VAT System

[abrowaqas]

What is this VAT system... one common distributor ask from me. that he used to read daily in newspaper about VAT System. but no one actually written that what is VAT in actual. he told me he used to give tax regularly . what would happen after VAT will introduce.

what is the difference between the existing system and VAT?
how can a common person understands about VAT danger?
give some historic background?

Kindly discuss.

[maliasghar]

Value added tax (VAT), or goods and services tax (GST) is a consumption tax (CT) levied at each stage that value is added to a product or service. VAT is an indirect tax, in that the tax is collected, and paid to the state, by someone who does not bear the cost of the tax. In contrast to sales tax, the number of steps there are between the first producer and the final consumer is neutral in terms of tax charged, whereas sales tax is levied on total value at each stage, resulting in a cascade effect (at each stage tax is levied on the tax levied at the previous stage). Although true in theory, in practice, in the U.S. and many other countries, sales tax is charged only at the point of final sale to the final consumer, with no sales taxes at intermediate levels

[xavier]

THE implementation of value-added tax (VAT) proposed from the next financial year may tend to do away with all exemptions to export-oriented industries.
The enforcement of VAT on the production chain of these industries is feared to eliminate what exporters call as their zero-rated status, result in a serious liquidity crunch and higher production costs for smaller exporters, and bring back the ‘old era of flying invoices and corruption’.

“The implementation of VAT will seriously hamper exports by eliminating zero-rated status of the export-oriented sectors, particularly of textiles, carpet, sports goods, leather, and surgical instruments,” argues Pervaiz Hanif, a Lahore-based exporter of readymade garments and carpets who heads the All Pakistan Carpets Manufacturers and Exporters Association (Apcmea).

These sectors were allowed exemptions from the payment of sales tax at any stage by the Shaukat Aziz government to remove the ‘unnecessary irritants’ in the way of export expansion and put an end to complaints of delays in the payment of refunds and corruption that often resulted in financial crunch for many smaller to medium exporters. The tax refund system was done away with after complaints that the government had to pay more money to exporters against their claims than it collected from them.

The decision to exempt these industries from the payment of sales tax and zero-rate them amounted to official acknowledgement of the fact that the bulk of their production is exported, a tanner from Sialkot says. “The scrapping of the zerorated status under the VAT Act is no less than a nightmare for the smaller exporters.” The VAT Act, 2010 will replace the existing Sales Tax Act, 1990 from July 1 if federal and provincial legislatures stamp their approval on the bills already moved in the national assembly and the four provincial assemblies under the International Monetary Fund’s $11.3 billion stand-by arrangement (SBA) programme..

The VAT would be applicable to all economic activities covering all supplies of goods and rendering of services, with very limited exceptions, a senior Federal Bureau of Revenue (FBR) official posted in Islamabad says. “Exemptions and exceptions on domestic supplies are against the very spirit of the VAT,” the official who did not want to be identified, adds.

Though the official contends that all exports would continue to enjoy the zero-rated status even under the VAT through the revival of the efficient refund of all taxes to exporters, most exporters do not agree with him.

“The exceptions given to the said industries have been removed for two reasons: One, the exemptions are against the spirit of the VAT. Two, the domestic supplies of these industries were also put outside the ambit of sales tax while zero-rating their exports. Now only exporters will still be zerorated but the domestic suppliers will have to pay the tax on their local sales,” the publicity-shy official insists.

The exporters, however, reject the argument. “If the purpose is to tax domestic supplies alone, it can easily be done by taxing sales at the retail stage or by calculating the difference between the production and export of a manufacturer without disturbing the zero-rated status of the export-oriented industries,” says Pervaiz. “There wasn’t really a need to increase the capital requirements and the financial costs of the exporters to tax domestic supplies of the exempted industries.” The tanner is of the view that the VAT on exportoriented sectors would encourage revival of the culture of flying invoices. “You will soon find the government paying more money against false refund claims than it is able to collect while genuine exporters are made to wait for months to receive their refunds. It is particularly bad for the smaller exporters who do not have enough capital and who cannot borrow to meet their capital requirements,” he insists.

He is of the view that it would be better for the government to broaden the tax net to improve its tax-to-GDP (gross domestic product) ratio instead of enforcing the VAT and bringing hitherto tax-exempt, export-oriented sectors under the new tax. “We demand that the sectors outside of the tax net, should be brought into the net rather than creating problems for exports and reviving the culture of corruption and misuse of authority.

Pervaiz says most export-oriented industries are in crisis because of energy crunch, security conditions, high cost of utilities and credit, and slow down in global demand.

“Exports of carpets alone have slid 50 per cent in the last couple of years and industry is on the verge of collapse. If the zero-rating status is withdrawn and VAT levied, the industry will collapse completely leading to massive unemployment and decline in exports.” Exporters are also not happy with the vast discretionary powers given under the VAT Act to tax authorities to even arrest a person believed to have committed a tax fraud. The act provides that a person suspected or believed to have committed tax fraud is a company, and every director or officer of such company may be arrested.

