INCREASING TAX BASE THROUGH NEW TAX

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)

Mar
15 - 21, 2010

Federal board of revenue is said to have set an over ambitious target of Rs1700 billion for the next fiscal year 2010-11. It seems over ambitious if the collector continues with the same tax revenue system that is not able to bring untaxed sectors in to the tax net and still gives some of the money spinning sectors luxury of tax immunity. Instead, it may near to the target if it persists on the track of taxing those who are already taxed. This is what on next year tax machinery will likely to focus.

Introduction of value added tax is to catch up with tax-immune agriculture and service sectors. However, sceptics foresee another wave of price hike as outcome of value added taxation on supply chain.

Replacing general sales tax value added tax will most likely to become reality in the next budget. Service sector including retailers and wholesalers whose annual income exceeds seventy five hundred thousands would come under the VAT. The threshold is a proposal and thus may expand and shrink as per refinement. Uniformity in tax rate that is 15 percent is good as long as 12 variable rates under GST (16 to 21 percent) mode would be removed. The board is taking inputs from businesspersons to refine the VAT before pushing it in to action.

During a recent moot at the office of Korangi Association of Trade and Industry, the speakers from business fraternity were unanimous on one point that tax revenue could be increased by bringing tax-exempted sectors in to the tax net. However, generally they welcomed VAT. They are more concerned about whether or not new system would improve efficiency of tax refund system. Razak Hashim Paracha, chairman KATI said government target of increasing tax 0.5 percent per annum was achievable. Mian Zahid said there was a possibility of recovering Rs500 billion taxes. He said there was a need of modern tax system even though. When sales tax came in to being in 1990 it was in VAT mode. He raised a valid point favoured by others, concerning about furtherance of tax burdens on small numbers of taxpayers following the new system. Sixty to 65 percent parallel economy remains tax impervious, besides agriculture and service sectors, he observed calling for fiscal measures therefore.

S. M. Munir rebuked the tax proposal that intends to tax further those who are already tax payers. He said refunds of sales tax were a big problem and he called for actions on war footing to redress the issue. The proposed rate should be brought down to less than 10 percent, he commented. Asrar Raouf, member direct tax policy, FBR rejected the proposal saying VAT models in other countries had picked high rate in the beginning and reduced it so just as tax base would expand.

Asrar Raouf assured the business community of automated refund system after VAT. In fact, he linked VAT implementation with automated system, averring, "if we cannot do this we will not bring VAT". He hoped revenue could be increased.

Talking about problems with general sales tax, Khwaja Tanvir collector sales tax said there were twelve different GST rates within the scale of 16 to 21 percent. There is no risk based profiling because of lack of automation, he said adding VAT would be automated with a uniform rate of 15 percent, which will decrease after expansion of tax base. He said it would cover entire supply chain thus removing cash flow problems as well as cascading that is double- and multiple-taxation. Federal excise duty on services would be phased out after VAT. There will be incentives from the FBR for consumers who hold purchase receipts. He said VAT was prevalent in 130 countries.

VAT is to be implemented after endorsements from parliaments. In provincial value added tax bill 2010, exemptions were proposed for funeral and burial services, services by religious institutions exclusively for promotion of religion, non-profitable charitable organization, financial services, educational institutions registered by ministry of education, certain supplies of immoveable properties including agriculture land.

Under federal value added tax act 2010, supplies and imports exempted include unprocessed peas, wheat, and wheat flour, ice and water other than those sold under trademarks, table salt including iodized salt but not those sold under brand name, print materials excluding those devoted to advertisings, some medicinal items that include contraceptives, intraocular lenses, etc., and imported goods entitled to zero-rate of customs duty.

Collection of VAT on services and on goods would be subjects of provinces and the centre respectively. Some of the proposals in federal value added tax 2010 are ambiguous since it seems to define the applicability mutatis mutandis. For example, in case of implementation of VAT on printed materials including newspapers and other publications, the provision seeks enforcement on such materials that are devoted to advertisements. The question is what will be the parameter to define devotion; that means which newspapers and publications should put up with VAT.

Furthermore, alone unprocessed peas, wheat, and wheat flour do not form the entire basket of essential foods. Obviously, there are hundred of food items that may be affected with price escalation following VAT implementation. The claim of FBR about invulnerability of prices of essential foods to VAT does not hold credence.

When this writer asked Kaukab Iqbal, chairman consumers association of Pakistan would value added tax push up prices of consumer goods, he ducked the question saying culture of demanding sales receipts is not prevalent in the country and that consumers should ask for receipts after purchasing even at throwaway prices. Registration threshold should be broadened to cover untaxed businesses, he advised.

It will bring price stability and more of it means reduction of prices in future, a senior tax official asserted.