Dr. Ikramul Haq
Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: email@example.com). He is also a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law, some of which are co-authored with his wife, Ms Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.
After a long-drawn battle, marred by bitterness, hostility and closedown of businesses, the Government and the traders finally concluded an agreement on 22 August in Islamabad. Both the parties have ultimately realised that issues can only be solved through negotiations and not by confrontation. The most disturbing aspect of Pakistan’s ailing economy is ever-growing fiscal deficit, which is mother of all ills. One wishes that at this critical juncture of our existence, which is in serious danger due to financial crisis, every segment of society would pay the taxes honestly and diligently.
The salient features of Government-Traders Agreement are:
- Reduction in turnover tax rate
- New Stock Amnesty Scheme (SAS)
- Extension of ongoing National Tax Surveys to 13 more cities.
- All traders, retailers and shopkeepers have been given an option to opt for a new slab of 1 per cent turnover tax, without being registered under the existing sales tax regime. In this case, such traders would be considered as enrolled (not registered sales tax payers). These traders would pay 16.5 per cent (15 per cent GST plus 1.5 per cent additional tax on unregistered persons) sales tax on their purchases. They would not be entitled to claim refund of 1.5 per cent additional tax. However, this would break the chain of documentation at this stage.
- In the second case, traders have the option to remain under 2 per cent turnover tax regime, and claim refund of 1.5 per cent additional tax paid on purchases (15 per cent GST plus 1.5 per cent additional tax). Such traders would be treated as registered suppliers under the sales tax regime.
— In both the cases, traders, retailers and small shopkeepers have been asked to declare their monthly purchases and quarterly stock positions.
The government, while announcing the details of “concessions” given to the traders, reaffirmed its commitment to document the economy (sic). The traders’ representative expressed satisfaction over the agreement and assured that there would be no further strikes against the tax survey for documentation of the economy.
It is worthwhile to mention that the tax revenue target of Rs. 435.6 billion for the financial year 2000-2001 was solely based on the tax survey and documentation drive, therefore, further concessions in the turnover tax regime have created serious doubts about the realisation of an optimistic growth of over 25 per cent in one year. The tax revenue collection during the first month of the current fiscal year is only 5 per cent of the total target, which is an alarming sign. In the face of this grim reality, one wonders how the Government decided to succumb to the pressure of traders’ shutter power.
On the one hand concessions have been given to the traders at the expense of national Exchequer and on the other, the worthy Finance Minister is still positive to realise the tax revenue goals. He claimed that under-filing and non-filing of tax returns was much larger than originally estimated. The government, according to him, is eyeing this large untapped segment to get additional revenues by engulfing them under the tax net through the ongoing survey. The tax survey is being extended to 13 more cities – Sheikhupura, Sahiwal, Gujrat, Okara, Rahim Yar Khan, Kasur, Abbottabad, Larkana, Mirpur Khas, Nawabshah and Murree.
The Finance Minister also announced a new stock amnesty scheme at the rate of only 2 per cent on all undeclared stocks held by the traders and the industrialists. This scheme would remain available till end-September 2000, to whiten all the undeclared and hidden stocks of the business community. The minister assured the business community that the tax authorities would conduct only one sales tax audit in a year. He said an important SRO, relating to exports of value added garments and other textile made ups, would be announced within a week. The finance minister expressed confidence that the government would get additional revenue of Rs. 100 billion through the tax survey and the documentation of the economy.
On the issue of annual stocks turnover, the government has given the relaxation of three times counting instead of five times counting, as has been a normal practice, for the assessment of annual stocks turnover. According to the agreement, 3.5 per cent of the annual turnover will be considered as the net-profit, to be exposed for levy of income tax. However the figure of 3.5 per cent will be bare minimum and the traders can declare their profit much of this rate. Regarding self-assessment of income tax, in those areas where the survey is going on, the incomes assessed during the survey will be considered as the real income instead of what is mentioned in the returns filed by taxpayers in the self-assessment scheme.
