TAX NEWS - JUNE 2010

Pakistan Tax: Imposition of Value Added Tax (VAT) deferred till October 1

The imposition of Value Added Tax (VAT), which is part of the conditionalities of the IMF and the World Bank under the multi-billion dollar loan programmes, was deferred till October 1, 2010, owing to failure for evolving a consensus between the Centre and provinces.

"We took taxation measures under Plan-B by taking various measures, including raising the GST rate by one per cent after witnessing no consensus on the VAT," Chairman FBR Sohail Ahmed said while briefing reporters on salient features of budget 2010-11 here on Saturday night.

It is relevant to mention here that under $11.3 billion bailout package of the IMF, Pakistan is committed to impose the Value Added Tax (VAT) from July 1, 2010. Now Pakistan will have to approach the IMF to convince them for avoiding delays into releasing the next tranche worth $1.2 billion under the Stand-by Arrangement (SBA) programme. The World Bank has also linked its $300 million assistance under the Poverty Reduction Support Credit (PRSC) with the imposition of the VAT from July 1, 2010 and now hectic efforts are required to win support forcondonation of delay in the VAT implementation.

However, the chairman FBR said the government had estimated to generate Rs 70 to 80 billion additional revenues with the imposition of VAT but it was decided to raise the GST rate by one per cent instead of tinkering with the Sales Tax exemption at this stage.

In case of implementation of Value Added Tax (VAT) from October 1, 2010, he said that a major chunk of exemption would be abolished except few sectors such as education, health and essential food items. "After approving the VAT bills from parliament and four provincial assemblies, the tax will be imposed on goods and services and it will replace the existing general sales tax (GST) from October 1, 2010 with the consent of the elected representatives," he added.

Answering another query whether the government would be able to evolve a consensus till October 1, he said this question should be asked to the Ministry of Finance as the FBR was supposed to implement the decision of the government after approving the bill from parliament.

With the revenue collection target of Rs 1,667 billion for 2010-11, the tax to the GDP ratio is aimed at increasing to 9.8 per cent from the estimated level of nine per cent for 2009-10 if the FBR achieved its desired target of realising Rs 1,380 billion for the outgoing fiscal year.

But the former minister for finance, Shaukat Tarin opposed the government's decision to raise the general sales tax rate by one per cent. He said the retailers at market level are contributing only Rs 125 million on per annum basis, out of which Rs 50 million are being paid by the stores of defence authorities. Only Rs 75 million are contributed by the retailers at the market level all over Pakistan which is pathetic.

"We require political will to reverse this trend," he said and added it was regrettable that one major party strived hard for avoiding agriculture income tax while another wanted to avoid bringing retailers into the tax net purely on the basis of their political interests. He said now donors were raising questions that when Islamabad was not ready for broadening its tax base how could they be expected to provide money from their taxpayers money.