TAX NEWS - June 2010

Pakistan Tax: Pakistan economic experts in a fix over VAT imposition

LAHORE: While Pakistan government has deferred the imposition of the 92-year-old Value Added Tax (VAT) regime till October 1, 2010, international donors like the International Monetary Fund (IMF) are not ready to budge an inch from their key demand that this levy should be enforced at the earliest in Pakistan, sources told The News.

These sources claimed that the PPP government was reluctant to propose this levy in the federal budget 2010-11 in order to ward off a likely criticism from its charged-up opposition, but now that the budget is over, Pakistan is required to impose the VAT regime before it sends a requisition for any future assistance to the IMF.

Having started doing their homework at the eleventh hour to develop a consensus among all the four provinces over this issue, the country's perplexed economic wizards are now fully aware of the fact that the key Bretton Woods institution might not buy their excuses for a longer period of time, sources asserted.

They said, "Lenders are least concerned about the differences among the Pakistani provinces over this issue. They want business and writing is very much on the wall that the VAT regime in Pakistan is not far off, no matter how strongly the opposition political parties may react to it. VAT is surely a pre-requisite to qualify for future IMF loans and you cannot duck it for long."

History of VAT imposition reveals that a German industrialist Wilhelm von Siemens was the first to propose this concept in 1918, but this phenomenon was practically adapted by Maurice Laure, the Joint Director of the French Tax Authority in April 1954 to check the menace of smuggling.

Initially directed at large French businesses, it was gradually extended over time to include all business sectors. In France today, VAT is the most important source of state finance, accounting for nearly 50 percent of the state revenues.

A study of the prevalent taxation systems in over 100 nations of the world shows that while the applicable VAT rates vary from country to country, this tax is recognized under different names in different territories.

It is called IVA in Italy, Spain and Portugal, BTW in Holland and Belgium, Umsatzsteuer or MWST in Germany and Austria, TVA in France and Belgium, Japanese Consumption Tax or JCT in Japan, PDV in Bosnia and Herzegovina, Ma'am in Israel, GST in Malaysia, Australia, Canada, Singapore, New Zealand, Jordan and Morocco, KDV in Turkey, Mehrwertsteuer or MWST in Switzerland and MOMS in Scandinavian countries of Norway, Denmark and Sweden.

Similarly, the name VAT applies in UK, Malta, India, Barbados, Fiji, Guyana, Iran, South Korea, Mauritius, Palestine, South Africa and Thailand. This is a key difference between most sales taxes levied throughout the United States and the VAT system in many other countries.

In the United States, the state of Michigan used a form of VAT known as the "Single Business Tax" (SBT) as its form of general business taxation. It is the only state in the United States to have levied a VAT ever.

When it was adopted in 1975, it replaced seven business taxes, including a corporate income tax. In August 2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax, which became effective from January 1, 2009.

House Speaker Nancy Pelosi had stated in October 2009 that a new, national VAT was "on the table" to help the federal government garner the desired revenues.

After her speech, the American Tax Reform Group urged the public to contact their members of Congress to oppose this potential measure.

However, President Barack Obama was reported to be open to a national VAT, but American Treasury Secretary Tim Geithner had stated that the president was not in favour of VAT for the US.

Increased growth and pressure to provide infrastructure to support growing urban centres have also made the Gulf Cooperation Council member governments feel the need to introduce a tax system in the region.

In UAE, the government officials are studying the situation and considering implementation of a Value Added Tax in near future. But no matter whatever its name may be, VAT essentially works like a sales tax.

The VAT rate ranges from 3 percent in Iran to 25.5 percent in Iceland.Apart from Iran, the countries with lowest VAT rates include Japan and Panama with five percent each.Among the nations with highest VAT rates, Iceland is followed by Denmark, Norway Hungary and Sweden with 25 percent each.

There are just four countries, including Pakistan, where the tax rate stands at 17 percent currently. Apart from Pakistan, the other three countries with a 17 percent tax rate are Bosnia and Herzegovina, China and Montenegro. These taxes do not apply in Hong Kong and Macau, which are financially independent as special administrative regions. In India, VAT is not implemented in just two of its 28 states.

Since its inception, various critics have pointed out that VAT disproportionately raises taxes on middle and low-income homes, though those in favour of this levy outpace these critics by an overwhelming majority throughout the globe.