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: firstname.lastname@example.org; website: http://www.paktax.com.pk). He is 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 and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.
The levy of VAT and turnover sales tax at retail stage has assumed multidimensional importance in Pakistan’s politico-economic milieu. The Central Board of Revenue (CBR), with shortsightedness and highhandedness, has created a situation of tax revolt in the country. The IMF and other donor agencies think that levy of VAT is the most important measure for the documentation of the economy. The independent thinkers on the other hand stress that from pure economic point of view, leaving aside the political dimension of the conflict between the bazaar and the rulers, a debate is needed to justify the levy of retail sales tax at 15%. They strongly apprehend that the imposition at such a high rate will be a final deathblow for the already critically sick economy and will lead to more inflation, recession and poverty. Sales tax in its very nature, they argue, is a regressive tax, being an ad valorem imposed on the seller; a consumer ultimately bears its burden. It is well established that sales tax takes a larger proportion of small incomes than of larger incomes.
The problem of Pakistan is that its tax system is not equitable. The burden of taxes is already less on the rich and more on the poor. In the face of this reality the government has abolished wealth tax, which was a tax on rich people. Wealth Tax has been pinching the higher echelons in civil-military bureaucracy having huge landed interests, courtesy the state awards etc. bestowed on them. On the one hand all the progressive taxes like gift tax, estate duty and capital gains on immovable property have been abolished and on the other in the name of documentation of economy the state is resorting to regressive taxation like presumptive taxes in income tax and turnover taxes in the shape of multi-point sales tax.
The undisputable reality of Pakistan is that its tax machinery has completely failed to perform its basic function of collection of revenues. Its image as one of the most corrupt structures in the country has created a complete feeling of distrust between the ruler and the ruled. In this period of unprecedented economic crises, the high-ups of bureaucracy have not shown a single gesture of austerity. They are still using the big and expensive cars although the country doesn’t have the money to pay for the import bill of petroleum products. Are they justified in asking the common man to bear the burden of retail sales tax as high as fifteen per cent?
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 high time that as a nation we must strive hard to overcome economic enslavement. We can break the shackles of IMF-World Bank provided everybody starts paying taxes honestly and diligently. There will be no improvement in situation if we keep on abusing the donors and fail to perform our national duty of paying taxes. The beggars cannot be choosers!
The study of imposition of VAT and General Sales Tax on goods and services in other countries of Asia 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 some countries of Asia:
India like Pakistan is a Federal State. 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.
- 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. T
- the maximum rate is 14% and minimum 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.
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.
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. 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.
The comparative study of above countries shows that the levy of VAT/ 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 that the same cannot be implemented through a corrupt and inefficient tax apparatus.
The CBR stalwarts are not ready to make sales tax a simple tax in Pakistan. They know that control and corruption lies in the complexities of law, rules and SRO system. The present regime has failed to understand the modus operandi of tax bureaucracy. The result is that day-by-day it is becoming an anti-people, anti-business force, courtesy ill-designed tax measures taken by tax administration. Somebody has very correctly said Hui tum dost jis ke dushman uska asmaan khun ho [In the presence of unwise friends one needs no enemies].