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The items Exempt/Zero Rated under the Sales Tax Act, 1990 but Proposed to be taxed under the Reformed General Sales Tax Bill, 2010.

Table I

(Imports and Supplies)

 

Serial No	Description	Heading Nos. of the First Schedule to the Customs Act, 1969 (IV of 1969)
(1)	(2)	(3)
1.	Seeds, fruit and spores of a kind used for sowing.	1209.1000, 1209.2100, 1209.2200, 1209.2300, 1209.2400, 1209.2500, 1209.2900, 1209.3000, 1209.9110, 1209.9120, 1209. 9130, 1209.9190 and 1209.9900.
2.	Milk preparations obtained by replacing one or more of the constituents of milk by another substance, whether or not packed for retail sale.	1901.1000, 1901.9020 and 1901.9090
3.	Poultry feed and Cattle feed including their all ingredients except soyabean meal of PCT heading 2304.0000 and oil-cake of cottonseed falling under PCT heading 2306.1000.	2301.2090, 2305.0000, 2306.2000, 2306.3000, 2306.4100, 2306.5000, 2309.9010, 2309.9020, 2309.9090, 2936.2100, 2936.2200, 2936.2300, 2936.2400, 2936.2500, 2936.2600, 2936.2700 and 2936.2800
4.	Surgical tapes	30.05
5.	Ultrasound gel	3006.7000
6.	Glass bangles	7020.0090
7.	Bricks.	6901.0000
8.	Building blocks of cement including ready mix concrete blocks.	6810.1100
9.	Incinerators of disposal of waste management, motorized sweepers and snow ploughs.	8417.8000, 8430.2000 and 8479.8990
10.	Computer software.	8523.2990, 8523.4010, 8523.4090, 8523.5990 and 8523.8090
11.	Aircrafts and their spare parts	8802.2000, 8802.3000 and 8802.4000
12.	Ships of gross tonnage exceeding 15 LDTs including their spare parts, excluding those for recreational or pleasure purpose.	8901.2000, 8901.3000 and 8901.9000
13.	Goods supplied to hospitals run by the Federal or Provincial Governments or charitable operating hospitals of fifty beds or more or the teaching hospitals of statutory universities of two hundred or more beds.	Respective headings
14.	Defence stores, whether manufactured locally or imported by the Federal Government against foreign exchange allocation for defence, including trucks, trailers and vehicles falling under PCT heading 87.04 of the First Schedule to the Customs Act, 1969 (IV of 1969), specially modified for mounting defence equipments, their parts and accessories for supply to Armed Forces.	Respective headings
15.	Equipment and Machinery for pilotage, salvage or towage for use in ports or airports.	Respective headings
16.	Equipment and Machinery for air navigation.	Respective headings
17.	Equipment and machinery used for services provided for handling of ships or aircrafts in a customs port or Customs airport.	Respective headings
18.	All plant and machinery.	Respective headings
19.	Tractors, bulldozers and combined harvesters; and components (which include sub-components, components, sub-assemblies and assemblies.	Respective headings
20.	Import and supply of fully dedicated CNG Euro-2 buses whether in CBU or CKD condition.	8702.9010 and 8702.9090
21.	That following Agriculture Implements and machinery:- (1) Rotavator. (2) Cultivator. (3) Ridger. (4) Sub soiler (5) Rotary slasher. (6) Chisel plow. (7) Ditcher. (8) Border disc (9) Disc harrow (10) Bar harrow (11) Mould board plow (12) Tractor rear or front blade. (13) Land leveller or land planer (14) Rotary tiller. (15) Disc plow (16) Soil-scrapper. (17) K.R.Karundi. (18) Tractor mounted trancher (19) Land leveller. (20) Seed-cum-fertilizer drill (wheat, rice barley, etc.). (21) Cotton or maize planter with fertilizer attachment (22) Potato planter. (23) Fertilizer or manure spreader or broadcaster (24) Rice transplanter. (25) Canola or sunflower drill (26) Sugarcane planter (27) Tubewells filters or strainers (28) Knapsack sprayers (29) Granular applicator. (30) Boom or field sprayers. (31) Self propelled sprayers (32) Orchard sprayer (33) Wheat thresher (34) Maize or groundnut thresher or sheller. (35) Groundnut digger. (36) Potato digger or harvester. (37) Sunflower thresher. (38) Post hole digger. (39) Straw balers (40) Fodder rake (41) Wheat or rice reaper (42) Chaff or fodder cutter. (43) Cotton picker (44) Onion or garlic harvester. (45) Sugar harvester. (46) Tractor trolley or forage wagon (47) Reaping machines. (48) Combined harvesters Vegetables and fruits cleaning and sorting or grading equipment. (49) Fodder and feed cube maker equipment. (50) Machinery and equipment for grain handling and storage facilities. (51) Milking machines. (52) Compression-ignition internal combustion piston engines (diesel engines of 12HP to 32 HP of PCT 8408.9000)	Respective headings.
22.	Diagnostic Kits, as listed below:- (1)      HIV Kits (2)      4C Es Trionyx (3)      5C Cell control Lnormal (4)      Bovine precision multi sera (5)      Pregnancy test (6)      DNA SSP DRB GenericIC (7)      Reticulocyte count (control) Retic C Control (8)      Kit for vitamin B12 estimation (9)      Ferritin kit (10)   HEV (Hepatitis E virus) (11)   ID-DA Cell (12)   Urine Analysis Strips (13)   Albumin bcg (14)   Cratinin sysi (15)   Ring (16)   Detektiion cups (17)   ISE Standard (18)   Alkaline phosphatase (Alb) (19)   Bilirubin kit (20)   HDL Cholesterol	3822.0000
23.	Fertilizers and their ingredients as listed below:- (1)      Animal or vegetable fertilizers, whether or not mixed together or chemically treated; fertilizers produced by the mixing or chemical treatment of animal or vegetable products (2)       Urea, whether or not in aqueous solution (3)       Ammonium sulphate (4)       Other Fertilizers (5)       Ammonium nitrate, whether or not in aqueous solution (6)       Mixtures of ammonium nitrate with calcium carbonate or other inorganic non-fertilizing substances (7)       Crude Fertilizers (8)       Other Fertilizers (9)       Double salts and mixtures of calcium nitrate and ammonium nitrate (10)    Mixtures of urea and ammonium nitrate in aqueous or ammoniacal solution (11)    Other, including mixtures not specified in the foregoing subheadings (12)    Superphosphates (13)    Other Fertilizers	3101.0000             3102.1000   3102.2100 3102.2900 3102.3000   3102.4000       3102.5010 3102.5090 3102.6000     3102.8000       3102.9000     3103.1000 3105.9000
24.	Pesticides and their ingredients as listed below:- (1)      Xylol (xylenes) (2)      Beta Pinene / Agrotin 527 / Terpenic derivative (3)      Toluene (4)      Mixed xylene isomers (5)      Naphthalene (6)      Solvesso-100, 150, 200 (7)      Ingredients for pesticides (8)      Cadusafos Technical Material (9)      Methanol (methyl alcohol) (10)   Propylene glycol (propane-1, 2-diol) (11)   Adhesives Polyvinyl Acetate- Polyvinyl Alcohol (12)   Ingredients for pesticides (13)   Other Ingredients for pesticides (14)   Solvenon MP / 1-Methoxy 2-Propanol- Methyglycol Acetate (15)   Methanal (formaldehyde)	Respective headings.   2707.3000 2902.1990   2902.3000 2902.4400 2902.9010 2902.9090 2903.3040 2903.6900   2905.1100 2905.3200   2905.4900   2906.2910 2906.2990   2906.4910     2912.1100
25.	CNG kits, cylinders and valves for CNG kits	If supplied for automotive vehicles.
26.	Raw and pickled hides and skins; wet blue hides and skins; finished leather; and accessories, components and trimmings for leather manufacturers.	If imported for the manufacture of goods meant wholly for export provided that conditions, procedures and restrictions laid down in rules 264 to 278 of the Customs Rules, 2001 are duly fulfilled and complied with.
27.	Machinery, equipments and materials either for exclusive use within the limits of Export Processing Zone or for making exports there from; and goods imported for warehousing purpose in Export Processing Zone.	If imported by investors of Export Processing Zones subject to the condition that the procedures, limitations and restrictions as are applicable on such goods under the Customs Act, 1969 (IV of 1969) and rules made there under shall mutatis mutandis, apply.
28.	Ships of gross tonnage of less than 15 LDT and all floating crafts including tugs, dredgers, survey vessels and other specialized crafts purchased or bare-boat chartered by a Pakistan entity and flying the Pakistan flag except the ships or crafts which are acquired for demolition purposes or are designed or adapted for use for recreation or pleasure purposes.	Import and supply thereof up to the year 2020 subject to the condition that the said ships or crafts are used only for the purpose for which they were procured and in case such ships or crafts are used for demolition purpose within a period of five years of their acquisition, sale tax applicable to such ships purchased for demolition purpose shall be chargeable.
29.	The substances registered as drugs under the Drugs Act, 1976 (XXXI of 1976) and medicaments as are classifiable under Chapter 30 of the First Schedule to the Customs Act, 1969 (IV of 1969) except life saving drugs as notified by the Board.	Import and supplies thereof.
30.	Fresh, liquid and dried milk with or without addition of sugar or any other sweetening matter	Import and supplies thereof.
31.	Oilseeds meant for sowing.	Import thereof subject to the condition that Plant Protection Department of Ministry of Food, Agriculture and Livestock certifies that the imported seeds are fungicide and insecticide treated and are meant for sowing.
32.	Raw materials for the basic manufacture of pharmaceutical active ingredients and for manufacture of pharmaceutical products.	Import and supplies thereof provided that where such raw materials are imported then only those raw materials shall be entitled to exemption under this notification which are liable to customs duty not exceeding ten per cent ad- valorem, either under the First Schedule to the Customs Act, 1969 (IV of 1969) or under a notification issued under section 19 thereof.
33.	Commercial catalogues, falling under PCT Heading 4911.1000.	Import and supplies thereof.
34.	Iodized salt bearing brand names and trademarks whether or not sold in retail packing.	Import and supplies thereof.
35.	Instruments for Film Production	Import by a member of (PFPA). (SRO 172(I)/2006

