What is Value-added Tax?

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What is Value-added Tax?

Friday, June 04, 2010

KARACHI: Adviser to the Prime Minister on Finance Hafeez Sheikh has made it clear that the government would go as per plan to implement the Value-added Tax (VAT) from July 1, dispelling the impression that a delay is expected for a couple of months.

The proposed VAT faces bitter opposition by various sectors and interest groups, which say it would increase inflation and distort the country’s already messed-up taxation system.

Following are some frequently asked questions about this controversial tax:

Q) What is VAT?

A) VAT is a consumption-based tax, which means that whoever consumes more will pay more. However, the Federal Board of Revenue (FBR) defines VAT as a multistage tax and it is being levied on the value-added items at each stage of chain of supply of goods and services with the provision of a set-off for the tax paid at the earlier stages in the chain.

Q) What is the proposed rate of VAT?

A) The government proposes a uniform rate of 15 per cent. However, all exports of goods and services will be zero-rated under the VAT mode. In addition, the FBR has recently proposed another rate of 18 per cent for those who avoid documentation through an amendment in the draft. At present, sales tax registered persons are paying different rates from 16 per cent to 25 per cent.

Q) What is the difference between VAT and sales tax?

A) The proposed VAT will replace sales tax from July 1, 2010 subject to the parliamentary approval. VAT is imposed on goods and services, while the sales tax is imposed generally on goods. The government in 1996 introduced limited-scope VAT with the imposition of general sales tax, but frequent changes by the revenue body distorted the law, which resulted in its failure.

Q) Would VAT implementation result into high inflation growth?

A) VAT implementation will further increase inflation because those sectors, which are not paying taxes, will be brought into the tax net. Therefore, the multiple effects escalate the cost of products. The FBR, however, claims that VAT is almost non-inflationary as compared with the traditional sales tax. It says that most of the processed packaged or branded-food items are already chargeable to sales tax in Pakistan. Therefore, no tangible price rise can be seen on the food items. Some critics say service providers, who are not in the tax net, will charge VAT and pass it on to the consumers. Suppose a doctor is not included in the sales tax net, but after VAT implementation a 15 per cent tax would be charged, which will ultimately be paid by the consumer. Similarly, export goods are exempted, mainly textile sector, but VAT has been proposed on the local consumption of textile products, which would boost the prices in the local market.

Q) What will be covered under proposed VAT?

A) VAT will cover supply, including import of both goods and services unless exempted under the VAT law.

Q) What are exempted supplies?

A) Food items either packed or unpacked will be exempted under the proposed VAT Laws. According to the FBR, exemptions will generally cover basic food items, charities, public sector education and health and international commitments.

Q) What is registration requirement?

A) The taxpayers already registered under the sales tax would be treated as registered under the VAT mode. However, relaxation has been provided under VAT by increasing threshold from Rs5 million to Rs7.5 million for registration under the new proposed tax.

Q) Will VAT help in expanding tax base?

A) All the commercial activities involving production and distribution of goods and provision of services are brought under the tax net. This will result in documentation of every person in the supply chain. Those, who are not registered in the chain, are unable to claim or deduct tax paid at the purchase level.

What is Value-added Tax?