Monday, May 17, 2010

Comments on VAT Act, 2010 By ZAKARIA USMAN

ARTICLE (May 13 2010): The International Monetary Fund (IMF) approved a $7.6 billion Stand-By Arrangement (SBA) programme for Pakistan, to be delivered over 23 months which has been enhanced to $11.3 billion in July 2009. As expected, the IMF approved the enhancement after imposing certain conditionalities, one of which is introduction of value-added tax system w.e.f. July 1, 2010 coupled with surrendering control of monitoring of revenue collection to the IMF.

Since then the 6 directors of the IMF and 2 directors of the World Bank are supervising revenue collection and preparation of federal budget. If you compare the role of the IMF/World Bank in Pakistan with the East India Company in Sub-Continent, you will find great resemblance in their operation.

The IMF officials, during their recent visit to Pakistan, had categorically warned that if the VAT was not enforced, Stand-By Arrangement programme would be abolished and Pakistan would be required to refund $6.5 billion, so far paid by the IMF. The IMF's fifth tranche of $1.2 billion that was to be released by the end of March is still pending, because of the fact that the IMF wants assurance regarding the imposition of the VAT from 1st July 2010.

Besides all representatives of trade and industry, who have totally rejected the VAT Bill, the provincial governments of Sindh and Punjab have also shown concern against the levy of the VAT. However, the FBR, on behalf of its foreign master, is advocating the VAT, knowing that it will have devastating effects for Pakistan's economy, which has already been showing recessionary trend for the last two years due to a host of internal and external factors.

Due to ever-increasing socio-economic challenges prevailing in the country, including wide income disparity, high cost of living, poverty, increase in unemployment rate, energy crisis, slow industrial sectors' performance, low economic growth, widening trade deficit, the people have become highly sceptical about the impact of any new economic proposal.

Given below are the views and proposals on some harsh and irritant measures of the VAT Law, evolved through consensus, after holding a series of consultative meetings with the representatives of business community and high government officials, for improving its impact on trade and industry.

Enforcement of VAT from July 1st: Without infrastructure, finely crafted law may be black ink on white paper. The FBR has failed to discuss the proposed VAT bill with the stakeholders and get consensus on its measures well in time. It started the consultancy process very late, 15th March, 2010, that is about two-and-a-half months before the announcement of 2010-11 Federal budget in June 2010.

During this period, the FBR is required to hold consultative meetings with more than 150 associations and chambers, and incorporate their proposals in the act, which is a gigantic task. There are reasons to believe that the FBR will not be able to get the comprehensive feedback from trade and industry due to shortage of time and any haste in enforcement of the VAT act with effect from July 1, 2010 will serve as counter productive.

In other countries, sufficient time of 2-3 years is given to the stakeholders to study the pros and cons of the new law and seek their confidence which is a prerequisite for the success of any scheme. Therefore, the VAT act (draft) be enforced from 1st July 2011 and during this period, it should be made public for seeking their comments and observations to incorporate in the proposed act, create awareness among all the stakeholders through workshops, conferences, interaction with trade and industry etc.

Moreover, the FBR should also complete its homework and develop infrastructure for the enforcement of the VAT act, such as documentation of the economy, registration of all eligible/potential taxpayers in the supply chain from importers/manufacturers to retailers, clearance of outstanding backlog of sales tax refund claims, removal of distortions from economy etc.

The establishment of an institutional framework with reference to multiple options for policy, enforcement and relationship between various stakeholders is most serious challenge for the FBR, at the time of introducing the VAT in order to achieve the VAT aims without creating any friction with taxpayers.

In the absence of an effective monitoring system, the FBR will also find it difficult to collect the tax. Under the VAT, the threshold turnover has been proposed to be enhanced to Rs 7.5 million, but there is no mechanism, procedures or rules in place to determine the actual turnover. One of the troublesome areas is rampant smuggling. The smuggled items are flooded and sold at both, small and big retail outlets without any invoice or legal import permits and makes it almost impossible for the tax collectorate to determine the real annual turnover, due to widespread under reporting.

During the current year, only 857 retailers so far have submitted their quarterly sales tax return out of which just 307 retailers have deposited sales tax amounting to Rs 90.86 million along with return. It means that too many retailers and wholesalers escaped the reporting system, mainly due to loopholes in the law, especially the turnover ceiling, after palm greasing of tax officials. As long as such loopholes are there in the law, no plan or scheme to raise the tax-to-GDP ratio can succeed. It is, therefore, again emphasised that the government must first ensure proper documentation of the system and removal of loopholes from the system.