Table 2

(Local Supplies only)

 

Serial No	Description	Heading Nos. of the First Schedule to the Customs Act, 1969 (IV of 1969)
(1)	(2)	(3)
1.	Supply of locally produced crude vegetable oil obtained from the locally produced seeds, except cooking oil, without having undergone any process except the process of washing.	Respective headings.
2.	Supply of fixed assets against which input tax adjustment is not available under a notification issued in terms of clause (b) of sub-section (1) of section 8 of the Sales Tax Act, 1990.	Respective headings.
3.	Breads prepared in tandoors and bakeries, vermicillies, nans, chapattis, sheer mal, bun, rusk.	Respective headings.
4.	Foodstuff cooked or prepared in-house and served in messes run on the basis of mutuality and industrial canteens for workers.	Respective headings.
5.	Foodstuff and other eatables prepared in the flight kitchens and supplied for consumption on-board in local flights.	Respective headings.

 

 

Table 3

(Zero-Rating)

 

Serial No	Description	Heading Nos. of the First Schedule to the Customs Act, 1969 (IV of 1969)
(1)	(2)	(3)
1.	Leather and articles thereof including artificial leather footwear	41.01 to 41.15, 64.03, 64.04, 6405.1000, 6405.2000 and other respective headings
2.	Textile and articles thereof	Chapter 50 to Chapter 63 and other respective headings Carpets 57.01 to 57.05
3.	Carpets	57.01 to 57.05
4.	Sports goods	9504.2000, 95.06 and other respective headings
5.	Surgical goods	Respective headings
6.	Maize (corn) starch	1108.1200
7.	Chemiclas and dyes as listed below:- (1)      Mucilages and thickeners, whether or not modified, derived from locust beans, locust bean seeds or guar seeds (2)      Rattans (3)      Emery powder/grains (4)      Magnesium oxide (5)      Coning oil (6)      Spin Finish Oil (7)      Silicon dioxide (8)      Titanium dioxide (9)      Antimony oxide (10)   Sodium bromate (11)    Sodium sulphide and sodium hydrogen sulphide (12)   Sodium dithionite (13)   Sodium sulphite and sodium hydrosulphide (14)   Disodium sulphate (15)   Phosphinates (hypophosphites) and phosphonates(phosphates) (16)   Sodium dichromate (17)   Hydrogen per oxide (18)   p-Xylene (19)   Trichloroethylene (20)   Ethylene Glycol (MEG) (21)   4-chloro 3-methyl phenol and chloro hydro quinine (22)   Di-ethylene glycol (23)   Ethyl glycol (24)   Tri-ethylene Glycol (25)   Glutar aldehyde (26)   Formic acid (27)   Sodium formate (28)   Acetic acid (29)   Sodium acetate (30)   Cobalt acetate (31)   Acrylic acid and its salts (32)   Esters of Methacrylic acid (33)   Oxalic acid (34)   Adipic acid, its salts and esters (35)   Maleic Acid (36)   Pure terephthalic acid (PTA) (37)   Tartaric acid (38)   GGluconic acid and its salts (39)   Glycolic acid and their esters (40)   Other phosphoric esters and their salts (41)   Dyes intermediates             (42)   DMF (Dimethyl Formamide) (43)   Acrylonitrile (44)   Other organic derivatives of hydrazine or of hydroxylamine (45)   Tanning extracts of vegetable origin; tannins and their salts, ethers, esters & other derivatives (46)   Synthetic organic tanning substances, inorganic tanning substances, tanning perpetrations, whether or not containing natural tanning substances; enzymatic preparations for pretanning (47)   Disperse dyes and preparations based thereon (48)   Acid dyes & preparation based thereon (49)   Basic dyes and preparations based thereon (50)   Direct dyes and perpetrations based thereon (51)   Indigo Blue (52)   Vat dyes and preparations bases thereon (53)   Reactive dyes and perpetrations based thereon (54)   Pigments and perpetrations based thereon (55)   Dyes, sulphur (56)   Dyes, synthetic (57)   Synthetic organic products of a kind used as fluorescent brightening agents (58)   other synthetic organic colouring matter (59)   Pigments and preparations based on titanium dioxide (60)   Other colouring matter and other preparations (61)   Granules, flakes, powder of glass (others) (62)   Prepared water pigments of a kind used for finishing leather (63)   Anionic surface active agents (64)    Anionic surface active agents (65)   Cationic surface active agents (66)   Non-ionic surface active agents (67)   Surface active preparations and cleaning preparations excluding detergents (68)   Preparations for the treatment of textile material, leather, fur skins or other material (69)   Spin finish Oil (70)   Artificial waxes and prepared waxes (71)   Other artificial waxes (72)   Electro polishing chemicals (73)   Other glues (printing gum) (74)   Shoe adhesives (75)   Hot melt adhesive (76)   Enzymes (77)   Photographic film, with silver halide emulsion (for textile use) (78)   Sensitizing emulsions (for textile use) (79)   Lignin sulphonates (80)   Gum rosin (81)   Fungicides for leather industry (82)   Preparation of a kind used in textile or like industry (83)   Preparation of a kind used in leather or like industries (84)   Compound plasticizers for rubber or plastics (85)   Antimony triacetate (86)   Palladium catalyst (87)   Electrolyte salt (88)   Polymers of vinyl acetate (in aqueous dispersion) (89)   Vinyl acetate copolymers: in aqueous dispersion (90)   Polymers of vinyl alcohol (91)   Other vinyl polymers (92)   Other acrylic polymers (93)   Acrylic polymers in primary forms (94)   Polyethylene terephthalate-Yarn grade, and its waste (95)   Nylon Chips (PA6) (96)   Polyurethanes (97)   Silicones in primary form (98)   Cellulose nitrates nonplasticised (99)   Other cellulose nitrates (100)   Carboxymethyl cellulose and its salts (101)   Alginic acids, its salts and esters (102)   Nylon tubes (103)   Synthetic leather grip (104)   Technical specialized natural rubber (105)   Synthetic rubber SBR 1502 latex (106)   Butadiene rubber (107)   Vulcanized rubber thread and cord (108)   Leather shearing-finish leather with wool (109)   Articles of apparel and clothing accessories of fur skin (110)   Artificial fur and articles thereof (111)   English willow cleft (wood) (112)   Cork Granules (113)   Cork sheet (114)   Satin Finishing Wheels (115)   Carbon Fiber (116)   Glass fiber sleeves (117)   Shoe tacks (118)   Forging of surgical and dental instruments (119)   Nickel not alloyed (120)   Nickel rotary printing screens (121)   Hooks for footwear (122)   Eyes and eyelets for footwear (123)   Tubular or bifurcated rivets (124)   Strings (125)   Bladders and covers of inflatable balls (126)   Press-fasteners, snap fasteners and press studs (127)   Buttons (128)   Slide fasteners fitted with chain scoops of base metal	1302.3210, 1302.3290, 1302.3900       1401.2000 2513.2010 2519.9010 2710.1991 2710.1998 2811.2200 2823.0010 2825.8000 2829.1100 2830.1010, 2830.1090   2831.1010 2832.1010, 2832.1090   2833.1100 2835.1000     2841.3000 2847.0000 2902.4300 2903.2200 2905.3100 2908.1910   2909.4100 2909.4490 2909.4990 2912.1900 2915.1100 2915.1210 2915.2100 2915.2930 2915.2940 2916.1100 2916.1400 2917.1110 2917.1200   2917.1900 2917.3610 2918.1200 2918.1600 2918.1800 2919.9090   2921.0000 2922.0000 2923.0000 2924.0000 2927.0000 2933.0000 2934.0000 2924.1990 2926.1000 2928.0090     3201.1000 3201.2000 3201.9020 3201.9090 3202.1000 3202.9010 3202.9090         3204.1100   3204.1200   3204.1300   3204.1400   3204.1510 3204.1590   3204.1600   3204.1700   3204.1910 3204.1990 3204.2000     3204.9000   3206.1900   3206.4910   3207.4090   3210.0020     3402.1110   3402.1190   3402.1210, 3402.1220, 3402.1290 3402.1300   3402.9000     3403.1110, 3403.1120 3403.1990, 3403.9110 3403.9190   3403.9131 3404.9010   3404.9090 3405.9000 3505.2090 3506.9110 3506.9990 3507.9000 3702.3900     3707.1000   3804.0000 3806.1010 3808.9200   3809.9100   3809.9300   3812.2000   3815.1910 3815.9000 3824.9060 3905.1200   3905.2100   3905.3000 3905.9990 3906.9000 3906.9080   3907.6010   3908.9000 3909.5000 3910.0000 3912.2010   3912.2090 3912.3100   3913.1000   3917.3910 3926.9099 4001.2200   4002.1900   4002.2000 4007.0010   4302.1910   4303.9000     4304.0000   4404.1010 4501.9000 4504.1010 6804.2100 6815.1000 7019.3200 7317.0020 7326.1920   7502.1000 7508.9010   8308.1010 8308.1020   8308.2000 8308.9090 9506.9919   9606.1000   9606.2920 9607.1100, 9607.1900
8.	Artificial leather	3921.1300
9.	Natural rubber latex	4001.1000
10.	Rubber latex	4002.1100
11.	Thermo-plastic rubber (T.P.R.)	4002.9900
12.	Buttons of plastics not covered with textile material	9606.2100
13.	Buttons of base metal not covered with textile material	9606.2200
14.	Studs	9606.2910
15.	Oil cake and other solid residues, whether or not ground or in the form of pellets (PCT Heading 2306.1000)	Supplies thereof.
16.	Cream (PCT Heading 04.01 and 04.02)	Import and supplies thereof.
17.	Yogurt (PCT Heading 0403.1000)	Import and supplies thereof.
18.	Whey (PCT Heading 04.04)	Import and supplies thereof.
19.	Butter (PCT Heading 0405.1000)	Import and supplies thereof.
20.	Desi ghee (PCT Heading 0405.9000)	Import and supplies thereof.
21.	Cheese whether processed or not either grated or powdered (PCT Heading 04.06)	Import and supplies thereof.
22.	Frozen, prepared or preserved sausages and similar products of poultry meat or meat offal (PCT Heading 1601.0000)	Import and supplies thereof.
23.	Preparations for infant use, put up for retail sale (PCT Heading 1901.1000)	Import and supplies thereof.
24.	Fat filled milk (PCT Heading 1901.9090)	Import and supplies thereof.
25.	Soyabean meal (PCT Heading 2304.0000)	Import and supplies thereof.
26.	Petroleum crude oil (PCT Heading 2709.0000)	Import and supplies thereof.
27.	Colours in sets (Poster colours) (PCT Heading 3213.1000)	Import and supplies thereof.
28.	Writing, drawing and marking inks (PCT Headings 3215.9010 and 3215.9090)	Import and supplies thereof.
29.	Erasers (PCT Headings 4016.9210 and 4016.9290)	Import and supplies thereof.
30.	Exercise books (PCT Heading 4820.2000)	Import and supplies thereof.
31.	Pencil sharpeners (PCT Heading 8214.1000)	Import and supplies thereof.
32.	Pens and ball pens (PCT Heading 96.08)	Import and supplies thereof.
33.	Pencils including colour pencils (PCT Heading 96.09)	Import and supplies thereof.
34.	Other drawing, marking out or mathematical calculating instruments (geometry box) (PCT Heading 9017.2000)	Import and supplies thereof.
35.	Remeltable scrap (PCT Heading 72.04)	Import and supplies thereof.
36.	Sewing machines of the household type (PCT Headings 8452.1010 and 8452.1090)	Import and supplies thereof.
37.	Trucks and dumpers with g.v.w exceeding 5 tonnes (PCT Heading 87.04)	Import and supplies thereof.
38.	Bicycles (PCT Heading 87.12)	Import and supplies thereof.
39.	Trailers and semi-trailers for the transport of goods having specifications duly approved by the Engineering Development Board (PCT Heading 87.16)	Import and supplies thereof.
40.	Road tractors for semi-trailers, prime movers and road tractors for trailers whether in CBU condition or in kit form (PCT Headings 8701.2010, 8701.2020, 8701.2030, 8701.2090, 8710.9030, 8701.9040, 8701.9050 and 8701.9060)	Import and supplies thereof.
41.	Purpose built taxis, whether in CBU or CKD condition (PCT Headings 8703.3226 and 8703.3227) which are built on girder chassis and having following features, namely:- (i)        Attack resistance central division along with payment tray; (ii)       Wheelchair compartment with folding ramp; and (iii)      Taximeter and two-way radio system.	Import and supplies thereof.
42.	Vessels for breaking up (PCT Heading 89.08)	Import and supplies thereof.
43.	Compost (non-chemical fertilizer)	If produced and supplied locally.

