Single, harmonized, integrated VAT-based ST regime: FBR gradually moving towards adoption

ISLAMABAD: The Federal Board of Revenue (FBR) is gradually moving towards the adoption of a single, harmonized and integrated value added tax (VAT) based sales tax regime to improve efficiency, reduce evasion and address problem of jurisdiction.

According to the research report, 'Growth inclusive Tax Policy: A Reform Proposal' conducted by Pakistan Institute of Development Economics (PIDE), there are 14 sales tax rates. On goods the rates are: 1%, 1.5%, 2%, 3%, 5%, 7%, 7.5%, 8%, 10%, 12%, 14%, 17%. In the case of services, the standard rate is different in each province. The rate in Balochistan is 15%, in KPK 15%, in Punjab 16%, and 13% in Sindh. The general sales tax (GST) on services is a provincial subject and GST on goods is a federal subject.

It is recommended to gradually move to the adoption of a single, harmonized and integrated VAT based sales tax regime. It will improve efficiency, reduce evasion and problem of jurisdiction. Doing so, both provinces and the federal government would get additional revenue, report stated.

The sales tax on items included in the 3rd schedule is collected from the manufacturer at the retail price (origin-based). This should be aligned with the principles of VAT and tax be collected from the entire supply chain, rather than the manufacturer alone. However, VAT on manufacturers in the supply chain should be a single one, after figuring in the whole production process to avoid complications. For example, there are thousands of parts used in manufacturing cars. Implementing and collecting VAT on every single supplier would be almost impossible, at least administratively.

The VAT Bill 2010 proposes no exemptions. So, the items in the 3rd schedule should be abolished. There are no exemptions in the VAT regimes. This will lead to an increase in revenue in the long run, it said.

Finance Act 2020 has added a new clause to make the offence of under-invoicing cognizable as a criminal offence. However, the report recommended that under-invoicing for Chinese imports can further be reduced by linking our WeBOC system with Chinese port authority system (which is used for calculating subsidies for their exporters at the other end). Similarly, UN Com Trade data can be used to establish the under-invoicing. Strengthen the FBR through laws and capacity for transfer pricing matters. Tariff rationalization under the National Tariff Policy 2019 has been made by reducing customs duty on 90 tariff lines from 11% to 3% and 0%. PIDE recommended that it should be adopted for all tariff lines to establish a tariff-based trade policymaking.

Finance Act has proposed a reduction in regulatory duty on smuggling prone items to bring these items under legal imports. But still, a lot needs to be done.

However, on the other side Tariff protection for the domestic industry by increasing/levy of regulatory duty on import of those items which are also locally manufactured is also proposed. The protection provided to the local industry should be time-bound with clear sunset date and accountability against rentseeking. Exemptions and concessions in import duties should preferably be provided through tariff code and not through SROs, PIDE report added.

Copyright Business Recorder, 2020