A taxpayers guide to the Value Added Tax
ISLAMABAD:
The proposed new consumption tax on goods and services from July 1st 2010 is designed to take away tax exemptions, given mostly on political grounds, by levying 15 per cent tax at every stage of value addition of a product from a producer to a retailer.
The proposed Value Added Tax would replace the existing General Sales Tax, which is charged at the rate of 16 per cent only on sale of goods. The tax on sale of services would be an addition under the VAT regime. Nonetheless, the government charges telecommunication services in federal excise duty mode. Constitutionally, the tax on services is a provincial subject and after the levy of the VAT the excise duty on telecommunication would be abolished.
Successive governments have been making efforts to broaden the sales tax base and accelerate economic documentation but could not succeed, as the vested interests groups always prevailed upon the policy makers. The federal government believes that an integrated valueadded- tax on goods and services would help resolve the problem of tax over tax and bring in the exempted sectors under the net. The authorities say that under the existing General Sales Tax the supply chain from a producer to a consumer is broken at the retail stage.
Former Chairman FBR, Abdullah Yusuf says that under the existing consumption tax regime the manufacturer pays 16 per cent tax over its finished product, which the consumer picks up while buying the product from a retailer. Under the proposed law, he adds, if a manufacturer produces a good at a cost of Rs 100 he would sell its product to a wholesaler at Rs 115 by adding up 15 per cent VAT. The wholesaler would add its profit margin and 15 per cent tax only on its profit not on the amount of Rs 115 and then would sell the product to the retailer at a new price. The retailer then would sell the product to the consumer by paying 15 per cent tax on its profit, he concludes.
The other stated positive aspect of the proposed law is the documentation of the undocumented sectors of the economy. The strategy is two-pronged in this regard. Firstly, only registered businesses would be able to claim tax refunds. Secondly, if small businesses, particularly retailers, do not want to get registered they would have to pay 18 per cent value-added-tax while purchasing goods from registered manufacturers, importers and wholesalers. In order to give the refunds, the FBR would give tax adjustments while taking into account the stock in trade, capital goods, fixed assets, logistic cost and other tax-related expenses of a taxpayer.
However, independent experts doubt that the FBR has such professional capabilities to accurately check all these elements before issuing a refund. The other worry is that the FBR will hold the refunds just to reflect higher revenues, as is the case now-a-days. According to Chairman FBR, Sohail Ahmad, the success of the new consumption tax is dependent upon a universal tax system for the whole country, a point of view not accepted by Sindh, which wants a separate tax system. “The VAT can succeed only if it is applied, administrated and enforced at the national level. Its fragmented application (will) generate serious issues of equity, efficiency, consistency and relevancy,” says Sohail Ahmad. There are so many discrepancies in the sales tax rate under the GST system.
According to the FBR’s documents, under the new proposed law there will be a universal tax rate of 15 per cent against 12 different sale tax rates under the GST system. The standard rate is 16 per cent but the retailers with over 1.25 million turnover are liable to pay just 0.5 per cent tax that they too do not pay. The retailers over 2.5 million quarterly turn over are liable to pay Rs 6250 plus 0.75 per cent of quarterly turn over. Under the VAT the wholesalers and retailers up to Rs 7.5 million annual sales will be exempted from tax while the others would be charged at 15 per cent. The steel melters pay Rs 6 per electricity unit consumed. Even for raw material there are two different tax rates. For one category there is 21 per cent tax rate and for the other it is 18.5 per cent.
For commercial importers the tax rate is 16 per cent plus 2 per cent of the value of the imports. On home appliances, the sales tax rate is 16.75 per cent. On sale of natural gas at CNG stations the government charges 25 per cent tax of the value of the gas. On sale of sugar the tax rate is eight per cent and on ship breaking the rate is Rs 4,848 per ton. The FBR has estimated that the tax rate rationalisation would cost it Rs 60 billion during first year of the implementation of the VAT. However, levying the tax on the exemptsectors would fetch in Rs53.8 billion. Under the proposed VAT Bill, the FBR will no more have the powers to issue SRO, a tool to change tax rate or exempt a sector/ individual from tax without Parliament’s approval. Under the new regime the powers will rest with parliament.
Nonetheless, the businesses, the politicians and the parliamentarians fear that the new tax would be inflationary. According to Senator Haroon Akhtar Khan of the PML-Q, due to netting in the supply chain the real tax rate would be 21 to 22 per cent against the proposed 15 per cent. The Senate standing Committee on Finance and Revenue has recommended the government to reduce the rate to 12 per cent to mitigate inflationary impact. The new tax regime will also impact the farmers as the fertiliser would not be tax free anymore. The packed and process food and juices would also be taxed at a rate of 15 per cent. However, unprocessed food, wheat, wheat flour and peas would remain exempt.
The proposal also talks about tax levy on private schools, the activities of non-governmental organisations. It will also affect almost every household, as the exemption granted on local sales of garments, leathers, pharmaceutical and sports would be withdrawn. Failure to deposit VAT would result in up to three years imprisonment and fine. Whereas, if the taxpayer submits a false or forged document he or she would be liable to five years imprisonment and fine equivalent to tax amount. On tax fraud too, the imprisonment would be five years.