 

Main Features of the Reformed General Sales Tax Bill, 2010

1-                  The same system of adjustment of input tax is proposed in R-GST Bill, although there are certain differences in proposed design/implementation vis-à-vis the existing sales tax. In proposed system most of the powers are vested with the Board which will cause delays in resolving day to day problems of tax-payers.

2-                  The language of the law has been entirely changed as compared to the Sales Tax Act, 1990. The language of the proposed Bill is apparently influenced by the Australian Goods and Services Tax.

3-                  Third Schedule of the present Sales Tax Act, 1990 is proposed to be abolished. Hence all items will be taxable on ex-factory price basis.

4-                  All special schemes are proposed to be abolished. Similarly, all rates other than the standard rate of 15% are also proposed to be abolished. However, with the reduction of rate from 17% to 15%, special excise duty rate is proposed to be increased to 2% from the existing 1%.

5-                  Previously, value always excluded the amount of tax. Now it is proposed to apply tax fraction formula to arrive at the value. The formula is as under: –

___R__

100 + R

Explanation: R  in this formula is rate of tax.

The formula is difficult to understand for common taxpayers and will cause confusion.

6-                  The proposed legislation deals not only with goods but also with services rendered in Islamabad Capital Territory.

7-                  Since tax on services is a provincial subject, provinces are expected to introduce their respective General Sales Tax Acts for levy of sales tax on services. Provinces are also expected to allow the FBR to administer and collect the tax on such services as are decided by them with a view to ensure that the provincial sales tax law and the federal sales tax operate together as an integrated tax on goods and services. A special provision for this purpose has been added in the Bill (section 8).

8-                  Two new concepts of “progressive and periodic supply” and “ancillary or incidental supplies” have been introduced to cater for periodic supply and supplies incidental to goods.

9-                  Previously only fraudulent refunds and falsification of records was covered under tax fraud. Now tax evasion is also proposed to be covered by the definition of tax fraud. There is likelihood that the same will be used to harass/blackmail the tax-payers.

10-              The department will have very vast powers to disregard and to re-evaluate value of supply of a tax-payer. Previously  consideration received by a supplier was to be accepted as a value of supply and in case of any difference of opinion a procedure was laid down to re-evaluate the same by associating the concerned association/trade body. Now it is proposed that tax authorities will determine the same at their own and as evasion is included in tax fraud, the tax-payer may be charged with the same.

11-              Now recovery can also be made from the associated person which also include relatives of the taxpayer.

12-              List of exempt goods has been reduced to minimum and only very limited items such as wheat, wheat flour, vegetables, meat, diapers for adults, ambulances, fire fighting trucks, artificial human body parts are included in the First Schedule. Roti, bread, nan, sheermal, milk, animal feed, tractors, pesticides, fertilizers, etc. will now be taxed.

13-              Local zero-rating of textile, surgical goods, foot wear, sports goods, leather and leather products and carpets is proposed to be abolished.

14-              Contrary to the previous law, exemptions and zero-rating will be provided only through an Act of parliament/Ordinance by the President. These can’t be provided through notifications.

15-              Now tax-payers will again required to pay GST on advances received by them.

16-              A new concept of increasing and decreasing adjustment is introduced. Now tax-payer can make adjustment against bad debts for a supply against which payment is not received or amount has been overdue for more than six months. Increasing adjustment shall be made for (i) post-supply adjustment vide debit or credit note, (ii) against bad debits, (iii) for goods applied to private purpose, (iv) in case of cancellation of registration, (v) for amount of tax withheld by the buyer, (vi) in case of change in the rate of tax, and (vii) against a penalty, fine, fee, default surcharge or             any other sum payable by the tax-payer. Decreasing adjustment shall be made for the (i) tax already paid against advances, (ii) post-supply adjustment vide debit or credit note, (iii) for bad debits, and (iv) against a carry forward amount.

17-              Input tax is proposed to be disallowed only on passenger vehicles and expenses on entertainment. This is now as per standard VAT. Previously input was disallowed on all type of vehicles such as pick-ups, trucks, buses etc.

18-              Board may, if so desired, collect advance GST on import stage maximum up to 1/4th of the rate of GST for prospective value addition. Previously importers other than manufacturers were paying 2% value addition tax on import stage, which comes to 1/8th of the rate of GST.

19-              Refund will be allowed on the basis of purchases if exports constitute more than 50% of supplies. However, in case exports are less than 50% of total supplies, refund procedure will be notified by the Board. The procedure for such exporters is therefore not clear at the movement.

20-              No procedure has been envisaged for refund to investors who import machinery for installation / commissioning but come into production at the later date. Refund for such investors will be necessitated due to proposed withdrawal of the exemption on machinery.

