VAT: some suggestions By HAFIZ MOHAMMAD IDRESS

ARTICLE (May 02 2010): Numerous words have been used in the proposed "the Federal and Provincial Value Added Tax 2010" bill but there is no definition of these words, hence these words need proper explanation to avoid long litigation. For example, Progressive or Periodic Supplies, Ancillary or incidental supplies, increasing/decreasing adjustment, minor correction, etc, need to be explained. It is, therefore, suggested that suitable definition of the above words/phrases should be provided.

Provincial VAT - time of supply: Time of supply for service has not been provided in the Provincial VAT. Further, there is no provision in the Provincial VAT, which covers post services adjustment for bad debts. It is suggested that the time of supply of services should be defined as "the time of receipt" in the case of professionals such as doctors, lawyers, chartered accountants and architects.

Exemptions: As per section 11 of the Federal VAT and Section 10 of the Provincial VAT, the 1st Schedule deals with the exemptions, whereas the threshold limit of Rs 7.5 million is given in Section 41 of the Federal VAT, which deals only with registration. This means that the threshold limit will be only for the purposes of registration, but the persons having turnover less than Rs 7.5 million will be subject to the levy of VAT.

It is suggested that the threshold limit of Rs 7.5 million should be provided in the 1st Schedule of the Bill. The Provincial VAT, under the heading "Continuity of Registration" provides for the continuation of the registration for the persons registered under Sales Tax Act 1990 and also states that if the person exceeds the registration threshold under Section 46 or if the person does not exceed the registration threshold under Section 47.

From the above, the question arises: Sections 46 and 47 referred in the Provincial VAT belong to which statute? Imposition of tax: The Federal VAT is imposed at the 15% rate on taxable imports under Section 9 of the Bill. On the other hand, the threshold limit of Rs 7.5 million is provided in Section 41. Question arises that if an importer, having turnover less than the threshold limit and is not liable to register, then how the same is subject to levy of VAT.

Rate of tax: The rate of 15% is too high in comparison with the other countries of this region. Further, the proposed VAT will be imposed on almost every item, which will result in price hike. It is suggested that rate should be at the rate of 10%. Restriction on input tax deduction: Threshold limit of Rs 50,000, ie payment through banking channel to vendor should be enhanced to Rs 100,000 keeping in view the increase in prices of goods.

Authority: Officer of Inland Revenue, through whom the VAT will be administered, has been defined in Section 2 of the bill. But on the other hand in most of the sections of the bill reference to the Board has been given, particularly Section 59 of the bill states that all the powers and functions shall be performed by the Board.

Is it practically possible that the Board will delegate its powers to the Officer of Inland Revenue for each and every function? Further, Section 60 states that the Board may constitute the Directorates General for achieving the objects of this Act consisting of the Director General, Director, Additional Director, Deputy Director and Assistant Director. On the other hand, in many sections, Officer of Inland Revenue has been made responsible to do certain acts under this Act.

Questions arise: (1) Will the Board perform all the functions under this act? Or (2) Will the new Directorate General, constituted under Section 60, perform all the functions under this Act? Or (3) The Officer, Inland Revenue, under the present setup will perform all the functions under this act? Amended tax return: An Amendment to tax return should not be made subject to permission by the board.

The concept of rectification of mistakes apparent from records is available in Income Tax Ordinance, which facilitate to rectify mistakes such as calculation error and incorrect credit of tax. But no such provision is available in VAT, which may result in unnecessary prolonged litigation. It is suggested that the concept of rectification should also be provided in this Bill.

Repeal and saving/adjustment of input: Sections 95 and 96 of the Bill do not provide saving to the sections of the Federal Excise Act 2005, which will be omitted in the event of the promulgation of this act, which will result in unnecessary litigation.

1st and 2nd Schedule: Exemptions have been withdrawn on the items of the basic needs. It is suggested that exemptions should be granted to items of basic needs such as rice, pulses, vegetable, fruit and milk. Pharmaceuticals and medical supplies have been placed in the 2nd Schedule as items on which the VAT is zero-rated. It is suggested that these items should also be placed in the 1st schedule.

VAT on immovable property - Provincial VAT: In the 1st schedule, some of the supplies of immovable property have been exempted vide serial No 6 of the schedule which means that some supplies other than provided in this schedule are taxable but in section 3 of the Provincial VAT, immovable property has been excluded from the definition of supply of services which needs a clarification/amendment.

Chargeability of VAT on inter-provincial services: It is not clear from the language of section 14 of the Provincial VAT Bill about the levy of VAT on a person who is resident of one province and is also providing/rendering services in other provinces. How and in which province he will be levied VAT? Provincial VAT bill is not exhaustive/complete: Section 18 of the Provincial VAT Bill deals with "Power and duties of the Board".

Provincial VAT Bill is not exhaustive/complete like Federal VAT Bill. Some of provisions of Federal VAT Bill relating to Registration etc are referred in Provincial VAT Bill but many other provisions which are necessary for enforcement of this Bill are not referred.

It is suggested that either Provincial VAT Bill be made exhaustive/complete to cover all the eventualities or section 18 should be suitably amended by giving reference that all the sections of Federal VAT Bill will apply mutatis mutandis, otherwise it will result in unnecessary long litigation. Repeal/adjustment of input: The Bill does not provide saving to the sections of the Federal Excise Act 2005 which will be omitted in the event of the promulgation of this Act, which will result in unnecessary litigation.

(The writer is a Supreme Court lawyer)

Source: http://www.brecorder.com/index.php?id=1051841&currPageNo=1&query=&search=&term=&supDate=