Pakistan Tax: The Federal Board of Revenue (FBR) advocating Value-Added Tax (VAT) to cover its failure in implementing TARP

30 May 2010 By Shahnawaz Akhter, KARACHI -- The Federal Board of Revenue (FBR) is advocating the Value-Added Tax (VAT) to cover its failure in implementing tax reform programme, experts said on Saturday.

Tax Administration Reform Programme (TARP) was initiated in December 2004 with $100 million funding from the World Bank. The objectives included an increase in the revenue collection, tax-to-GDP ratio and tax base.

"By the proposed date of December 2009 for the completion of the reform programme, all the benchmarks were missed by the revenue body," said Ikram-ul-Haq, tax consultant at Huzaima and Ikram.

It was not the International Monetary Fund (IMF) or the World Bank insisting on implementing VAT. It is just the revenue body that is ambitious in achieving all reform programme targets through imposition of VAT, he said.

The World Bank-funded TARP was expired on December 2009, but the revenue body had requested the donor agency to extend the date for another two years that was granted by the World Bank only on the condition that Value-Added Tax (VAT) would be imposed by July 2010.

"VAT will be a death pill for us. We can generate additional revenue of Rs800 billion by just taxing speculative transactions in shares, real estate and colossal income of absentee landlords,î Dr Haq said.

The government has proposed Value-Added Tax (VAT) for the next fiscal year by replacing the existing general sales tax (GST), which was imposed in 1996.

Tax experts said that the revenue body had distorted the general sales tax (GST) laws by exercising vast authorities in terms of issuing Statutory Regulatory Orders (SROs) and General Orders to favour a few sectors of the economy.

"The amendment should be introduced in the general sales tax (GST) laws to remove inequality in the system," said Ali A Rahim, President, Karachi Tax Bar Association.

The economy is not prepared for Value-Added Tax (VAT) and the only solution is to restore general sales tax (GST) in VAT mode back to 1995 position, he suggested.

In its quarterly report July-September 2009, the FBR had identified a number of factors that are responsible for low general sales tax (GST) efficiency. "Some of them are conspicuous such as large volume exemptions and zero-rating, higher general sales tax (GST) threshold, poor compliance rate and abysmally wider tax gap pointing towards gross evasion, the lack of documentation and the absence of strong audit and ineffective enforcement," the report said.

All the flaws had to be addressed by the revenue body under the reform programme, but in contrast the tax base shrunk and the tax-to-GDP ratio declined, the tax experts said.

The government is implementing VAT in haste and without homework by the FBR. "The system would result in a failure in these conditions," Rahim said.

The FBR is seeking easy collection way through Value-Added Tax (VAT), which would burden the poor masses. The FBR should identify the venues as presently the tax collection potential is over Rs4,000 billion, Dr Haq said.

"Instead of suggesting restoration of progressive taxes, including wealth tax, capital gains tax, duty on real estate, gift tax, etc, these institutions are supporting continuance of pro-rich tax policy," he said, adding that by levying fair and equitable taxes and withdrawing exemptions given to the rich, the country can easily generate Rs4,000-5,000 billion per annum.

The Value-Added Tax stressed upon documentation of economy and all the taxpayers from manufacturers to retailers should document their input and output taxes and file their returns to the revenue body.

"The success in implementation of VAT would depend on the homework of the revenue body, political resolve of the government, prior understanding and tackling of legal and constitutional complications, well-tested audit and enforcement system, education to general public and tax personnel," according to the quarterly report.

The issue in Pakistan is not that of lack of revenue resources as wrongly portrayed by the IMF and the World Bank, but documentation of economy, Dr Haq said, and questioned, "How VAT will be enforced in Pakistan where more than 50 per cent of the economy is undocumented?"