“Such provisions will only discourage the much needed investment in the economy, hitting the efforts for industrial expansion hard,” Pervaiz says. The exporters have already proposed that the implementation of the VAT should be delayed for one year. “In the meanwhile, the government would do well if it starts consulting stakeholders, particularly the export sector, and elicit their opinion on it,” Pervaiz adds.

Share your opnion that Will governmnet be succeeded from National Assembly and Provinancial Assemblies in passing of VAT Bill 2010? and also give your opnion on Sindh's reservations????

[zash]

Optimistic View of Value added tax

It is interpreted that once Value added tax is imposed there will be no need of foriegn aid while at the same time notables of the business fraternity have rejected the proposed Value Added Tax (VAT).

Pakistan would be 137th country where this tax would be introduced with approval of parliament. Value-added tax would be realised at the same rate that of general sales tax, and powers of tax collectors to grant any exemption had been abolished. However, the Parliament would be sovereign to grant any exemption to any sector and it would be realised at the uniform rate of 15 percent.

It would enable FBR to directly collect income tax from the ginners and textile millers, and the dispute between FBR and ginners, textile millers on the issue of cut in income tax would be resolved on top priority basis.

It is said that Pakistan would get debt of $ 11.3 billion from IMF under standby agreement. "We have so far received $6 billion till March 2010 while another tranche of $1.2 billion would be received in April. PCGA chairman Muhammad Akram said that VAT would directly hit the farmers who were playing a key role in strengthening the national economy while ginners entire investment would be dumped in the tax.



Negetive Views on imposition of VAT

Some negetive criticism is also observed in the imposition of VAT

1. VAT law is totally contrary to the recommendations of the 7th NFC Award relating Sales Tax (ST) on services

2. it would empower Federal Board of Revenue to collect VAT on behalf of Federation and Provinces without providing any scope for provincial rights on collection of ST on services.
3. Innumerable clauses encroach upon the provincial jurisdiction limiting the role of provincial government would be another apprehension

4. VAT would create a complete distress among business community and increase the prices of consumer items which will affect the general public and lead to social unrest and unemployment.

[aariz]

What is the difference b/w VAT and other tax? The govt. charges general sales tax and income tax from businessmen. Elaborate the difference plz.

Regards

[zash]

@ aariz

GST is also one of the kinds of Value added tax the only difference is that previously GST was levied only on goods. Consumer has to pay 16% GT on each good purchased, manufacturer directly collects the GST from consumer and deposits to Govt. on annual basis. In this way most of the underground manufacturers were skipped and most of the manufacturers misrepresent their sales to avoid tax resulting in heavy loss to Govt. and the ratio of tax to GDP had dropped to nine percent.
Now Government has made a commitment to the International Monetary Fund (IMF) to introduce value-added tax (VAT) in the country, which will be implemented from July 2010 and will serve as extended scope of GST which will be levied on services also i.e Agriculture, hotels, restaurants, clubs, catering, marriage lawns, advertisement on TV and Radio, customs agents, ship handlers, courier services and stevedores services.
Previously all the four provinces in turn, have levied sales tax on very few services and have authorised federal government to collect GST on their behalf. Now the GST on services will be administered by the Federal Board of Revenue (FBR) because all the provinces do not possess administrative capacity to with it.

[zash]

Services that are brought under net of VAT

Following services have been planned to brought under the net of Value Added Tax (VAT) to be implemented w.e.f July 2010

advertisements Services……in news papers and periodicals, poles signs and sign boards; facilities for travel including services provided or rendered in respect of travel by air of passenger within the territorial jurisdiction of Pakistan,
services provided or rendered in respect of travel by air of passengers embarking on international journey to or from Pakistan, P
assengers embarking or from Saarc region, UAE (Middle East), Saudi Arabia, Africa, Afghanistan, passengers embarking to or from Europe, Far East, China, USA, Canada, Australia, South America, others; inland carriage of goods by air; shipping agents;
telecommunication services including telephone services, fixed line voice telephone services, wireless telephone, cellular telephone, wireless local loop telephone, video telephone, payphone card, pre-paid calling cards, voice mail service, messaging service, short message service (SMS), multimedia message service (MMS), bandwidth services used for voice and video telecommunication vices, fibre-optic based, co-axial cable based, microwave based, satellite based, telegraph, telex, telefax, store and forward fax services, audiotext services, teletext services, trunk radio services, paging services, voice paging services, radio paging services, vehicle tracking services, burglar alarm services,
Insurance services ……… life assurance, including a re-insurer, including goods insurance, fire insurance, theft insurance, marine insurance, other insurance;
services provided by banking companies or non-banking financial companies; franchise services, services provided by property developers or promoters for development of purchased or leased land for conversion into residential or commercial plots, construction of residential of residential or commercial units, services provided of rendered by stock brokers, services provided or rendered by port and terminal operators in relation to imports excluding stevedoring services.

