FBR may face Rs50b revenue shortfall

Irshad Ansari April 15, 2010

ISLAMABAD: The Federal Board of Revenue (FBR) is expected to suffer a revenue shortfall of Rs50 billion next year when it switches from general sales tax to value added tax.

The government has announced that it will replace the 16 per cent General Sales Tax (GST) with a 15 per cent Value Added Tax (VAT) on July 1, 2010. The shortfall will increase if the VAT’s rate is further reduced from 15 per cent to 12.5 per cent, according to the FBR. However, in recent press conferences FBR Chairman Sohail Ahmed and VAT Committee member Iftikhar Qutub claimed that revenue collection would increase by Rs150 billion in the first year after the scrapping of GST and adoption of VAT.

They also claimed that the tax-to-GDP ratio would increase by 3 per cent over the next three to four years. Besides, they said, tax revenues would increase by Rs300 to Rs450 billion in the same period.

Current tax-to- GDP ratio is 9.3 per cent. About the impact of VAT on food prices, the FBR said that sales tax was already charged on most of the processed and packaged food items.

Prices of food items are likely to fall because VAT will be charged on actual sales or open market prices and not on printed retail prices. Retailers will be in a position to reduce prices to attract consumers.

The FBR said that there would be no increase in the compliance cost of those who were already registered and operating under the sales tax regime. They would automatically switch over to VAT, it said. However, new taxpayers would have to bear small expenses for coming under the VAT structure.

Owing to an IT-based VAT process, the compliance cost would be low for the taxpayers who would discharge their tax obligations on time.


Meekal Ahmed | 12 years ago | Reply The real issue is whether we are prepared for the shift to the VAT. Experience shows the VAT needs time to prepare and a concerted education program amongst the public, including producers and consumers. A 15% standard VAT rate is arguably too high. It should be lower. However that may mean that the number of exemptions would have to be cut and/or the exemption threshold below which there is no VAT lowered. There are complex trade-off's here. I hope the calculations have been done carefully so that there are no revenue surprises on the downside.
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