The present government, it may be remembered, very strongly insisted on implementation of its new and simplified (sic) GST retail scheme announced in the Finance Ordinance, 2000. In recent years, the CBR has experimented with different modes of retail GST. These included: Trade Enrolment Certificates (TECs), Turnover Tax and the Development Tax. None of them worked. The CBR failed to collect the desired revenue despite the tall promises by the traders/retailers that through these schemes the State would get enormous amounts. Now the matter is back to square one. The tall claims of the CBR that no more fixed tax schemes in GST regime would be announced proved to be wrong. Once again the traders managed to avoid proper documentation and “turnover tax” is another name of fixed GST. Who will determine the correct turnover? A new vista of corruption has been opened. Unholy alliance between the traders and tax collectors has already deprived the State of billion of rupees. The seasoned and skilful tax administrators in CBR wrongly posed that they were at war with the traders. In fact, they managed to get concessions for them by posing that it is the decision of the Finance Minister alone. Their tough posture towards traders was a tactical move to ultimately push the present government to the wall and get benefits for their “friends” in business, trade and industry.
The present government time and again asserted that extending of retail sales tax to all the exempted areas of the economy would ensure documentation of the economy. This, it has now realised, is not an easy job. After realising that it might lead to tax revolt in the country, even the strong military regime decided to save its own skin by striking a deal with the powerful shutter lobby. The traders/retailers from the very beginning have maintained that they would not pay sales tax on each and every transaction and for this they were even ready to confront the armed forces. They have ultimately proved their strength. “Documentation”, as the regime desired and propagated, has proved to be yet another unrealised dream. The poor people of Pakistan are the real losers, being hapless lot; they have no voice in the democratic or military eras alike. They have been left to face the unprecedented burden of rising cost of life, as the mighty sections of society are not ready to pay the taxes. They have now not even the slightest doubt about the fact that this country is only meant for powerful high-ranking civil military bureaucracy, corrupt politicians and profit-hungry businessmen.
Pakistan’s tax to GDP ratio is just 10.4 per cent against an average of around 20 per cent for other developing countries. It is a matter of utter disgrace for the entire society. We have to improve this situation before it is too late; already the country had suffered irreparable loss due to policies of appeasement by the successive governments towards the traders in tax matters just to keep their vote bank in tact. It is really shocking to see that a military regime having no electoral obligations has also succumbed to the same pressure.
The nation at this critical juncture of its history is struggling hard to survive as independent economic entity. We are facing the worst ever economic crisis where the very survival of the country is tat stake. In these circumstances, the Government instead of succumbing to pressures from vested interests must ensure the proper compliance of taxes. The traders/retailers must pay taxes honestly and diligently and the State must ensure that there is no administrative highhandedness on the part of tax machinery.
The study of imposition of retail sales tax in other countries having similar conditions as prevailed in Pakistan can be useful from policy implementation perspective. For the benefit of readers and CBR’s policymakers (though they always claim to be the last word on everything and take it as an offense if somebody tries to educate them), the following is synopsis of retail GST in a few such countries:
India is a Federal State like Pakistan. The Central Government is empowered to levy taxes as per the entries listed in the First Schedule to the Constitution. These entries do not include sales tax. Sales Tax is the State subject in India, therefore, each State has enacted its own law to levy the sales tax in the concerned State. Since the sales tax is the State subject, the rates of the tax vary from State to State. There is no uniformity regarding the levy of sales tax, the procedure for collection and its administration. However, different States in India levy the sales tax generally in accordance with following principles:
(a) Sales Tax is levied at the time of first sales. In other words, when the goods are manufactured, the manufacturers will charge sales tax to the buyer. The buyer will fix up its sales price for resale of the said product after considering the sales tax that he has paid to the manufacturer. In case of buyer, it is second sale of the same product and therefore sales tax is not levied at the time of second sale unlike in the VAT system.
(b) When the retailer sells the goods to the consumer he will fix up his sales price depending upon the sales tax he has paid to the manufacturer.
(c) If the retailer or wholesaler is selling to another person be it a consumer or registered dealer in the same State the sales tax is not levied.
(d) If the buyer is a registered dealer and he has not purchased the goods from the registered dealer and used the same in his manufacturing activity, he has to pay purchase tax on the purchase he has made, which is popularly known as purchase tax. However, it is a part of sales tax and is levied to check tax evasion.
