The Federal Board of Revenue (FBR) has the legal authority to continue with the existing value-added tax (VAT) regime and levy Federal excise duty (FED) in VAT mode to increase documentation by amending the existing Sales Tax Act 1990 without obtaining prior approval of the Parliament.
Sources told Business Recorder here on Saturday that the FBR is legally empowered to use the existing VAT arrangement and charging FED in VAT mode for broadening the tax base through expansion of the VAT regime. Instead of introducing entirely a new law, the FBR can amend the existing Sales Tax Act to expand the scope of the VAT for documentation of the economy. The FED in VAT mode could be effectively utilised for bringing maximum services into the tax net by applying a lower rate on new service providers. The new services could be documented under the existing Sales Tax Act by imposing FED in VAT mode. In this way, the documentation of services is possible within the excise regime, without moving new Bills in the National and Provincial Assemblies. The FED in VAT mode is the most appropriate tool to document services sector without taking permission of the Parliament.
Sources said that currently sales tax is applicable in the value-added mode with multiple rates ranging from 17 percent to 26 percent. At the same time, the federal excise duty is also in the value-added mode and its slabs have been considerably reduced over period of time. The VAT is already being implemented through the Sales Tax Act and the government does not require approval from the parliament to use the two existing indirect taxes--sales tax and FED. Both these taxes could be used for increasing revenue collection as well as expansion of the tax base without facing criticism and resistance from the business community as well as politicians.
The FBR can adopt a fast track method to timely notify amendments in the Sales Tax Act and withdraw notifications dealing with the zero-rated sectors. This would give some time to the corporate sector, business associations and the political parties to obtain clarifications on reforms being introduced in the sales tax. Without introducing new legislation, the FED in VAT mode could be used for broadening the tax base without going into the Parliament.
Sources said that the FBR is fully equipped, under the existing Sales Tax Act, to take enforcement action against the non-compliant registered persons within the supply chain for documentation purposes. The RGST is an attempt of the government to increase documentation by increasing the number of items to be brought into the RGST net.
Under the existing Sales Tax Act, the FBR had implemented a law i.e. 'Missing Traders Fraud' under which all partners in the supply chain would be jointly liable to deposit the unpaid amount of tax not paid at any stage of supply. In 2006-07 budget, the board had introduced several strict provisions in the Sales Tax Act, 1990 to reject the fraudulent refund claims where the amount has not been actually deposited by the supplier in the national exchequer. The section 8 of the Sales Tax Act was amended through Finance Bill 2006 to disallow refund or 'input tax adjustment' in case the tax claimed has not been deposited by the respective supplier.
The section 8A was enacted in the Sales Tax Act, 1990 fixing joint liability of persons in a supply chain where tax is unpaid and all persons in the chain shall be jointly liable for payment of such unpaid amount of tax.
Similarly, the board had introduced a new system for checking the refunds claimed by persons whose suppliers have collected tax from them, but not deposited in the treasury. Under the Missing Traders Fraud, both the buyer and the seller would be responsible for depositing the amount of due tax if not deposited. Prior to this, the buyer was not held responsible even if his supplier had not deposited the tax recovered from him.
At that time, the tax authorities had copied this law from section 77A of the UK Value Added Tax Act, 1994. Later, the FBR had amended the law to suit its own business environment for incorporation in the 2007-08 budget. Under the British law, 77A (joint and several liability of traders in a supply chain where tax unpaid) was applicable on telephone, any other equipment including parts/accessories and computers and related equipment. British tax department has to notify specific transaction of goods for applying strict provisions of this law.
Contrary to this, the FBR obtained powers to exempt any transaction from "Missing Traders Fraud" bringing all others transactions under the purview of section 8A of the Sales Tax Act. Under amended section 8A, the board may exempt transaction or transactions from the provisions of "joint liability for payment of unpaid tax". This amendment was introduced in 2007-08 budget with the objective to obtain powers for exempting any transaction from this provision.
The law is in vogue in European countries to punish persons involved in obtaining fraudulent refund on fake invoices of blacklisted units etc. It seemed that the board wanted to invoke the provisions of 'Missing Traders Fraud' in 2007-08. So far, the law was not suspended and no cases were framed against the taxpayers.
In the presence of such strict enforcement provisions of the Sales Tax Act, there was no need to introduce new kind of enforcement laws under the RGST Bill 2010. In the presence of 'Missing Traders Fraud' law, the FBR has no need to introduce new legislation for the documentation of the economy. If the said enforcement provisions have been effectively implemented, the entire supply chain could be documented under the Sales Tax Act, 1990.
When contacted, a tax expert said that the reforms in the sales tax only require 1-2 hours work for the FBR. The rescinding of statutory regulatory orders would not require much time. Similarly, distortions in the Sales Tax Act could be removed on paper in one day. The only issue is to develop consensus among the provinces on collection of sales tax on services.
The FBR has the first option to incorporate all new concepts of VAT in the existing Sales Tax Act. The FED in VAT mode could be used for bringing services into the tax net. The second option is to remove distortions through SROs without going to the Parliament. In this case, the FBR can take away exemptions without tabling amended Sales Tax Bills in the Parliament. It would result in continuation of the existing sales tax law by rescinding all SROs, which created hurdles in true implementation of the VAT.
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