21-              Threshold for registration is proposed to be enhanced from Rs.5 million to Rs.7.5 million per annum.

22-              Tax-payer will be required to issue sales receipt instead of sales tax invoice to an unregistered person. Tax-payer is bound to provide CNIC number in this case; however he must indicate that tax is included in the amount. However it is not clear why this distinction between registered and un-registered buyers has been made.

23-              Now a person can file amended return after obtaining approval from the Board within three years from the actual return. Commissioner will not be empowered to allow filing of amended return.

24-              Minor corrections in the return are also required to be made with the permission of the Board subject to the condition that default surcharge in this case should not exceed Rs.1,000/-. Tax-payers will face hardship if they are forced to approach Board for redressal of such kind of petty issues.

25-              An Assistant Commissioner or an officer of higher rank may arrest a person with approval of the Board on suspicion of involvement in tax fraud.

26-              The commissioner may compound, at any time, any offence including tax fraud on payment of tax due along with default surcharge and penalty. Trial of cases of tax fraud shall be conducted by a Special Judge. Compounding of tax fraud  shall be undertaken with the permission of the Court of Special Judge if case is before him

27-              The penalties are prescribed in the third schedule and the same can not be foregone completely by any adjudicating officer, Tribunal or Court if it is proved that the offence was committed.

What is Wrong with R-GST (Reformed General Sales Tax)

Discussion on Reformed General Sales Tax is raging all over the place. It is therefore, important to highlight as to what is wrong with the proposed       R-GST. Here are some of the drawbacks:-

●    The big question not addressed is: should a new law be introduced or the existing Sales Tax Act be suitably amended. The existing law is already in VAT mode. The government has gone for a new law, mainly inspired from the Australian Goods and Services Act. As a result, new terminology, jargon and diction has been adopted which is confusing for a common taxpayer. Opposition to the Bill, to a large extent, is due to this factor. There was no need to fish in unknown waters. The plunge is, therefore, unnecessary and a result of bad planning and ill-advice.

●    The proposed law gives wide discretionary powers to the Board and the sales tax officers. If past is any guide, these discretionary powers are likely to be massively abused by government functionaries.

●    Only one legislation is being introduced for taxing the goods on all Pakistan basis and services in Islamabad Capital Territory. This has aggravated the complexity and confusion in the law.

●    On the one hand, rate of sales tax is being reduced from 17% to 15%; on the other special excise duty is being increased from 1% to 2%. Apparently there is no reason for this. Special excise duty is highly cascading and distortionary and will further complicate the system. Why not impose only sales tax @ 17% and no special excise duty. Apparently, saner advice is either not being given or not being heeded to.

●     Compliance cost for small size manufacturers, wholesalers and retailers above the exemption threshold of 7.5 million is likely to be very high which is one of the major reasons for its opposition by SMEs. Nothing has been done to reduce the compliance cost.

●     Almost all exemptions on goods are being withdrawn. Even items like milk, yogurt, butter, bread are proposed to be taxed. The current inflation will certainly sky rocket, specially for lower middle class / middle class consumers. Most VAT countries studiously avoid taxing basic household kitchen items.

●    R-GST, like all VATs, will entail substantial refunds on exports. No suitable refund mechanism is in place nor is in sight. The exporters are likely to suffer in a big way due to held up refund claims. Their money will remain stuck with the government, increasing the cost of doing business.

●    Although some changes in tax administration have been made during the last two years during which time an Inland Revenue Service has been created; however, this tax administration is still in complete disarray. The present tax administration cannot handle the heat.

●    Introduction of R-GST will certainly improve documentation of economy. The businesses are afraid of this documentation. Their fear has a historical background emanating from their experience with the tax administration. These fears are largely valid.

●    It is a known fact that corruption and rent seeking has substantially increased during the tax reform period in spite of tall claims to the contrary. Ask any taxpayer coming in contact with the department.

●    The present Inland Revenue Tax Administration is not sufficiently trained even to run the present sales tax regime, what to talk of the expanded R-GST. It will result in extreme confusion, mismanagement and harassment of tax payers. Backlash is likely to be very serious.

●    The proposed law is no longer a benign tax. It is without a human face. Most of the actions have been left at the whims of the Board and the tax officials. A case in point is the definition of ‘tax fraud’, ‘time of supply’ and the provisions relating to suspension of registrations etc.

●    The issue of fake/flying invoices has not been taken care of in the draft. At the same time rights of bona fide tax payers purchasing goods from suppliers, whose registration is subsequently suspended due to any wrong doing, have not been protected. Both these issues needed serious consideration, keeping in view the experience of the last more than one decade. Apparently this was not done as draft has been blindly copied from Australian GST. In Australia, fake/flying invoices is not a huge issue/phenomenon.

●    The most important stakeholder i.e taxpayers and their trade bodies have not been consulted on the proposed bill who have been completely left out. If at all R-GST is introduced, very serious resistance will be offered by them. More trouble is therefore, in store for the government.

●    Withdrawal of zero rating facility on fire export oriented sectors will have serious repercussions on the economy & exports. Both are likely to suffer an immediate upheaval.

●    Some of the provisions of the Bill are draconian. Recoveries can be made from relatives of a tax payer. Any evasion of tax/undue refund can be stretched to level charges of tax fraud against any tax payer. Extortion will become rampant.

●     There are many inconsistencies in various provisions of the Act, which will be highlighted once Bill is adopted and put to judicial scrutiny. There was no justification for changing those provisions of Sales Tax Act of 1990 which had withstood judicial scrutiny.

●    The most important issue is that of services which are to be taxed by the provinces. Most of issues relating to taxation of services by provinces are unresolved to this date. More confusion will ensue with introduction of provincial Sales Tax on services. It is an established fact that taxation of intangibles is more difficult and cumbersome. Can this tax administration handle it? Apparently not.

Keeping in view the above, I am of the view that proposed       R-GST is likely to be another failed experience. I believe that either it will not be introduced in its present form or if at all introduced, under directions from the donors, Government will be forced to withdraw it or water it down in few months. If this does not happen, my dear taxpayers, tighten your belts and be ready for a rough ride!

 

IMF knocking our doors at a wrong time!

As reported in various newspapers during the last couple of days, IMF and World Bank have been consistently demanding that Reformed GST, as promised by the Minister for Finance, must be introduced by 1st of October 2010; otherwise the next tranche of loan will not be released. The donor agencies are reportedly in constant touch with the Government of Pakistan to ensure that the promise made by the minister is fulfilled. Even Mr. Halbrooke, during his recent visit to Pakistan, has insisted that Pakistan must broaden its tax base and increase revenue collection from domestic taxes. Pleas of the GOP officials that Pakistan is passing through a very critical juncture due to devastating floods have not been able to convince the donors to relent. Government of Pakistan and its officials negotiating with the IMF appear to be stricken by IMF terror. They don’t have the capacity to say upfront that it is not possible to introduce Reformed GST by the said date due to very valid reasons which include devastating floods, political uncertainty, inefficient tax administration and insufficient preparations. Some of the factors are self-inflicted but others are God gifted!

The net result is that Reformed GST cannot be introduced by 1st October whatever the IMF says. The Government knows that if it was not drowned by the floods, it will surely be drowned by the tsunami of public reaction against a so-called Reformed GST. It will therefore be suicidal on the part of the Government to introduce a Reformed GST through ordinance as being urged by the donors with democratic credentials. Even that is out of question because provinces apparently are still not willing to impose GST on services which fall in their domain.

I have consistently been saying that if Reformed GST is at all to be introduced, it may be planned for the next financial year but preparations must be started forthwith in right earnest and zeal. A strategy should be devised, planned and executed and monitored by a team of experts dedicated for the purpose.

Apparently neither the Government of Pakistan nor FBR is up to the task. FBR is at present heading an extremely inefficient, unorganized, untrained, unskilled, inept, indolent and leviathan tax administration. This tax administration needs surgical reforms, only then a genuinely self assessed Reformed GST can be introduced. As is true of all developing countries, tax administration is the tax policy. A reform project of tax administration is going on for the last more than nine years. This project has miserably failed to deliver, even under the watchful eyes of the IMF, World Bank and Foreign advisors and consultants appointed at fat salaries. The tax administration is as corrupt, inefficient and untrained as it was nine years ago. In all probability all these attributes have increased substantially if not multiplied.

FBR has to put its house in order before it embarks upon the project of Reformed GST. That is however, not in sight. The Government also needs to have political commitment which is badly lacking. A Government at war for its survival is not expected to have political commitment required for tax administration. The IMF and the World Bank are knocking at the wrong door and at a wrong time. The IMF also surely knows this!

Reformed GST by 1st October 2010. Is it doable?

The Federal Finance Minister in his budget speech had indicated that a reformed GST will be introduced in Pakistan with effect from 1st October 2010. The word VAT was consciously and deliberately not used by the FM. In spite of the fact that during the last one year, the Federal Government officials were consistently using the word VAT in their discussions and parlance. It appears that there is a realization that names are at times very important, even though just for psychological purposes. The tax payers in Pakistan have already reconciled with Sales Tax, commonly referred to as GST. In essence there is no difference between GST and VAT. We can even call it a General Consumption Tax (GCT), without compromising on basic and fundamental principles of VAT, as commonly understood in Western Europe. It appears that the present FM has realized this basic premise.

