ARTICLE (May 14 2010): It seems that the stage has been finally set to replace the existing Sales Tax Law with the VAT with effect from 1st July, 2010 as the World Bank experts, after finalising the VAT implementation plan with the FBR have left for Washington to submit their report on Pakistan's preparedness on VAT to the IMF Executive Board, which is scheduled to meet on 14th May, 2010.
It is relevant to say that the IMF depends on the World Bank report to review progress on the tax administration, including the implementation of VAT. The FBR Chairman says that the FBR is prepared to implement the VAT and not looking for Plan B to introduce the improved version of the GST. He further says that the rules and regulations have been finalised which would be made public for comments after the Law is passed by the Parliament and the Provincial Assemblies.
Encouraged partly by the government's determination to impose the VAT, the IMF was the first to respond in a positive manner and its Executive Board will now meet in Mid-May to approve the next tranche of Pakistan's 11.3 billion-dollars loan.
The drafters claim that the value-added tax (VAT) bill has been prepared keeping in view the best practices of VAT prevailing in the world. The FBR Chairman says the VAT is successfully implemented in 130 countries of the world and tax collection has been increased substantially in these countries after implementation of the VAT. Israr Rauf, one of the members of VAT team of FBR, says, Pakistan is 137th country where the VAT would be applied. On the other hand, the Senate Standing Committee on Finance has recommended deferment of the VAT for one year, reducing its rate from 15% to 12.5% and lessening the powers of its arrears recovery from the relatives of defaulters.
All members of the committee were unanimous that it is too early to implement a new law without taking all the stakeholders such as business and trade community on board. The committee has recommended deferment of implementing the VAT for one year. This is necessary as the stakeholders, particularly business and trade community, are not ready to accept the VAT at this stage. The entire business community has rejected the VAT law and at least one year should be given for deliberations on the new law.
Few stakeholders opined that the time of consultation is too short as it should be at-least two years from now onward, arguing that Singapore took two years to complete the consultation process and India postponed the introduction of the VAT system for one year just to complete the consultation process as every country has its own economic structure and tax culture.
Australia took more than 6 years to convince the parliament for the enforcement of GST. It also did a lot of capacity building of the potential taxpayers. The FBR has not published any material on the viability of the proposed bill, except placing FAQs on the website and conducting few seminars subsequent to moving of the bill in the parliament. Since this bill shall have far reaching repercussions, the print and electronic media also needs to sensitise on this core economic issue.
The World Bank says Pakistan has a revenue system that is low yielding by international and regional standards. The tax-to-GDP ratio has been declining over the time despite several years of robust economic growth. At around 10 percent, the country's tax-to-GDP ratio is among the lowest in the world. The impact of Pakistan's weak revenue performance is significant. The resources to finance necessary investments in education, health care and infrastructure remain limited, increasing Pakistan's dependence on external aid.
However, the matter of levy of the VAT is an issue of utmost importance and involves question of constitutionality. This appears to be the main stance of the government to introduce the VAT that tax-to-GDP ratio in Pakistan is very low, ie about 10.6%. It is also being said that the VAT rate is directly proportional to tax-to-GDP ratio.
When we look at different developed countries of the world where VAT is successfully implemented, it does not appear to be correct as is evident from the following table:
It is quite obvious from the above that by applying lesser rate, higher tax-to-GDP ratio has been ensured by these countries. So, it cannot be said that higher VAT rate is directly proportional to the tax-to-GDP ratio. The matter is, in fact, of proper application of law in its true perspective. So, the Senate Committee and other stakeholders have rightly demanded the reduction of the VAT rate from 15% to 12.5%, but the government appears to be still reluctant to reduce the proposed VAT rate.
It is being commonly said by the stakeholders that the Federal as well as the provincial drafts are not in consonance with the present spirit of the Constitution. If we look at Article 142 of the Constitution, which is basically the subject matter of the Federal and provincial laws, there are four situations provided in this Article. First situation says that this is the sole prerogative of the Parliament to make legislation in respect of the entries contained in the Federal Legislative List.
In the Second Situation, it has been provided that regarding 47 entries contained in the Concurrent Legislative List, both Parliament vis-à-vis provincial assemblies are authorised to make legislation. It is relevant to add that through 18th Amendment, the Concurrent Legislative List has been abolished and now both the Parliament as well as the provincial assemblies have been given authority to promulgate criminal laws and procedures/law of evidence.
However, Article 143 still, after cosmetic changes through the 18th Amendment, says that in case of any inconsistency between the Federal and provincial laws on the same subject, the Federal Law would prevail.
As per the Third Situation, all those matters, which are not enumerated in both the Federal as well as the Concurrent Legislative List, fall within the exclusive domain of the provincial assemblies. After the 18th Amendment, now except the entries contained in the Federal Legislative List, all the remaining matters fall within the jurisdiction of the Provincial Assemblies, to make legislation.