(e) There are different rules and regulations for the purpose of levy and collection of sales tax. For example, the dealer has to obtain sales tax number and thereafter he is considered as a registered dealer. The registered dealer has to give different forms to the manufacturer. He has to maintain various records and is bound to produce the same before the Sales Tax Authority to prove that the turnover he has made is correct and the sales tax is paid properly. With a view to increase the revenue, the State also levies general sales tax on particular items. The procedure is same. The rates of tax for different items decided in the budget and they are changed from time to time depending upon the needs of revenue by the State and the capacity of the consumer, administrative problems etc. For example, everybody including poor person consumes salt. To protect the poor, there is no sales tax on salt. Further, the rates of sales tax are high on luxurious items such as air conditioner, car etc. The maximum rate of tax is on liquor and cigarettes.
(f) The Central Government has levied Central Sales Tax for the purpose of charging sales tax when the goods are transferred from one State to another State In this case also if certain procedure is followed then the rates of taxation is less whereas if it is not followed maximum.
(g) The exceptionally high rate of sales tax is provided on liquor that is 42%. The maximum general rate is at 14% and minimum rate is 2%.
In India all the States and Central Government levied sales tax immediately after the independence in 1947. The main source of revenue in each State remains sales tax. India has completed 50 years of imposition of sales tax; therefore, the business community and consumers are well accustomed with it. The VAT is not yet introduced in India. Recently, the Central Government has taken the initiative to introduce VAT phase wise. As a first step the Central Government has tried to enforce the uniform rates of sales tax in all the States. Some States have started following and some are yet to follow. From the year in which the sales tax is levied, the documentation has been there. Since the assessment has to be made on the basis of documents maintained by the dealer, the act and rules provide for the maintenance of records and different forms.
As regards rates of sales tax on different items it varies from item to item as may be decided by the Annual Budget from time to time. However, at present the maximum rate is 14% and minimum rate is 2%. In case of liquor the rate of sales tax is 42%. If more revenue is needed the surcharge on sales tax is levied for temporary period. Similarly relief is also given from time to time depending upon the economy needs, promotion of industry and commerce and business etc. Many States have levied professional tax for augmenting the revenue of the State. Professional tax is levied on the professionals like Advocates, Chartered Accountants, Doctors, Consultants, and Businessmen etc. etc.
Pakistan is struggling hard to properly impose GST or VAT at the retail stage, whereas its former East wing, after independence in 1971 successfully introduced, first GST and then VAT on goods and services. Comparative study of this levy in both the countries shows that Pakistan lacked a political will for such taxation and the successive governments acted in self-interest to appease the shutter power.
In Bangladesh from 30 June 1982 to June 30 1991, a combination of a sales tax and a business turnover tax applied. The Value Added Tax Act of 1999 abolished the Sales Tax Ordinance of 1982 and the Business Turnover Tax Act 1982. The VAT legislation effective from July 1, 1991 has the following features:
- It is based on consumption.
- It uses the invoice or tax credit method designed to tax the consumer goods rather than the capital goods.
- It applies on imports and not exports.
- A single-stage VAT on importation and manufacturing at uniform rate of 15% and services.
- VAT for whole-sellers and retailers is optional.
- It is applicable to all goods except some unprocessed agricultural products and listed services.
- Exports are zero-rated.
- VAT is levied at the time of supply of goods and services.
- Cottage industries are exempt from it.
- Tax paid on inputs is creditable against output tax.
- Luxury and socially undesirable goods are subject to supplementary duties at different rates ranging from 10% to 300%.
It has partially replaced the excise tax on the domestic production and has completely replaced the sales tax on imports. The taxpayers are required to register before commencement of business. Maintenance of the following books of accounts is mandatory:
- Sales book
- Purchase book
- Current books of accounts
Each taxpayer is required to submit a tax return for each tax period (each calendar month) within twenty days of the month following the tax period. Records have to be retained and made available for inspection on demand for a period of six years from the end of every tax period. VAT for services is paid through monthly returns.