The minister did not specify what exactly he meant by a reformed GST, for example, only the present Sales Tax Act, law and procedures will be amended or a new GST Act will be introduced.

As already reported in the press, the draft VAT Bill has been withdrawn from the Parliament. If so, there are only two options, one is to introduce a new GST Act or; (two) to amend the existing law. It is felt that time for introduction of a new GST Act is already gone. The only workable solution is to amend the existing law. This perhaps might be doable.

However, the best advice is that reformed GST should be introduced from the next financial year. The factors at work are out of the control of the Government. A very good case can be made out for postponement of the reformed GST due to floods and the attendant financial disaster. My view is that introduction of reformed GST is not possible till the next financial year. Even if reformed GST is to be introduced in the next financial year, immediate and specific steps are required to be taken now so that the ground work is complete by the start of the next financial.  These immediate steps include:

1. Laying down benchmarks/timelines including specifying the goals to be achieved.

2. Constitution of a Reform Implementation Team with dedicated workforce. The Team should have enough human resource to form sub-teams/committees.

3. Appointment of the Team Leader, who should have immediate and direct access to the decision makers up to the level of FM.

4. Appointment of foreign and local consultants; however, more reliance to be placed on local expertise.

5. Availability of funds for the Team especially for IT related projects.

6. Monthly review by the FM of the work done. This will obviously entail constant review of the work by the Chairman FBR and the Secretary Finance.

The most important and critical issue is however, tax on services for which concurrence of the provinces is required. This concurrence is not forthcoming. A lot of persuasion on the part of the Federal Government at the political level is required to convince the provinces to go for a comprehensive GST on both goods and services to be collected by a central agency with availability of input tax paid on services, whatever the place of supply of service. This will be required to be done at the level of the President and the Prime Minister. This obviously is a political issue for which no advice can be rendered to Politicians except to say that either you do it or leave it. However, the consensus is immediately required if reformed GST at all is to be introduced. The only other option is to reform the present GST and restrict it to goods only.

Short Term and Long Term Implications of VAT/ GST/Sales Tax in Pakistan

The government under pressure from IMF and other donor agencies has been insisting that VAT will be introduced w.e.f. 1st July, 2010.  Statements to this effect were frequently made by all government functionaries/high ups including the then Finance Minister, Secretary Finance and Chairman FBR. In fact the statements by the then Finance Minister reflected his arrogant, hauteur and hawkish attitude, unsuited for the present day financial realities of the country. The saner elements, aware of limitations of tax policy, had consistently held that VAT could not be introduced by the said date for the simple reason that the government itself was not ready for the job, what to talk about the other stake holders i.e taxpayers who were not even consulted. Introduction of a true VAT on goods and services requires certain gestation period during which full-fledged preparations and efforts are to be mounted. All those countries which have been able to introduce a successful VAT have normally taken a period of 2-3 years for preparations and for allied purposes. We intended to do it in a period of less than one year and that too without any preparatory ground work. The effort could only boomerang. It was written on the wall; only the inchoate GOP and IMF could not read it.

I myself have been consistently writing that the time period is not sufficient for the purpose. If GOP was serious and sincere in introduction of VAT, it must have sought a period of 2-3 years from donor agencies. By not doing so, GOP had shown its intention loud and clear. Now the job at hand is first to convince the IMF to give us a further period of few months and then to make preparations for introduction of a tax resembling a VAT or Goods and Services Tax, being referred as ‘Reformed GST’. The new Finance Minister in his budget speech has now indicated the target date as 1st October, 2010.

However, the shift in emphasis and policy was crystal clear. The FM did not use the word VAT even a single time in his speech. He used the word GST only. The change was obvious and perceptible. The hawkish and arrogant attitude of the previous FM was gone. The new FM appears to be more humane, firm and understanding. He appears to be sensitized to the ground realities. Considering his budget speech and his no non-sense attitude, it appears that the new date might be possible for a reformed GST. However, there is lot to be done during this short period of three months. First of all the present Sales Tax Act needs almost a complete overhaul. Same will be the fate of present Rules and Notifications. A complete revamp of computer system alongwith highly efficient and trained work force will be required. A seamless refund system is to be put in place. All this might not be possible during this short period. However, something resembling this can be put in place. Therefore, a haphazard and disjointed, so called reformed GST, could be put together by 1st October 2010. This is a dangerous proposition which might even result in complete failure of the system. All these factors should be kept in view whatever decisions are made during this interim period.

Now the most important issue. How to convince the provinces to adopt sales tax on services by the said date so that the whole system consists of an integrated general sales tax on goods and services with cross adjustment / input tax credit. Apparently, no effort appears to be directed towards this goal. One reason might be that the new FM has lost hope of bringing the provinces on board and is preparing for reformed sales tax on goods only. Obviously, a long term strategy is required to introduce a general consumption tax covering both goods and services. This requires realization of magnitude of the issue and long term political commitment on the part of powers that be. It requires vision, strategy, planning, preparation and commitment; virtues very difficult to find in our political and ruling class.

I am pinning my hopes on the new FM. He perhaps realizes that the nomenclature VAT is not sacrosanct. He deliberately used the word GST in his budget speech and avoided any mention of VAT. He in all probability realizes the importance of this gesture. It is not the word VAT which is important. It is spirit of the system which needs to be protected and promoted. The present sales tax of Pakistan is already in the VAT mode. All it needs is purging of certain provisions of the Act and introduction of few newer ones to bring it at par with standard VAT practices. In fact more needs to be done in the realm of administration and the IT whose reform is more tedious, frustrating and time consuming. No seamless refund system is in place nor is one in sight. No state of the art information technology system is in place nor can be bought off the shelf, in view of our peculiar problems. No well-oiled, slim, hungry looking, well-fed tax bureaucracy has been established during all the reform years spread over almost a decade. There is no comprehensive audit strategy and no mechanism for affectively controlling fake / flying invoices. The dispute resolution mechanism is extremely poor and scaled heavily in favour of the government and therefore, not credible. Since VAT / Sales Tax refund fraud is a real possibility, it requires a proactive and effective machinery to deal with the same. Unfortunately, all these requisites of a better VAT/GST/Sales Tax model are missing. This requires time, planning, strategy and all that is required for such an exercise. No credible VAT / GST can be expected without these prerequisite. I hope that the new FM is aware of all this and is taking reasonable steps in the right direction. Apparently, there are no indications to suggest that.

Pakistan’s tax administration is typically in a reactive mode. We as a nation believe in doing things first and plan later on. That is true of tax administration as well. My fear is that this problem of poor planning will continue haunting us. GST to be introduced by 1st October, 2010 is likely to be in the same mode. Then there is the problem of taxing services, which being intangibles are always difficult to tax. Provinces are apparently neither serious not keen about it. Perhaps, no consensus will be achieved on taxing services by the said date and the Federal Government might have to do it alone and on goods only.

This article intends to examine short term and long term implications of VAT /GST. It is based on the premise that something resembling VAT / GST will be introduced in near future (say, July 2011, if not 1st October, 2010), sans sales tax on services.

In the short term no significant gain in revenue is expected from reformed GST because tax rate is likely to be reduced to 15% i.e. a reduction of 2%. There is also a possibility that highly anomalous 1% special excise duty will also be removed. Higher tax rates of 19.5% and 21% are also likely to be abolished. Obviously, many of the existing exemptions will be withdrawn but their revenue gain will be more than offset by reduction in rate. VAT has been used by many countries as a tool for documentation of economy. Hopefully, with most of the exemptions gone, documentation will likely improve which in turn might result in marginal increase in revenue over medium term.

Strangely, our experience has shown pitfalls of documentation. VAT tax chain had resulted in the phenomenon of fake and flying invoices during late 90s and in early part of the present decade. Resultantly, textile and other export oriented sectors were zero rated for local supplies as well. That phenomenon is likely to recur with the same ferocity. A well thought out strategy is required to counter the menace. At present the tax administration is as clueless as it was in 2005 when textile and other export sectors were zero rated. This is therefore going to be a major headache for tax administration.

Hopefully, domestic zero rating of textile and other export oriented sectors will be withdrawn. It will multiply the refundable amounts. If past is any indication, there will be delays in sanctioning of refunds. Upfront financial cost of exporters will increase significantly, rendering them more uncompetitive in the world market. Exports will suffer as also the country. Corruption will creep in due to refunds. It is obviously, not a happy sight. Three months is too short a time period to develop a strategy and an infrastructure to deal with the issue. It will be a test of Government’s resolve and commitment to effectively address the issue. I personally feel that it is not doable for the present tax administration. Unfortunately, it is expected that malpractices prevalent before the year 2005 will come back with full force and rage. This is for the policy planners to think and decide.

VAT has its advantages which will be apparent in the long run. If malpractices pointed out above are addressed, revenues are likely to increase significantly. An efficient VAT will likely improve collection of income tax as well. If Government is somehow able to extend VAT to retail sector (a very difficult proposition), it will be an extra icing on the cake. However, for this to happen, structural issues of VAT will be required to be adequately addressed. This is again a very difficult proposition. I doubt if the present tax administration is geared for the job at hand.