In the Fourth Situation, it is provided that matters, which are not provided in the Federal Legislative List, this is the prerogative of the Parliament to make legislation in respect of areas falling within the jurisdiction of the Federation.
It is relevant to say that in the light of Article 142(1)(a), as per Entry No 49 of the Federal Legislative List, Sales Tax Act, 1990 was promulgated to levy tax on sale, purchase, importation, exportation, production, manufacture and consumption of goods. Whereas, in the light of Article 142(1)(c), the provincial governments issued Sales Tax Ordinances in 2000 to levy sales tax on certain services. In 2001, the President of Pakistan issued Islamabad Capital Territory (Tax on Services) Ordinance, 2001 to charge Sales Tax on certain services in the territory of Islamabad.
The Entry No 49 of the Federal Legislative List empowers the Federal government to levy taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed. Through the 18th Amendment, the words "except Sales Tax on services", have been inserted in this entry.
As per Entry No 53 of the Federal Legislative List, the Federal government is empowered to levy terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and freights. Both the above Entries are contained in the preamble of the draft VAT Bill.
As per Section 2 (XII), Federal List Services means "the carriage of goods or passengers by railway, sea or air". As per Section 2 (XIV), the Federal VAT means tax imposed under this act on supply or import of goods or on supply of Federal List Services. As per recent Amendment, ie insertion of words "except sales tax on services" in Entry No 49 of the Federal Legislative List read with 7th NFC award, the Federal government has been specifically barred from levying sales tax on services and this has been declared the domain and sole prerogative of the Provinces to make legislation and collect VAT on services.
Now, by inserting Entry No 53 in the preamble and defining the Federal List Services, the Federal Government has been given Powers under Section 9 to impose sales tax/VAT on said services under the garb of terminal taxes. Undoubtedly, these are two different entries defining the levy of two different taxes but surprisingly the VAT has been proposed to be levied on goods and certain services in the light of both these entries.
In India, a separate law viz "The Terminal Tax On Railway Passengers Act, 1956" is available to charge terminal taxes. The Federal government earlier imposed Federal Excise Duty on these services. Admittedly these are services as provided in Table II of the 1st Schedule to the Federal Excise Act, 2005, so when these are the services and as per 18th Amendment as well as 7th NFC award, the provinces have been given authority to levy sales tax on services, then how the Federal government can do so?
Moreover, if any power was earlier available to the Parliament to impose sales tax on services that stands omitted as the later amendment would repeal the earlier one, if any available on the subject and doctrine of implied repeal would be squarely applicable in the given circumstances.
As per Section 8 of the proposed Federal Law as well as Section 19 of the proposed Provincial VAT Bill, the VAT shall be collected as an integrated tax regime.
The draft Bills 2010, relating to Federal and provincial VAT, reflect a gross violation of the Constitution of Pakistan, and these are totally contrary to the recommendations of the 7th NFC award relating to sales ax on services.
On the issue of sales tax on services, there is a specific recommendation in the 7th NFC award, which reads: 'NFC recognises that sales tax on services is a provincial subject under the Constitution of Pakistan, and may be collected by respective provinces, if they so desire'. The deletion of this recommendation is a major deviation from the entire spirit of the NFC and is contrary to the interests of provinces.
It is worth mentioning that Finance Department, government of Sindh has already placed its serious reservations to the FBR by submitting that the draft bills on the VAT, both Federal and provincial, being contrary to constitution "are not acceptable to Sindh."
According to the Sindh government, these bills empower the FBR to collect the VAT on behalf of the Federation and the provinces without providing any scope for provincial rights on collection of sales tax on services. There are innumerable clauses which, in a way, encroach upon the provincial jurisdiction so much so that the role of the provincial government has almost been minimised to the promulgation of the act only, as is the case in the existing Provincial Sales Tax Ordinances, 2000.
The draft VAT Bills further involve a very complex system of input and output adjustments in such a way that it becomes impossible to ascertain what are "goods" and what are "services". (Example- Section-17 - Federal Bill, Section-6 - Provincial Bill/Ancillary or incidental supplies. Simplicity in tax structure is one of the basic principles under the cannons of taxation, as a complex tax structure will always lead to evasion of tax. 'Tax on goods' and 'tax on services' are two separate domains; thus they should be treated separately.
Any integration of the taxes on sales and purchase of services in the provinces and cross-credit of each tax in case of 'Federal VAT' on integration; with Federal taxes on sales and purchases of goods and cross-credit of each tax in case a 'Provincial VAT' would lead to complexity in tax structure.
Since Sindh was contributing more than 60% to the main pool of GST on services and, in return, it had been receiving only 23% of the total kitty of the said pool. So, Sindh has decided to opt for the collection of the GST on services by itself instead of assigning it again to the FBR.
(To be continued)
Source: http://www.brecorder.com/index.php?id=1056463&currPageNo=1&query=&search=&term=&supDate=
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