. Likewise, all unprocessed foodstuffs, such as raw meat and fish, vegetable and fruits, cereals, nuts and pulses etc are zero-rated, so almost all the agricultural Products are exempt from the VAT and entitled to tax credit paid on any goods and services used in their Production.
The exemptions available to farm products are world-over just to attract investment in this core activity of life. The GST in Australia is proving a very smooth growth engine for the Economy. Basic food, education courses, medical, health and care services, medicines, exports, childcare, religious services, charitable activities etc are exempt.
Australia has not only exempted agri products, food items and socio-economic services, but allows refund or input credit adjustment to the suppliers. This, in return, keeps them cost free of any taxes hidden or otherwise. In one decade, since the GST was introduced in Australia, it has become a success story.
There is no VAT in the US. However, in the US federating units, there is unadjustable GST. In California (largest state), grocery stores, un-prepared food items are not taxed. All other food items, eg fruits and vegetables are exempt from sales tax. The US states rely upon GST as internal revenue, ie with the federal government. For this reason, the states are continuing with non-adjustable GST instead of adopting the VAT. Despite such heavy reliance on GST, the list of exemptions is not different from European Union, UK and Australia.
Almost all food items, medicines, supplies to federal government, educational institutions are exempt from GST. The list of exemptions in the US may be very relevant to our government as we have very strong strategic partnership with the US. The Indian exemptions list is also very exhaustive. It has even exempted the supply of electrical energy and textile as well as sugar sector. None of their agri products are subjected to VAT.
Once the VAT becomes operational, (In the present shape), almost every commodity other than peas, Wheat and Wheat Floor shall be changeable to the VAT. What would happen to a common person in a country where 40% of its population lives below the poverty line?
As per Section 12, following local supplies would be Zero rated:
(i) Sale/transfer of an economic activity or part as an on-going concern by a registered person to another registered person (ii) Supply of stores and provisions for consumption aboard a conveyance proceeding abroad (iii) Basic Pharmaceuticals or medical supplies Specified by FBR (iv) Supply of Precious metals (v) Supply of international transport services.
As per the present Law, Section 4 deals with Zero rating. Besides all exports, there are 8 entries in the 5th Schedule where zero-rating has been allowed. About 32 SROs relating to zero-rated items are being abolished along with the 3rd Schedule. The zero-rating is being confined to exports only as per Section 23 of the proposed draft bill.
However, Section 13 provides that the new law would withdraw the powers of the FBR as well as the Ministry of Finance, regarding the exemptions through SRO or special orders and it will be the sole prerogative of the Parliament to grant exemptions whatsoever. This appears to be a positive change as the present Sales Tax Act, 1990, was also promulgated in the VAT mode but due to continuous violations, deviations and departures from the basic spirit of the VAT by the FBR as well as the Federal government, its shape has been entirely changed which has resulted into promulgation of a new law in the shape of proposed draft VAT Bill.
None is happy on proposed plan of the government regarding withdrawal of all exemptions. Recently, the Pakistan Dairy Association has tendered an appeal to the Prime Minister of Pakistan, demanding that let the milk industry survive and let Pakistan grow its dairy sector through the white revolution. The government will only get revenue if the industry survives. Continue the zero-rating for dairy and this is the part of engine of growth in the country and the market link for thousands of small farmers associated with this industry.
As per Section 95, sub-Section (4), old registrations shall be deemed to have been effected under the new law and there will be no need for any fresh registration on coming into force of the new law. The concept of voluntary registration has been introduced through Section 41. However, voluntary registration once obtained cannot be withdrawn before 12 months at least, as per sub-Section (4) of Section 46. The list of registered persons shall be published by the FBR on 1st July, 2010 and as per Section 48, it shall be available on the website of the Board.
As per Section 41, threshold has been enhanced from 5 million to 7.5 million and the decision regarding the registration or refusal will be issued within 15 days. This Section provides right of appeal against the refusal order. However, Section 79, dealing with the appeals does not provide the right of appeal to the persons whose applications for registration are refused. This anomaly is required to be redressed.
Furthermore, en-block exemption threshold of Rs 7.5 million has been provided whereas in the present law, there is no threshold for the importers, whole-sellers and exporters. Now the Government may find it difficult to collect the VAT from the importers at the import stage, if their total imports for the last 12 months remain below the threshold of 7.5 million. So, it would be better, if no threshold is provided to the importers.
The Section 9 of the proposed VAT Bill speaks about the imposition of the VAT. Only two tax rates are provided ie 0% and 15%. As per sub-section (3), the VAT will be charged on ad valorem basis. The Section 7 defines taxable supplies including supply of goods and Federal List Services. Different rates of sales tax presently prevailing would be abolished to apply a standard rate of 15% on all the taxable supplies, including retail sector abolishing multiple sales tax rates. There would be no fixed tax, reduced tax or enhanced tax, retail price based tax, or any special tax scheme.
As earlier discussed about the VAT on Federal List Services, it may be reiterated that as per present Federal Excise Act, 2005, the FED is being already paid on services by terminal operators at the rate of 16% and likewise shipping agents, inland carriage of goods by air and facilities for travel are being also taxed under the Federal Excise Act, 2005, which is being paid in the VAT mode as provided in Section 7 read with SRO 550(1)/2006 dated 5-6-2006.
As earlier stated, Entry No 53 of the Federal Legislative List of the Constitution has been incorporated in the preamble of the proposed VAT law to levy the VAT on all these services in lieu of Federal Excise Duty, despite the fact that there is no constitutional guarantee for the levy of sales tax on services by the Federal government.
In Sections 55, 56, 57 and 58 dealing with filing of returns and declarations, the taxpayers would be allowed to file their returns manually or electronically. However, FBR's permission would be required to file the return after the due date or to file revised/amended return. The time limit for furnishing amended return has been extended to three years, which was 120 days as per the present law, ie Section 26(3). However, there is a news that a provision is going to be added in the proposed law to remove the restriction of the FBR permission for furnishing the revised return.
(To be continued)
Source: http://www.brecorder.com/index.php?id=1056813&currPageNo=1&query=&search=&term=&supDate=
Subscribe to:
Posts (Atom)