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=
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