FBR opposes Value Added Tax implementation

ISLAMABAD: None other than the Federal Board of Revenue (FBR) itself is against the implementation of the Value Added Tax, it is learnt.

The board, say sources, has told the government it can collect Rs24 billion more in taxes if Value Added Tax (VAT) is not implemented. Informed sources told The Express Tribune that in its presentation to the Ministry of Finance, the FBR said it could collect Rs1.724 trillion in taxes – against the proposed target of Rs1.7 trillion – if VAT weren’t implemented. “The FBR’s concern is that the lowering of the sales tax rate, which ranges from 16 per cent to 25 per cent, and an increase in the tax exemption threshold from Rs5 million annual turnover to Rs7.5 million, in accordance with the VAT regime, will result in massive revenue loss,” says a finance ministry official who attended the briefing.

The FBR’s Plan B hints at the difficulties the federal government is facing in the implementation of VAT from July 1, as per IMF conditionality. The Sindh government has already refused to surrender to the FBR the right to collect taxes on services. Earlier, the Senate Standing Committee on Finance also recommended deferring the tax for another year and the National Assembly Standing Committee on Finance is unable to take up the bill that has to be passed for the VAT implementation.

According to government estimates, 15 per cent VAT will net some Rs 53.8 billion. In its presentation, the FBR is said to have argued that the rationalisation of the sales tax rate will result in the loss of Rs 56.7 billion. “The FBR men said lowering the average sales tax rate from 16 per cent to 15 per cent would result in a revenue loss of Rs 31 billion,” says a source. Similarly, the FBR expects that lowering the sales tax rate from 25 per cent to 15 per cent on various goods will cause a revenue loss of almost Rs 20 billion.

According to the FBR, the government has extended various facilities to different sectors. Steel melters, for example, don’t pay the standard rate of 16 per cent. Instead, they are charged Rs 6 per electricity unit consumed. Similar is the case for raw material, which has two different tax slabs – 21 per cent and 18.5 per cent. Lowering these to a standard 15 per cent, argues the FBR, will hit revenues. For commercial importers, the tax rate is 16 per cent with an additional two per cent of the value of the imports. On home appliances, the sale tax rate is 16.75 per cent. On sale of natural gas at CNG stations, the government charges 25 per cent of the value of the gas as tax.

The FBR is said to have estimated the total amount of revenue loss from increasing the tax-exemption threshold from Rs 5 million turnover to Rs 7.5 million at more than Rs 7 billion. In order to meet the tax target of Rs 1.724 trillion without resorting to the VAT, the FBR is said to have suggested the withdrawal of tax exemption from various sectors.

Published in the Express Tribune, May 22nd, 2010.