However, given below are some harsh and irritant measures of the proposed bill and suggestions thereof, identified after a series of consultative meetings with the representatives of trade and industry. These proposals, if adapted, will reduce the level of corruption and harassment without compromising the ability and power of the bill to generate the potential revenue.

Bar of suit, precaution and other legal proceeding (U/S 87): Under this section, taxpayers are not allowed to go to any court, including the high court, to seek remedy or justice against the order passed, assessment made, tax levied, penalty imposed, audit etc, against any action taken by an officer of Inland Revenue. This measure is against all norms of justice and tantamount to denying a taxpayer of his basic right of justice, given in the Constitution of Pakistan. It is proposed that a taxpayer be allowed to go any court of law and if the case is decided in his favour, the concerned tax official should be penalised. If the case is not decided within 6 months, it shall deemed to be decided in favour of the taxpayer.

Recovery or payment of tax (U/S 61): Unlimited powers have been given to the official for recovery of amounts, including raiding the business premises without serving prior notice etc. The powers granted are too harsh. All these powers can be applied at one time and at once without giving any time notice to the taxpayer. Moreover, no distinction is made between admitted tax not paid and the disputed tax imposed by the department, which is a big injustice to the taxpayer and, therefore, must be removed.

Discretionary powers U/S 72: Section 72 of the bill grants arbitrary power to arrest anybody, not necessarily a tax defaulter, who, in the opinion of the low-ranking officer of the FBR, is suspected (just only suspected) of any offence or is believed to commit offence liable to prosecution. The arrest can be made even of a person against whom no tax demand is outstanding. It must be deleted.

Concept of supply (U/S 4, 6 and 8): The concept of supply, based on open market price, is proposed to be introduced according to which the price can be challenged on the basis of evidence. These are harsh measures and against the business practice where the bargain in price is made on the basis of quantity and value of supply/order, credibility of party etc.

Advance payment at import stage U/S 35: At present, under Special Procedure Rules, advance tax on value addition is paid by various categories of taxpayer such as commercial importers, and gets exemption from the audit. Now the taxpayers will pay advance tax but they will not be immune from the audit. It is proposed that the importers, on payment of advance value added tax should be exempted from audit.

Carry-forward and refund (U/S 37): Excess amount will be carried forward and may be deducted in the following six tax periods and thereafter will be refunded. It will create hardship for the taxpayers, particularly for those who pay advance tax, in getting refund.

Cancellation and suspension of registration (U/S 46 and 47): After serving the notice, the taxpayer's registration will either be suspended or included in the blacklist or cancellation whether the notice is received or not. The task of serving the notice should also be assigned to the concerned associations and it should be consulted before blacklisting or cancelling registration.

Tax invoice (U/S 49): A tax invoice will be prepared to contain a plethora of information about the buyer such as NTN, CNIC etc. However, the supplier will be implicated/penalised if he is given fake or forge CNIC. Moreover, nowhere in the world such information is given by the supplier/buyer. The job of business community is to undertake economic activities not collection of unnecessary information from the purchaser.

Sales receipt (U/S 50): In case a registered person, who makes taxable supply of a value not more than Rs 25,000 to an unregistered person, will issue a sales receipt for the price of supply containing a lot of unnecessary information. The measure will consume a lot of time of the supplier unnecessarily.

Record-keeping (U/S 54): This section proposes to keep records and accounts for at least 6 years, which is too long and should be reduced to 2 years for the sake of simplicity of law.

IRS to act as court (U/S 62): The IRS will have the same powers as enjoyed by civil court for recovery of unpaid amount which tantamount to create a state within state.

Audit and special audit by IR officer (U/S 69 and U/S 70): Conduction of audit, including forensic audit etc by the Inland Revenue officer will enhance their discretionary powers for harassment and interaction between a taxpayers and tax collector, which will be resulted in corruption and tax evasion. It is suggested that audit should be conducted once in three years after giving 30 days' notice, but the audit objection should be finalised by the officer above the officer conducting the audit after receiving the viewpoint of the taxpayer.

Adjustment of input tax (U/S 96 (a) and (c)): A taxpayer may claim a decreasing adjustment to any amount of input tax, incurred, but within 12 month. It means that input adjustment will not be available on imports (say) made 1.5 years ago. Similarly, U/S 96 (c) there is no provision of automatic carry forward of input tax amount. It is proposed that section 96 of the VAT Act be abolished altogether.

Rate of 15 percent: Low tax rate discourages tax evasion and encourages potential taxpayers to get into the tax net, therefore, the VAT rate be reduced from 15 percent to 10 percent.