One thing is very obvious. We will try to emulate and imitate the best VAT practices so long as IMF is here. Once they are gone, we will revert to the old, tried and tested methods again. Special schemes for various categories of taxpayers will be back with a vengeance. For the present we are likely to do away with these schemes under pressure from IMF. In this go, we will discontinue even those schemes which are otherwise required for small traders / retailers. After IMF is gone, we will first bring back special scheme for small traders / retailers. Then will justify similar schemes for mild steel producers, CNG stations etc. and for host of other sectors. The list is un-ending. Since rule of law, tax policy, best practices are not our national norm, we will waver from best VAT model. This has already happened frequently. A case in point is the sales tax reform effort of 1996. After having adopted the then prevalent best VAT practices, we immediately started dithering.

In the end, it can be argued that there are no likely short term gains from introduction of reformed GST. However, if we continue on the right track and address design and implementation issues, long term implications are likely to be positive. All the advantages of VAT can be reaped with a well thought out strategy. Documentation can improve as can the tax recoveries. Once services are also brought in the net, tax to GDP ratio can be significantly increased. Buoyancy of VAT can improve the overall administration and collection of tax. Disputes with the taxpayers can be minimized once fully automated IT based system backed by highly efficient tax administration is put in place. In this exercise, another two very important and related issues will also be required to be addressed. These are (i) under invoicing;   and  (ii) smuggling. These two issues have a great bearing on successful implementation of VAT. This is however, a different subject and will be discussed separately. Suffice to say that these two issues also need to be addressed for a successful VAT/GST, although these two issues are generally not adequately discussed by VAT experts.

Difference between VAT & GST/Sales Tax

Note: This blog has moved to http://clients.akhtarali.com. To access the full article click here.

In recent weeks there is lot of discussion and debate as to what is the difference between Value Added Tax (VAT) and General Sales Tax (GST) in the context of Pakistan.  The issue has further been confused by statements emanating from the government high ups who are insisting that VAT is to be introduced w.e.f 01.07.2010 which will replace the so called GST. Multiple opinions have surfaced most of which are misplaced and unwarranted.

This article intends to dissect the difference if any, between the two and to give a clearer picture of the whole issue.

Read full article…

 

VAT/GST by July 2010? They must be kidding!

During the last few weeks, Chairman, FBR has been publicly stating and commenting that VAT on goods and services (GST) will be introduced by July, 2010.  He has also given the understanding that it is part of the overall arrangement with the IMF. The government is, therefore, under an obligation to introduce VAT on goods and services by the said date.

2.         It is, therefore, assumed that the Government of Pakistan (GOP) has finally and firmly agreed with the IMF to introduce VAT on goods and services by the said date. However, it appears that the commitment has been given without appreciating the difficulties involved in the venture. Apparently, the GOP without doing its home work, has agreed for the introduction of GST and the Chairman, FBR is also issuing statements, off the cuff. Perhaps the Chairman, FBR is not aware of the implications involved in the introduction of GST. This is condonable, considering the non-professional background of the Chairman. The act of agreeing with the IMF to introduce VAT on goods and services by the said date by the GOP is also condonable, considering the way the GOP works. Everybody knows that it always acts on whims and under pressure from donor agencies. However, what is not condonable is the attitude of the professionals working in the FBR who should be aware of the complexities involved. The insistence of IMF for introduction of GST by the said date is also not condonable considering that IMF is a highly professional organization.

3.         Introduction of VAT on goods and services in normal circumstances requires at least a period of two to three years. (We are, however, permanently living in abnormal times). The present tax administration of FBR is familiar with the working of VAT on goods and is reasonably aware of the issues involved; irrespective of the fact that the present system is distortionary and inefficient. Pruning of the present system to make it effective and efficient requires mounting of considerable effort which might be possible by July, 2010. But to introduce VAT both on goods and services by the said date is asking too much.  Imposition of VAT on goods is relatively easier. But when it comes to services/intangibles, problems start accumulating. We in Pakistan do not have any experience of collecting sales tax on services either at the federal or the provincial level. Tax administration of Pakistan has some experience in imposition of Federal Excise Duty on few selected services. But VAT is altogether a different ball game and the previous experience of Federal Excise Duty is of no use. The drafting of new law, training of staff and officers, formulation of rules and procedures etc. etc. requires lot of time and effort.  To top it all we need a dedicated team of professionals.  None of these ingredients are available at present.  The IMF is here to force it down our throats without realizing the ground realities and the most important ground reality, not taken into consideration at all, is the expected response of the trade and industry.  Is the trade and industry willing to accept VAT on services? In fact the first question in this regard is: will an unpopular government be willing to take on trade and industry on this issue when it will already be in third year of its tenure and the spectre of mid-term polls already looming large on its head.

4.         At present FBR is at logger heads with itself. The Customs and Excise Group is in litigation with the FBR regarding introduction of Inland Revenue Service (IRS).  Understandably, certain sections in the Income Tax Group are also not comfortable with the IRS.  The litigation is likely to take some time to end.  Even if the litigation comes to an end, one has to understand the limitations of a tax administration extremely dissatisfied with its service structure. Nothing worthwhile can be expected from them and should not be expected. They are on extremely confused, disoriented, disarrayed and highly vulnerable group of people, not ready for the job ahead.

5.         However, another very important issue not addressed so far, is the relationship between the Federal Government and provinces. At present, imposition of sales tax/VAT on services is a provincial subject. Will the provinces be ready and willing to surrender their powers to the Federal Government?  What concessions will they expect at the negotiating table in return for surrendering their powers in favour of the Federal Government?

6.         Introduction of VAT on goods and services by the Federal Government will in all probability, require a constitutional amendment as well. Does the political government has the commitment and where withal to introduce a constitutional amendment to implement a VAT? This should not be one of the priority areas for the government, embroiled in most pressing issues of security, law and order and its own survival. Unless this constitutional question is addressed, no Federal VAT on goods and services can be imposed.

7.         Considerable time has passed since we started toying with the idea of a tax on services.  Since sales tax could not be introduced on services due to constitutional bar, Federal Excise Duty on few selected services was imposed. However, it was resulting in cascading, double taxation and distortions created due to its imperfect working (litigation relating to refund of excise duty to telecom companies is a case in point). To address these issues, certain changes were introduced in the federal excise law to ensure that Federal Excise Duty on services was collected in VAT mode. The effort had met with some partial success. But to introduce a full fledged VAT on services requires another kind of effort. Since the commitment was not there, way ward policies were adopted. One of such policies was introduction of sales tax on few services by the provinces. For this purpose, Provincial Sales Tax Ordinances were introduced during the Musharraf era. This imposition of sales tax by provinces on few services was, from the very beginning, a non-starter. It was not designed to deliver and was of no significance.

8.         If the Federal Government is really serious in introduction of federal VAT on goods and services, immediate steps are required to be taken and a period of at least two to three years should be earmarked for achieving the task. The first step should be to talk to the provinces and to convince them that a federal VAT on goods and services is required to be introduced. They need to be convinced to surrender their powers and authority.  Most of the VAT on services will be collected from Sindh and Punjab but smaller provinces also need to be convinced of the need to have a federal VAT on goods and services. This is an arduous task. Such an arrangement has already been worked out by the Australian Tax Administration.  Their experience can be of great importance and significance for Pakistan. The Australian Government had agreed with the provinces to enter into an Inter-governmental Agreement (IGA) to have a federal tax on goods and services. They took substantial time to work out details of IGA. At the same time, agreement on expenditure/distribution of the tax so collected was also reached with consensus.  Such an exercise needs to be mounted here.

9.         The whole issue needs to be looked into in its perspective. On the one hand, provinces are clamoring for more provincial autonomy. There is a serious demand for abolishing the Concurrent List so that these powers go to the provinces. In this perspective, to convince them to surrender their power and authority in favour of Federal Government for VAT is a difficult task. If the FBR and GOP are willing for the job, they need to realize difficulties involved and they need to address serious reservations of the provinces on the subject. Then, there is the issue of amendment in the Constitution. Two third majority in the parliament is required which the present government does not enjoy.  Will the opposition parties in the bigger provinces as well as parties in the smaller provinces agree to an amendment in the Constitution?  I hope, not.

10.       Even if the Federal Government has a smooth sailing and everybody agrees to whatever the desire of the government, the introduction of VAT on services requires mounting of considerable effort. Taxation of intangibles is always very different. What services to tax and what to exempt?  What about financial services?  How, the rent, sale and purchase of property and hundreds of other services being provided by professionals to be taxed.  Decision on all these aspects requires an in depth knowledge of experience of other developing and developed countries which the present tax administration does not have. Of course the technical assistance will be coming from IMF, but to transpose experience of other developed and developing countries to Pakistan requires in-depth knowledge of local conditions as well. This expertise is missing in case of IMF. Then training of the staff and officers in the law to be introduced. They need to understand the complexities involved. The taxpayers also need to understand the law and their complications, if they are willing to pay or the Government has the will to ensure compliance.

11.       The most important question is how to break the resistance of trade and industry; how to educate them as to their rights and liabilities.  These and host of other issues need to be addressed.