On 1st April 1994, tax on services and goods was introduced in Singapore. It was implemented without any resistance or reluctance from the taxpayers. This tax on goods is not VAT, but a simple General Sales Tax payable at retail level @ 3%.
In a country, where literacy rate is as high as 97% and development is one of the best in Asia, there was no desire to introduce Value Added Tax (VAT) on goods. The Government of Pakistan, in fact, under immense pressure from the IMF, has been trying to impose VAT, which is neither suitable to our peculiar conditions, nor a model followed by two very developed countries of Asia, i.e., Japan and Singapore.
There is 7% VAT on retail trade in Thailand (In 2001 it will increase to 10%). VAT was introduced in Thailand in 1992. Now VAT is a main income for the government. Country’s economy started picking after levy of VAT.
The Malaysian government introduced 5% service tax on goods and services some 10 years back. The taxes on various goods and services were progressively extended from time to time. At the same time income tax was progressively reduced. Small businesses having a turnover of less than RM30 k to 500k were exempt from imposing and collecting the tax. Further tax was paid on a receipt basis and paid once in 2 months. Where debts were not collectible after due legal recourse the tax is waived. There will be a gradual shift from income tax to service tax to encourage people to earn and pay tax as they spend. The range of products and services will be increased together with the rate of tax. The gradual shift from income tax to service tax has encouraged investment thereby contributing to the economy through employment etc.
Country has a Value Added Tax on goods and services. It came into operation in 1998. Prior to its introduction, sales tax @ 8% on goods was introduced in 1982, a large number of small traders are not concerned with VAT as only those having an annual turnover in excess of Rs. 4.0 million have to register with the VAT office. Sales tax of 5% was introduced in 1982. VAT rate is presently at 10%.
There is no sales tax or export duty. Import and excise duties are, however, imposed on certain articles.
A Vat is charged on transfer of imported and manufactured goods and the provisions of services. The normal rate is 10% that may be reduced to % or increased to 15%; further, special rates of output VAT, ranging from 1% to 8.2% may also apply.
Various exemptions and deferments apply.
The excess of output VAT over input VAT is paid by the 15th of the following month. A monthly VAT return is required to be lodged by the 20th of the following month. Procedures are prescribed to claim a refund of overpaid VAT. An administrative penalty of 2% of the VAT imposition base is imposed under certain conditions.
Sales tax on luxury goods is levied at the rate of 10%, 20%, 25% and 35% on imported and domestically produced luxury goods as stipulated by the Ministry of Finance. This tax is single-stage tax levied ether on the transfer by the manufacturer or on importation into the customs territory of Indonesia. Exports and certain imports are exempt. This tax is levied in addition to VAT.
The VAT regime in the Philippines, effective from 1 January 1988, is governed by Title IV (Value Added Tax) of the National Internal Revenue Code (hereinafter NRIC), as amended by Executive Order No. 273 (hereinafter EO No. 273). With effect from 1 January 1996, the Expanded VAT Law (Republic Act No. 67716) extended the scope of VAT to most services and the sale or lease of real property.
Generally, all persons who, in the course of their business, sell goods or render services subject to VAT are required to register as VAT taxpayers if the aggregate amount of their actual or expected gross sales or gross receipts exceeds PHP 200,000 for any 12-month period.
VAT is levied on the sale, barter or exchange of goods within the Philippines, the importation of goods into the Philippines and the rendering of services within the Philippines. VAT is imposed at the rate of 10%. However, various transactions are either zero-rated (for example, export sales) or exempted.
Value Added Tax
There is no value added tax.