Published in the Express Tribune, May 24th, 2010.
The proposed new consumption tax on goods and services from July 1st 2010 is designed to take away tax exemptions, given mostly on political grounds, by levying 15 per cent tax at every stage of value addition of a product from a producer to a retailer.
The proposed Value Added Tax would replace the existing General Sales Tax, which is charged at the rate of 16 per cent only on sale of goods. The tax on sale of services would be an addition under the VAT regime. Nonetheless, the government charges telecommunication services in federal excise duty mode. Constitutionally, the tax on services is a provincial subject and after the levy of the VAT the excise duty on telecommunication would be abolished.
Successive governments have been making efforts to broaden the sales tax base and accelerate economic documentation but could not succeed, as the vested interests groups always prevailed upon the policy makers. The federal government believes that an integrated valueadded- tax on goods and services would help resolve the problem of tax over tax and bring in the exempted sectors under the net. The authorities say that under the existing General Sales Tax the supply chain from a producer to a consumer is broken at the retail stage.
Former Chairman FBR, Abdullah Yusuf says that under the existing consumption tax regime the manufacturer pays 16 per cent tax over its finished product, which the consumer picks up while buying the product from a retailer. Under the proposed law, he adds, if a manufacturer produces a good at a cost of Rs 100 he would sell its product to a wholesaler at Rs 115 by adding up 15 per cent VAT. The wholesaler would add its profit margin and 15 per cent tax only on its profit not on the amount of Rs 115 and then would sell the product to the retailer at a new price. The retailer then would sell the product to the consumer by paying 15 per cent tax on its profit, he concludes.
The other stated positive aspect of the proposed law is the documentation of the undocumented sectors of the economy. The strategy is two-pronged in this regard. Firstly, only registered businesses would be able to claim tax refunds. Secondly, if small businesses, particularly retailers, do not want to get registered they would have to pay 18 per cent value-added-tax while purchasing goods from registered manufacturers, importers and wholesalers. In order to give the refunds, the FBR would give tax adjustments while taking into account the stock in trade, capital goods, fixed assets, logistic cost and other tax-related expenses of a taxpayer.
However, independent experts doubt that the FBR has such professional capabilities to accurately check all these elements before issuing a refund. The other worry is that the FBR will hold the refunds just to reflect higher revenues, as is the case now-a-days. According to Chairman FBR, Sohail Ahmad, the success of the new consumption tax is dependent upon a universal tax system for the whole country, a point of view not accepted by Sindh, which wants a separate tax system. “The VAT can succeed only if it is applied, administrated and enforced at the national level. Its fragmented application (will) generate serious issues of equity, efficiency, consistency and relevancy,” says Sohail Ahmad. There are so many discrepancies in the sales tax rate under the GST system.
According to the FBR’s documents, under the new proposed law there will be a universal tax rate of 15 per cent against 12 different sale tax rates under the GST system. The standard rate is 16 per cent but the retailers with over 1.25 million turnover are liable to pay just 0.5 per cent tax that they too do not pay. The retailers over 2.5 million quarterly turn over are liable to pay Rs 6250 plus 0.75 per cent of quarterly turn over. Under the VAT the wholesalers and retailers up to Rs 7.5 million annual sales will be exempted from tax while the others would be charged at 15 per cent. The steel melters pay Rs 6 per electricity unit consumed. Even for raw material there are two different tax rates. For one category there is 21 per cent tax rate and for the other it is 18.5 per cent.
For commercial importers the tax rate is 16 per cent plus 2 per cent of the value of the imports. On home appliances, the sales tax rate is 16.75 per cent. On sale of natural gas at CNG stations the government charges 25 per cent tax of the value of the gas. On sale of sugar the tax rate is eight per cent and on ship breaking the rate is Rs 4,848 per ton. The FBR has estimated that the tax rate rationalisation would cost it Rs 60 billion during first year of the implementation of the VAT. However, levying the tax on the exemptsectors would fetch in Rs53.8 billion. Under the proposed VAT Bill, the FBR will no more have the powers to issue SRO, a tool to change tax rate or exempt a sector/ individual from tax without Parliament’s approval. Under the new regime the powers will rest with parliament.
Nonetheless, the businesses, the politicians and the parliamentarians fear that the new tax would be inflationary. According to Senator Haroon Akhtar Khan of the PML-Q, due to netting in the supply chain the real tax rate would be 21 to 22 per cent against the proposed 15 per cent. The Senate standing Committee on Finance and Revenue has recommended the government to reduce the rate to 12 per cent to mitigate inflationary impact. The new tax regime will also impact the farmers as the fertiliser would not be tax free anymore. The packed and process food and juices would also be taxed at a rate of 15 per cent. However, unprocessed food, wheat, wheat flour and peas would remain exempt.
The proposal also talks about tax levy on private schools, the activities of non-governmental organisations. It will also affect almost every household, as the exemption granted on local sales of garments, leathers, pharmaceutical and sports would be withdrawn. Failure to deposit VAT would result in up to three years imprisonment and fine. Whereas, if the taxpayer submits a false or forged document he or she would be liable to five years imprisonment and fine equivalent to tax amount. On tax fraud too, the imprisonment would be five years.
Published in the Express Tribune, May 24th, 2010.