12.       At present nothing appears to be on ground. Every effort is in the air including frequent statements by the Chairman FBR and occasional statements of the Finance Minister. If the GOP is serious in implementing GST in Pakistan, they should be demanding a period of at least two/three years for its introduction. The FBR at present is in a mess which is likely to be further compounded by July, 2010. I do not want to be harsh but left with no option except to say that policy makers in FBR and in GOP are day dreaming for introduction of VAT on Goods and Services by July, 2010.  Come July, 2010, they will be awakened and will start begging IMF for extension in time period benchmark. Why do it then and why not do it now. But before that, one has to be serious about it. There is however a big question mark so far as seriousness and commitment is concerned.

What is the way forward for Pakistan’s Sales Tax?

With the recent “comeback” of IMF to Pakistan, the issues of structural adjustments and reforms are being raised more frequently and emphatically. It is an open secret that strings are always attached with the loan and assistance provided by donor agencies especially IMF. So is the case this time around. One of the key issues raised and bench marks fixed by the IMF is adoption of a “true” value added tax.  Recent statements by the Minister of Finance, Secretary Finance and the Chairman FBR clearly indicate that IMF has demanded adoption of a full-fledged VAT^.(*1) There is talk of a new VAT Act intended to replace the existing Sales Tax Act 1990.  The impression being given by the Finance Minister and Chairman FBR is as if the present Sales Tax Act is not a value added tax. The impression being given by them may be because of lack of understanding on their part as to what VAT actually means, or it may be a deliberate policy aimed at camouflage so that new legislation is introduced to satisfy the demands of the donor agencies.

The questions that should be raised are:   whether present Sales Tax Act is not a value added tax whereas it was always intended to be one.  How come it has failed to deliver as a VAT Act?  Is it possible that it is a value added tax but has failed to live up to its expectations due to weak tax administration? Is it a question of weak tax administration only or of a poor design as well? What actually is wrong with the Sales Tax Act 1990?  These and host of other related questions will be raised and should be raised in the present scenario where the Government of Pakistan appears to be already committed to IMF that a new VAT legislation will be introduced.  The matter appears to have been finalized without threadbare discussions at the Government level as well as at the level of academia, tax professional and local tax experts.

Sales Tax Act 1990 was always intended to be a consumption tax based on VAT model. However, in 1990, the Government as well as the tax payers were not fully prepared for adoption of VAT.  Introduction of VAT requires certain pre-requisites and gestation period of around two to three years.  Pre-requisites of VAT were not fulfilled in the year 1990.  Therefore, many features of the old Sales Tax Act of 1951 and of Central Excise Act of 1944 were retained. However, the system in any case worked on input tax/output tax mechanism which is the spirit of a VAT.  The first serious attempt to model the Sales Tax Act 1990 on so-called “VAT model”^(*2) was made in 1996 and all features of Central Excise Act and the Sales Tax Act of 1951 were done away with.  For all practical purposes, Sales Tax Act, as amended in 1996, was a VAT.  Since then, the tax has developed, the Act has been frequently amended and good and bad features added to allegedly make it “responsive” to the changing ground realities. Some of the features added in the subsequent years have taken the tax away from a so-called “VAT model”.  That is why it is being said again and again that a new VAT Act is now required to replace the existing Sales Tax Act.  In this context, it can be reasonably argued that new Act may be introduced. However, there is certainly a lot of weight in the argument that there is no need for a new VAT Act; the existing Act may be purged off some sections/provisions as are in contradiction with the VAT model or against best VAT practices.  But this is an issue which needs detailed discussion with all relevant stake holders.

It is, however, argued at this stage that there is no standard VAT model or a standard VAT recipe.  VAT in any country will be modeled on ground realities and on policy considerations. The level of economic development, education, documentation etc., being different in each country, will require various facets of VAT to be trimmed accordingly. Then there are issues of ‘culture’ of tax administrations and tax payers.  Countries even with similar economic development, education, documentation etc. may take different decisions with regard to threshold, rates, exemptions, zero-rating, refunds, audit, enforcement, scope and coverage etc. It is now an accepted proposition that VAT is not a “one size fits all”.  Even IMF advice to developing countries has considerably changed during the past two decades especially with regard to refunds. The IMF advice is now increasingly less purist. But that does not mean that VAT has no common features and characteristics.  As we know, VAT has developed in the world during the last 60 years and has seen a phenomenal growth due to certain features which have generally been adopted by most of the countries.  Since VAT in most of the developing countries has been adopted on recommendation and advice of IMF, common features were sure to take shape even in these countries. It is, therefore, to be understood that inspite of country specific differences, there are broad parameters and principles common to all VATs. These common principles and parameters may be loosely called a VAT model. These broad parameters are: systematic off-setting of input tax against output tax, zero rating of exports resulting in refunds, broad-based imposition of tax on goods (and preferably on services as well), minimum exemptions, tax chain starting from imports, running through various stages in the supply chain reaching to the whole sale stage (and preferably to the retail stage) etc. Deviation from these broad parameters and principles will generally depend on the complexity of economic structures and policy considerations in each country.  What is true for VAT of an EU country or New Zealand ^(*3) cannot necessarily be true for a developing country like Pakistan.  The more developed economy is likely to adhere to broad principles as fully as possible whereas a developing economy like Pakistan will generally be deviating from the principles as much as possible or as much as allowed by the donor agencies.

The question is:   if there is no standard recipe and if there are various shades of VAT, what should be adopted and what can be conveniently discarded.  To what extent deviations from these broad parameters can be accepted in a VAT and where VAT ceases to be a VAT?  These and other relevant questions are, of course, mind boggling for tax administrations of developing countries as well as intellectuals of these countries dealing with VAT issues; although  the   matter   is   fairly   straight   for   VAT   experts, descending on developing countries from donor agencies. Their case is simple. They would like us to remain as near to (first generation) VAT model of Europe as possible.  However, this difference of perception between the tax administrations of developing countries and donor agencies is an unresolved conflict which is likely to remain so in the near foreseeable   future.  There is, however, another aspect.  Developing countries like Pakistan when left to themselves, tend to deviate from broad parameters to an extent that the tax loses the character of a VAT.  We, in Pakistan, have done it frequently and are now fully aware of its pitfalls.

What should be suggested for Pakistan in this perspective?  The advice should be:  remain as close to the so-called best VAT model as possible, make changes where so required keeping them to the bare minimum.  Broadly speaking, the advice is:  try to emulate the best VAT models but also keep in view the local ground realities and experiences of other similarly placed developing countries. Also take advice from international experts but do not discard local knowledge. It should be a well designed VAT with effective implementation strategy with a local tinge.

Now coming to the various questions raised in the beginning of this article.  Some of these questions already stand replied in preceding paragraphs but are being reiterated here for further reference in this article.

The present Sales Tax Act of Pakistan, when introduced, was essentially a VAT/GST model in a limited sense as input/output mechanism was incorporated in the scheme.  However, there were certain gaps i.e. importers were not required to be registered and practically the tax net was extended to manufacturing only.  A major reform effort was made in 1996 and the Act was brought at par with standard VAT/GST practices (although tax net remained extended upto manufacturing only ^(*4)).  It can be safely said that Sales Tax Act, as amended in 1996, was a VAT; although there were still some design issues and implementation flaws. These design and implementation issues could have been sorted out easily if, among other things, the mind-set of tax administration was also changed through sustained training and reform efforts. Unfortunately, there were no extensive programmes for training of staff and officers and the mind-set essentially remained that of Central Excise. Many changes in the Act introduced subsequent to 1996 reform reflected this mind-set. For example, in 1997, availability of input tax was restricted to only those raw materials which became “constituent and integral part” of the manufactured product. This was obviously not VAT.  Luckily, the notification was withdrawn within 6 months.  Although, subsequently many changes have been made in the Act and some computerization functions added, design and implementation issues have not been addressed.  In fact, subsequent changes in the Act reflect diverse trends.  At times, attempts have been made to copy best practice VAT, experiences of other developing countries have been incorporated and at times, the excise mind-set has swayed.  The present Act is, therefore, a hodgepodge. However, since many of the VAT features are intact, it is generally being argued that instead of a new VAT legislation, the existing Act may be suitably amended ^(*5).

It will be an over-statement to say that sales tax has failed to deliver in Pakistan.  The present collection is about 4% of the GDP and share in federal tax receipts is around 39%.  This, inspite of the fact that design and implementation issues have not been addressed and tax is being  administered by a weak tax administration in an overall social milieu where tax compliance is not in particular, a good virtue. If design & implementation issues are addressed, it is expected that sales tax will undoubtedly become the major revenue spinner.  There is, therefore, nothing inherently wrong with the imposition of VAT/GST in Pakistan.

Now coming to some of the nitty-gritty which is the most difficult part.  How to address the problems of threshold, tax rates, registration, audits, refunds, domestic zero rating of textile and other export oriented sectors, taxation of retailers, compliance cost and collection cost, enforcement, simplicity/complexity of tax laws, credible quasi judicial and appellate forums, extension of tax on services etc? All these and many other details need to be addressed more thoroughly and professionally.

In the next few pages, these issues will be discussed very briefly and suggestions made for consideration by policy makers, if so desired by them.

