IMF bows to demand

ISLAMABAD: The Interna-tional Monetary Fund (IMF) has relaxed the condition of the integrated enforcement of value-added tax (VAT) on goods and services in the federal and all four provinces from July 1, 2010, Adviser to the Sindh Chief Minister Dr Kaiser Bengali confirmed here on Thursday.

From July 1, 2010 onwards Sindh would implement its own draft VAT legislation under which Sindh province would not only levy VAT on services but also collect VAT through its own tax collection machinery, he added. However, VAT on goods would remain the exclusive right of the federal government and its collection from Sindh would be done by the Federal Board of Revenue (FBR), he explained.

From July 1, 2010 the FBR would enforce VAT on goods as well as services covering federal government and other three provinces Punjab, Khyber Pakhtunkhwa and Balochistan and its collection would also be performed by the FBR authorities, he added. The VAT Act was drafted keeping in view the British model, which is based on Unitary State and Pakistan being a federation, this model was not fit for it. To bridge this legal gap, there was a need to adopt a VAT model suitable in countries, which are federation and having federating units like India, Canada and Brazil, Dr Bengali explained.

From July 1, 2010 Pakistan may adopt Canadian VAT model, which allows the federal government and provinces to enforce and collect VAT individually and not collectively by one federal authority.

Its worth mentioning here that earlier the government of Pakistan had committed with the IMF that integrated VAT regime would be enforced on goods and services with its collection through FBR. However, with the finalisation of the 7th National Finance Commission (NFC) Award, the federal government accepted the right of provinces of taxing services by the provinces.

With the formal signing of 7th NFC Award, the province of Sindh was contesting for its right and demanding the federal government to allow the province of Sindh to enforce and collect VAT on services through its own tax collection machinery.

Although the federal authorities have tried their level best to convince the Sindh government to agree on enforcement of integrated VAT on goods and services through FBR, however, the strict stance of the Sindh government has compelled not only the federal government but also the IMF authorities to accept the demand of the province of Sindh.

FBR authorities strongly feel that only integrated VAT on goods and services is the best option, otherwise VAT could not be implemented.

FBR has prepared three scenarios for enforcement of VAT - National VAT, National and Provincial VAT and National VAT minus Sindh.

National VAT regime would 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, no origin or destination dispute, federal and provincial VAT to be mutually adjustable, no multiple taxation, single tax management to be done by FBR, low collection cost and whole of Pakistan would be considered as a single market.

National and Provincial VAT regime would have different features like multiple registrations at federal and provincial levels, there would be divergent tax scope, there are chances of inter-provincial disputes on origin and destination, no adjustment among federal and provincial VATs, 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 would 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 to exist in Pakistan, FBR analysis said.

Source: http://www.dailytimes.com.pk/default.asp?page=2010\04\23\story_23-4-2010_pg5_1