ISLAMABAD: Members of the Senate and tax authorities have divergent views on the impact of the value-added tax on consumers.
While the authorities have proposed 15 percent rate for VAT, senators feel that VAT will have a total impact of 21 percent on consumers as it will cover the total supply chain till end consumers.
Although the Senate Standing Committee on Finance has proposed key amendments to the Federal VAT Bill 2010, the fate of the Federal VAT Bill 2010 will be finally decided by the National Assembly Standing Committee on Finance because the bill is related to money. The bill is going to be debated in the latter in days to come. The NA Standing Committee on Finance has full right to accept or reject all or some of the key recommendations of the Senate Standing Committee on Finance on Federal VAT Bill 2010.
Commitment with International Financial Institutions (IFIs): The decision on the Federal VAT Bill 2010 would have far reaching impact on Pakistan’s relations with IFIs like the International Monetary Fund (IMF), World Bank (WB) and Asian development Bank (ADB) as these IFIs are of the view that Pakistan must improve its revenues as IFIs alone can not meet entire financial needs of the country on medium and long-term basis.
Pakistan has already committed with the IMF authorities for the introduction of VAT Bills in the parliament and four provincial assemblies before march 31, 2010 and fulfillment of this commitment will have an impact on the decision of the IMF Executive Board, which will be taken on March 31 whereby Pakistan is likely to receive $1.2 billion installment under the Stand-By Arrangement.
The Federal Board of Revenue (FBR) has already clarified that the government of Pakistan has not made any commitment with the donor agencies like IMF that the parliament would give approval of the new Federal VAT Act 2010 and Provincial VAT Bills 2010. Pakistan is a sovereign country and parliament has the authority to reject or accept the new VAT law. The drafts bills could be passed amended or rejected by the parliament, which is the sovereign body. The IFIs have been informed accordingly.
Applicability of VAT: VAT to be enforced within the federal and provincial level on goods and services with effect from proposed date of July 1, 2010 would also proposed to be enforced in FATA, PATA, Gilgit and Baltistan and Azad Jammu and Kashmir in the second phase.
The FBR has prepared three scenarios for enforcement of National VAT, National and Provincial VAT and National VAT minus Sindh. National VAT regime is expected to be more suitable for the entire country as it would have single registration number for the business selling goods and services, there would be uniform tax scope, there would be no origin or destination dispute, federal and provincial VAT will be mutually adjustable, there would be no multiple taxation, single tax management will be done by FBR, there would be low collection cost and whole of Pakistan would be considered as a single market.
National and Provincial VAT regime will have different features like multiple registration at federal and provincial level, there would be divergent tax scopes, there are chances of inter-provincial disputes on origin and destination, no adjustment among federal and provincial VAT, there would be multiple tax burden on taxpayers, multiple tax management would be required at federal and provincial level and this would result in high collection cost as the country would be divided into multiple markets.
National VAT minus Sindh regime will have totally different features like dual registration, divergent tax scope, there would be disputes on origin and destination between Karachi and Islamabad and no adjustment with Sindh VAT. There would be double tax burden, high collection cost and duel market will exist in Pakistan.
Impact of VAT: The Senate Standing Committee on Finance is of the view that VAT is inflationary in nature and pointed out that 15 percent VAT will have a burden of 21 percent on taxpayers therefore; initially the VAT rate should be reduced from 15 percent to 12.5 percent. FBR authorities also accept that imposition of VAT will have inflationary impact and to offset this impact, FBR has proposed to reduce the VAT rate from 16 percent to 15 percent and exempt 1 percent special excise duty on imports as well as local manufacturing.
Outcome of VAT: The federal government strongly feels that if the government is able to implement VAT and realize Rs 500 billion additional revenue upon its full implementation and is able to post 25 or 28 percent per annum growth in subsequent years then there would be no need to go for loans from the IMF or WB.
Scope of VAT: There would be exemption from VAT on essential food commodities, charities, and public sector education, health sector, exports sector and international or sovereign commitments only. Wheat and wheat flour, pulses, life saving drugs, would remain exempted. Agriculture commodities would be exempted at the time when these would be lifted from fields, however, when such commodities would be traded at market level then the big traders would give 15 percent VAT on such traded commodities.
At present federal excise duty at the rate of Rs 100 per square yard is applicable on land development of residential and commercial purposes and federal excise duty at the rate of Rs 50 per square feet of covered area for residential and commercial units is applicable. Under the VAT regime standard rate of 15 percent VAT would be applicable on the land development of residential and commercial purposes at pre square feet and per square feet of covered area for residential and commercial units is applicable.
There is general sales tax exemption on import and supply of bricks and blocks and construction machinery at present in the country, however, under VAT a uniform rate of 15 percent VAT would be applicable on the import and supply of bricks and blocks and construction machinery.
All other construction inputs including business use logistics are chargeable to sales tax without any input credit facility. However, under the proposed VAT regime input tax credit across the board would be available to the construction industry.
Source: http://www.dailytimes.com.pk/default.asp?page=2010\03\27\story_27-3-2010_pg5_1
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