SALES TAX ON SERVICES: At present, only few selected services are being taxed under (i) Provincial Sale Tax Ordinances; and (ii) Federal Excise Act. While services under sales tax ordinances are in VAT mode, only those Federal Excise services are in VAT mode as are liable to tax @ 16% or a higher rate. The rest of the services are therefore in excise mode. This is creating problems in implementation and adding complexity. The issue of sales tax on services needs to be looked into more seriously and sorted out. It is proposed that provinces should be taken on board and should be convinced for change in the Constitution so that federal sales tax on services is imposed. In return, major share of tax so collected should be judiciously transferred to provinces. It will relieve the provinces of raising infrastructure for collection of tax on services and will also save them from political fallout of imposing taxes. The entire burden will rest on the federal government. If judicious distribution of funds through NFC is agreed, provinces will shortly realize that “federal taxation is the best taxation” ^(*6). In a nut shell, it is proposed that sales tax on goods as well as on services may be imposed through a single federal statute.

THRESHOLD: The present threshold of Rs. 5 million was fixed in 2004. Due to substantial inflation during the last 5 years, it is recommended that threshold may be increased to, say, Rs. 8 million and for future, may be linked with inflation.  The higher threshold will free the tax administration to deal effectively with fewer number of tax payers.  However, a strategy should be developed to identify those above the threshold.  At present, there is no threshold for whole sellers and service providers which should also be at the same level as for manufacturers and retailers.

TAX RATES: At present, there are many tax rates including 18½%, 21%, 18% for commercial importers (16% + 2%) in addition to the standard rate of 16% and domestic zero rating of textile and other export oriented sectors.  There is another a very pervasive 1% Federal Excise Duty.  It is proposed that there should be a single standard positive rate of 16% and other rates including 1% FED may be abolished.  This would improve the simplicity of the tax system.

REGISTRATION: Registration for VAT is a very important function (unlike registration for income tax).  The registration checks for VAT will, therefore, be required to be more thorough and stringent.  All data provided by the intending registrants should be scrutinized before hand, in addition to subsequent periodic registration checks. The present register makes it impossible to carry out sectoral analysis because manufacturers and wholesalers of a particular product are registered under the same tariff heading. Similarly, there is no separate identification for services. Most of the time, incorrect PCT codes have been assigned. Registration data needs to be properly cleaned, so that value addition, input out ratios, wastages etc for various sectors are determined for any reasonably goods sectoral analysis. Codes need to be assigned for services as well. One option can be to adopt UN coding system which is more detailed and more suitable for such purposes.

AUDITS: This is the most important function and also the weakest component in any VAT tax administration. More so in Pakistan.  A well thought out strategy for audit is required to be prepared and implemented in consultation with international experts, local academia, tax experts and intellectuals.  SOPs for various types of audits e.g. desk audit, registration checks, issue oriented audit, detailed audit and investigative audit need to be prepared and functions assigned to specific audit units. System for monitoring of auditors needs to be fully developed and implemented with great detail to reduce the chances of collusion.  Time lines for each type of audit should also be laid down.  Audit is the most crucial area and needs great details to cover each and every aspect of sales tax as success of the system will largely depend on the audit system.  The present audit system cannot deliver whatever changes are introduced to improve the same. We need parameters and SOPs of best international standards applied to the minutest detail, with a proper monitoring and evaluation system.

REFUNDS: Refunds should be allowed immediately without much hastle to compliant tax payers.  With the mandatory e-filing of returns, it is possible to allow immediate refunds to such tax payers.  Pre-refund audit in their cases should be dispensed with.  However, in case of non-compliant tax payers, with doubtful refund credentials, pre-refund checks can be applied.  The tax administration needs to fully understand that refund is only one of the many facets of VAT and does not require over-allocation of resources at the cost of other important functions, especially audit.  VAT refund fraud is an international phenomena and should be pursued without compromising the efficiency of the system.  It should also be appreciated that there is no difference between input tax claimed by the tax payer and the refund allowed by the department.

DOMESTIC ZERO RATING OF TEXTILE AND OTHER EXPORT ORIENTED SECTORS: As a matter of principle, zero rating should be restricted to exports only. It is, however, not proposed to do away domestic zero rating of textile and other export oriented sectors immediately. It should be done in a phased manner in one or two years.  However, time lines for withdrawing domestic zero rating should be laid down. Domestic zero rating can easily be done away with, once efficiency in refund and audit systems are in place.

TAX ON RETAILERS: Over the years, this has been one of the most tedious issues.  It is understood that some type of special procedure will be required to be put in place for relatively smaller retailers.  World over, many schemes for such retailers are available and any of these can be adopted. It is, however, proposed by the author that ‘deductive method’ may be applied in case of smaller and medium size retailers to reduce their compliance cost. Large retailers should, of course, be under normal VAT.

COMPLIANCE & COLLECTION COST: Both these factors are important.  Compliance cost for smaller businesses is generally very high and at times can become unbearable and counter productive.  That is why the most vociferous opposition of VAT comes from smaller and medium size businesses. The tax policy should be aimed at reducing the compliance cost especially of smaller and medium sized tax payers. One way of doing it to increase the exemption threshold and the other is to prescribe simplified returns especially for retailers.  The collection cost will also be reduced by these measures.

SIMPLICITY / COMPLEXITY OF TAX LAWS: It has generally been argued that in developing countries, ‘tax administration is tax policy’.  While this may be true to a certain extent, this is not a gospel truth.  A good tax administration may be dealing with a poor law which will impair not only tax efficiency but will bring multifarious problems for tax payers.  The present Sales Tax Act has become very complex with the passage of time.  It is poorly drafted and amendments have also been made in bits and pieces, rendering various provisions of the Act contradictory. It is proposed that a new VAT/GST/ Sales Tax Act may be introduced by December 2010. The new law may be prepared in consultation with experts from IMF, World Bank, senior tax officials of Pakistan, tax professionals and academia. It should be discussed and debated for a period of 4 to 6 months with all relevant stack-holders before its introduction in the Parliament.  It must be a simple law, of international standards and enforceable.  Modern concepts and best practices in vogue in VATs should be a guiding principle (although not necessarily to be blindly followed).

CREDIBLE QUASI JUDICIAL AND APPELLATE FORUMS:  The present quasi judicial forums are neither credible nor delivering.  Same is the case with appellate tribunal.  It is proposed that while first assessment may be made by the department, the first appeal must go to an independent quasi judicial forum.  Recovery should be made only when appeal by an independent forum has been decided.  Procedures for assessment of non-fillers should also be streamlined.

PAYS & ALLOWANCES: All tax officials including those working in quasi judicial forums should be properly compensated to discourage collusion and corruption. Unless these issues are addressed, even the best model VAT will collapse.  A comprehensive carrot and stick policy is required. A systematic policy for promotion of auditors / senior auditors to next levels in hierarchy should be implemented as early as possible.

SPECIAL PROCEDURES: Most of the special procedures be discontinued. However, some special procedures will in any case be required due to business realities and difficulty of taxation e.g. special procedure for steel re-rollers.  But such special procedure should be exceptions rather than a rule.

ENFORCEMENT: The present enforcement system is faulty.  There is lot of data loss and very little accountability.  This issue needs to be addressed.

COMPUTARIZATION: A world class computer system is needed for efficient tax system.  The expertise of the best in the field should be obtained which, of course, will come at a price.  The government should be willing to pay this price.  The new system must be an integrated one, providing easy information of declarations made to customs, income tax, sales tax, excise etc.  The system should be based on the concept of ‘one shop complete solution’ where data/declarations made to tax administrations and to certain other government authorities should be available to the auditors/department at the touch of a button on real time basis.  The system should be capable of making risk assessments for audit, refunds, recoveries etc. etc.

TAX ADMINISTRATION: The issue of tax being administrated by Customs & Excise Group or by a separate organization responsible for domestic tax operations (IRS) needs to be addressed to the satisfaction of all stake holders; otherwise it will result in further bitterness and fissures in the organization. The pool of expertise already available with Customs & Excise Group should not be allowed to go waste.

These are some of the broad proposals which require lot of details to be worked out. The cardinal principles for a good self assessed tax remain the same as indicated by Lian Ebrill, Michael Keen, Jean-Paul Bodin, and Victoria Summers in their book ‘The Modern VAT”. There is no substitute for (i) simple tax laws (ii) assistance and facilitation to taxpayers, (iii) simple registration, filing, payment and refund procedures, (iv) effective collection enforcement (v) effective and well planned audit system with sufficient resources, (vi) suitable penalties for non-compliant taxpayers (vii) access to independent review of decisions; and finally (viii) periodic review of the working of the system by a team specializing in this job.

The earlier we internalize these features, the better for the system.

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(*1) In this article, nomenclatures i.e. sales tax / VAT / GST have been interchangeably used and should be construed accordingly.

(*2)        The words “so-called VAT model” have been used only to bring home the fact that there is no single ‘best VAT model’ as wrongly understood by some people in Pakistan. There is considerable diversity in law and practice even in countries considered as better VAT models.

(*3)        Reference to New Zealand has been made as its GST is generally considered a better model of VAT.

(*4)        Legally speaking, tax net was extended to wholesale and retail stage in 1998; although coverage upto retail stage has, at best, been insignificant.

(*5)        I personally do not subscribe to this idea simply for the reason that so many changes will be required to be made that it will be advisable to have a new Act. This new Act can then be modeled on the ‘best practice’ VAT of countries like New Zealand, Australia and some European countries with of course appropriate changes to suit local conditions.

(*6)        Australian experience can be of significant importance in this case.