Enterprises and individuals engaged in production, construction, transportation, commerce, provision of services and other business which have turnover must pay turnover tax which is computed as follows:
Turnover tax = A x B
A = total turnover (most business pay tax on gross sales; however, different tax bases may apply)
B = tax rate
Tax rates for foreign bank branches and joint venture banks on net turnover are as follows:
Taxable activity Tax rate (%)
Professional banking services 6.0
Gold and precious stone transactions 15.0
Foreign exchange operations 25.0
Stock and bond transactions 25.0
Rates for other entities or activities are as follows (the highest rate will be imposed when a taxable entity which conducts more than one taxable activity does not segregate the turnover for each activity):
Taxable activity Tax rate (%)
Real estate (including housing construction) 4.0
Trades in foreign currency 0.5
— dancing 30.0
— horse-racing 20.0
— lotteries 30.0
services in mountainous regions:
— transportation and other agencies 15.0
— gold 20.0
— books 0.0 – 1.0
— films, videos, etc. 1.0 – 2.0
Fabrics and textiles 2.0 – 5.0
Pulp and paper products 1.0 – 4.0
Cement 3.0 – 10.0
Manufacturing and assembling electronic equipment 4.0
Mechanical production 8.0
Chemical products 7.0
Construction materials 5.0
Business exempt from turnover tax are: agricultural production, which is subject to separate agricultural taxes; the production of commodities, which is subject to special sales taxes; and the production of goods for export. A maximum reduction of 50% is granted for 2 years to: businesses operating in mountainous areas; deep sea fishing; scientific research; the development of new technology; newly established companies; companies involved in import substitution; and businesses incurring losses as a result of natural disaster, war or some other contingency. Businesses operating on mountainous islands are eligible to be considered for a maximum reduction of 50% for 3 years.
A taxable entity must register with the Tax Officer no less than 5 days before the commencement of operations. Within 5 days of the end of every month, a turnover declaration must be submitted even if there was no turnover for that month. The tax may be paid in Vietnamese or foreign currency, regardless of the currency in which the turnover is earned. Where a foreign company sells goods into Vietnam through an agent in Vietnam, the agent is required to withhold turnover tax at the applicable rates.
Special Sales Tax
An enterprise which is subject to special sales tax (SST) is not liable for turnover tax when goods are sold. Enterprises that manufacture tobacco products, spirits and alcohol, and firecrackers must pay SST on those products at rates ranging from 15% to 100%. The tax base is the quantity of taxable goods sold and their taxable value (i.e. sale price at the place of production, excluding SST). Exemptions may be granted for goods manufactured for export, or if production is adversely affected by natural disaster, war or some other contingency. 30% reduction may be available for 2 years for new or expanded enterprises which use new technology. If losses arise because of force majeure or some other unforeseen circumstances, a 50% reduction (which must not exceed 30% of the losses) is granted for 180 days.
The comparative study of above countries shows that the levy of retail sales tax in Pakistan was unnecessarily made a controversial issue. This tax was introduced successfully in a number of undeveloped countries without any difficulty. In Bangladesh, Indonesia, Philippines, Thailand and Mauritius even VAT was imposed without any difficulty. In fact, it was shortsightedness and highhandedness of the CBR’s stalwarts (sic), which pushed the traders towards a tax revolt. Firstly, they never bothered to do any homework before introducing VAT type tax; secondly they never bothered to elicit the opinion and consensus of the business community. They tried to follow the European model of VAT in Pakistan without realising the following problems, which are peculiar and distinguishable of our socio-economic milieu:
1. Problem of widespread illiteracy.
2. Lack of monetization and poor accounting practices.
3. Corrupt and inefficient tax apparatus.
In my earlier article, Retail Sales Tax: issues and Implications, it was pointed out that both the traders and the Government must realise that single-stage retail tax (at a low rate of 2 to 3 per cent) will be less cumbersome for all. The CBR’s vested interests want to keep sale tax procedures complex and cumbersome so that they have “authority” (the underlying aim is to have leverage for corruption and highhandedness). The agreement now reached between the Government and retailers (negotiations with wholesalers are still in the process) exposes the so-called “documentation” stubbornness of the policymakers. The retail sales tax on turnover is ultimately where the things have ended. The CBR’s stalwarts have caused loss of revenue of billions of rupees by forcing the traders to strikes. They kept on insisting that there shall be no more compromise on retail sales tax and it would be payable on each transaction with proper documentation and record. If ultimately they had to agree to turnover tax what was the need to cause colossal loss to the national exchequer, besides creating a situation of tax revolt in the country. This was, in fact, a well-designed conspiracy to convert the people-friendly image of the present government into a people-hostile force. It is high time that the present regime should realize that with the present tax officials in the CBR, it would never be able to get the desired results.