--------------------

Instead of charging standard rate of 15 percent VAT on consumer items, sold in packing, on the basis of printed retail price, a lower rate of 5-6 percent may be proposed. This would reduce the prices of items such as fruit juices, ice cream, aerated waters, cigarettes, detergents, shampoo, toothpaste, shaving cream, perfumery and cosmetics, tea, powder drinks etc after imposition of VAT. However, the final decision would be taken in view of analysing the revenue implications by the Revenue Advisory Council and the FBR.

Sources said there is a strong possibility that the government may introduce two different VAT rates from 2010-11. Sources said that the Federal VAT Act has abolished Third Schedule of the Sales Tax Act, 1990, which would bring items of the Third Schedule under the normal tax regime. Under the Third Schedule, manufacturers have to pay sales tax on all the stages of value addition of consumer items having printed retail price.

A number of dealers, distributors and wholesalers of these consumers goods are still out of tax net despite efforts to bring the intermediate linkages in supply chain into the taxation system and resultantly the tax actually chargeable at each stage on value addition is not being recovered. Under the existing arrangement, manufacture are paying sales tax of all the stages of value addition and only one printed retail price has been paid by the end consumer.

Under the Federal VAT Act, 2010, the manufactures will supply these items on ex-factory price and not on the basis of printed retail price. The wholesalers and retailers would have to pay tax of each stage under the VAT regime. The tax payment by the wholesalers and retailers would be missed unless these wholesalers and retailers are brought into the tax net.

[zash]

VAT imposition to reduce revenue?
EDITORIAL (April 17 2010): The Federal Board of Revenue (FBR) has roughly estimated a loss of 50 billion rupees in revenue collection if sales tax is replaced by value added tax (VAT), during the initial implementation period, defined as one year.

This belies the claim by the Chief VAT in his last press conference, where he had maintained that the loss of revenue during the transition period would be offset by the gains from the withdrawal of exemptions, zero-rating and the imposition of the standard rate of 15 percent VAT - gains that he estimated at 150 billion rupees.

The Revenue Advisory Council (RAC), charged with assisting FBR in revenue projections, was scheduled to meet on Friday. Its agenda includes presentation on VAT implementation and its associated bottlenecks. The Council is to identify the actual revenue impact, as opposed to the 50 billion rupee ballpark figure determined by the FBR, during the transition of sales tax into the VAT, the cost of exemptions, zero-rating and withdrawal of special procedures and rules that would be redundant once the sales tax is replaced by the VAT. RAC is also to reveal the inflationary impact of the VAT to the FBR. Based on RAC figures, the revenue collection target for the forthcoming fiscal year would be identified. What is disturbing is that this time around, the provinces have not been invited to the RAC meeting.

While it is not within the mandate of the RAC to invite provinces, yet in the last meeting the provinces were invited in good faith to present their views and reservations, if any, on the proposed VAT draft. During this last meeting, Sindh had expressed serious reservations over the proposed integration of VAT on services by correctly maintaining that this tax is within the purview of the provincial government as per the country's constitution.

The question that is uppermost in everyone's mind is simple: why is the federal government hell-bent on an integrated VAT implementation from the forthcoming fiscal year, when it not only violates our constitution, but would also result in a decline in total revenue collected. The answer, we are informed, is the insistence by the International Monetary Fund to implement VAT from the next fiscal year, as part of its programme in an effort to increase the tax to Gross Domestic Product ratio, which is appallingly low in this country. If this indeed is the raison d'etre behind VAT implementation from 2010/11 then the resulting estimated decline in total revenue collections during the transition period must be considered as a mitigating factor to defer its implementation for a year, when the country's domestic revenue and expenditure position is more sustainable.

In addition, deferring the imposition of VAT would provide the government ample time to not only deliberate on a modus vivendi with the provinces on how to implement it, while not violating the country's constitution and taking their genuine concerns on board; but also to ensure that through public discussions, it is widely discussed and its pros and cons presented to a nation that appears hesitant to accept a tax openly being challenged by Sindh, as well as several industrial groups on legitimate grounds.

[niazikhan2]

http://express.com.pk/epaper/PoPupwi...&Date=20100608

[waqaswahla]

The International Monetary Fund (IMF) has stopped the release of next installment of loans to Pakistan till the imposition of Value Added Tax (VAT).
IMF has clarified to Pakistan, not to expect the release of loans before the imposition of VAT.

With this condition, loan of $1.15 billion has been stopped including Budget Support worth of $363.7 million. Pakistani officials were scheduled to hold talks with IMF in the first week of August, however, the visit now seems to be in doldrums due to refusal by IMF.

the Resident Mission of IMF in a dispatch sent to the Finance Ministry also asked Pakistan to fulfill its pledge made with World Bank regarding six percent increase in electricity rates.