Abolishing of zero-rating: The facility available on domestic supply chain of five export oriented sectors and reverting to refund regime under which refunds were more than the collection, will again open floodgate of corruption as it will increase interaction between taxpayer and tax official and encourage Bawan Shah-like scandals. Therefore, the zero rating facility on domestic supply chain for five export oriented industrial sectors is resorted. Moreover, the delay in refund will create liquidity for the exporters, who will be constraint to take loan form bank at higher mark-up rate. This will be resulted in reduction of competitive edge of our products both in local and foreign markets, against the foreign product.

Penalties (U/S 89): Heavy penalties, ranging from Rs 5,000 to 50,000, will be levied on a person who will commit an offence as described in Third Schedule to VAT Act.

Powers to reopen cases U/S 78: As per VAT, the FBR and commissioner have been empowered to examine the record (to reopen) even if the appeal is pending before the commissioner, appeals. No such powers exist in ST. This may increase the hassle of double audit, hence section 78 (1) be amended as ST section 45.

Power of commissioner appeal U/S 79(4): As per section 79 (4) of the bill, it has been made compulsory for the commissioner, appeal, to decide the taxpayer's appeal in 90 days, therefore, it can be provided in section 61 that the recovery proceedings as provided in clause (c) to (h) of Section 61 will become applicable only after the decision of the first appeal of the taxpayer.

Appeals to tribunal U/S 80 (6): It is suggested that the condition of expiry of stay after six months be removed by amending section 80 (6).

Appeals to high court U/S 81 (8): It is proposed that section 81 (8) be deleted that requires stay to the extent of 6 months only.

Proposed addition of new section to VAT: A new section be introduced to the effect that any issue decided by the customs, excise and sales tax appellate tribunal, high court or the Supreme Court will be given effect in the returns/orders for the subsequent period. If that order or decision is reversed, then such assessment/returns be revised to that effect. This section should in principle be in line with section 124A of the Income Tax Ordinance, 2001. It may be noted that absence of similar provision leads to unwarranted litigation.

Default surcharge U/S 88 and 89: It should be clarified in the VAT that in case of past cases (cases related to all preceding years) additional tax/default surcharge will be levied at the rate presently applicable as default surcharge.

Simultaneous levy of penalty and additional Tax under the Act may need to be removed, being unjustified, since both the provisions are of punitive nature. There should be only one penalty on a single default. Moreover, default surcharge should not be charged on an inadvertent error as was the case of additional tax.

Recovery of tax not levied or short levied or erroneously refunded U/S 90: It should be clarified that Section 90 will apply in case of 'tax fraud' only. Service of orders, decisions etc U/S 56 of ST: There is no section in the VAT regarding service of notice, order and decision etc ie pari material of Section 56 of Sales Tax Act, 1990 is missing.

One-window operation on Federal and provincial level: The VAT must have one-window operation, instead of implementing VAT separately on Federal and provincial levels. This is essential as the registered person should not be burdened by two separate bills, procedures and audits! One widow method will not prevent the federal government from distributing to provinces after it has collected the VAT and finalised all refund claims.

Manufacturer under provincial VAT bill: The provincial VAT bill does not cover manufacturer, who other than consuming zero rated inputs, also uses inputs attracting VAT. There is no satisfactory refund procedure given in these bills! How does one adjust/claim refunds if the manufactured product is zero rated but the inputs are liable to VAT?

Establishment of new provincial and Federal status for export-oriented industries: It comes as a complete surprise that Federal and Provincial VAT Bills require that industries and products, already established as export oriented industries and having obtained zero rated status, after lengthy investigation, will now have to re-establish this new provincial and federal status! To quote:

-- It is specified as a zero-rated supply or import in the Second Schedule of this Act or it is a supply of a right or option to receive a supply that will be a zero-rated supply.

-- It is specified as a zero-rated supply under a Provincial Value Added Tax law.

It is proposed that these new requirements be applicable only to new entrants to the zero regimes and that a clear procedure be given on how to achieve zero rating; this should also be a one-window system. Those industries and products already on zero rated status should automatically be carries forward into this new system. There should not be any surprise on July the first 2010!

Refund of input under federal and provincial VAT bills: There should be only one format, agency and law applicable to VAT. However, in case of two separate bills and authorities; it is proposed that the total refund on VAT input levied for the production of zero rated output is refunded to the manufacturer, from a combination of both. The refund process should be unambiguous and rapid.

(The writer is Vice-President of the Federation of Pakistan Chambers of Commerce and Industry.)

Source: http://www.brecorder.com/index.php?id=1056123&currPageNo=1&query=&search=&term=&supDate=

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