The freshly drafted VAT bill is the centre of debate as lawmakers and businessmen alike are voicing their concerns and reservations as regards the new tax regime.
The bill has now been introduced in the federal and provincial assemblies. However, agreement on the bill is far from certain at this point. Stakeholders were initially concerned as to what the broader implications of the changing system will be.
A close look at VAT in comparison to the prevailing GST regime shows that by and large both systems aim to achieve the same end. GST is levied on certain economic activities. The proposed VAT bill is a broad based tax, meaning that all economic activity will be taxable.
Amongst other issues, the tax law design is of crucial importance. It has to be simple, comprehensible and easily adoptable for it to be enforced with success, according to Zafar Iqbal, who recently conducted a seminar to explain the intricacies of the system at a local law firm.
Traditionally, goods are taxed on ex-factory prices under VAT regimes around the world. According to the draft law for Pakistan, however, tax imposition will be based on prevailing market prices at the time of inspection.
Determination of the market price, it is assumed, will be left to the tax officials. If that ambiguity isn removed, importers may be hit with a higher tax burden in case the exchange rate falls in the time between purchase and inspection.
Another area of concern for business owners may result from double taxation due to the loose definition of "associated persons" in the law.
Small business owners keep functions distinct to remain under the tax radar; and many times, different parties are associated with incremental functions. Experts believe the new law will allow revenue officials too much leverage in this regard; potentially leading to harassment.
High tax rates will encourage tax evasion. Agha Khaleel Barik, a former FBR official who believes introducing VAT at a high rate of 15 percent may prove a disincentive for business owners. It will encourage them to work around the system. Ideally, the system should be introduced at a lower rate so that economic agents are more open at accepting it. Gradually, rates can be increased as people start seeing the benefit of the new system.