Value Added Tax---Suggestions for Implementation

VALUE ADDED TAX---SUGGESTIONS VALUE ADDED TAX---SUGGESTIONS FOR IMPLEMENTATION* By Muhammad Shahid Baig, Advocate, High Court, Lahore It seems that the stage has been finally set to replace the existing Sales Tax Law with VAT with effect from 1st July, 2010 as the World Bank experts after finalizing the VAT implementation plan with the FBR have left for Washington to submit their report on Pakistan's preparedness on VAT to the IMF Executive Board which is scheduled to meet on 14th May, 2010. It is relevant to say that the IMF depends on the World Bank report to review progress on the tax administration including the implementation of VAT. FBR Chairman says that FBR is prepared to implement the VAT and not looking for Plan B to introduce the improved version of the GST. He further says that the rules and regulations have been finalized which would be made public for comments after the Law is passed by the Parliament and the Provincial Assemblies. Encouraged partly by the government's determination to impose VAT, IMF was the first to respond in a positive manner and its Executive Board will now meet in Mid-May to approve the next tranche of Pakistan's 11.3 billion Dollars loan. * Lecture at Lahore Tax Bar Association, in Seminar on VAT on 5-5-2010 The drafters claim that the value added tax (VAT) bill has been prepared keeping in view the best practices of VAT prevailing in the world. The Chairman FBR says VAT is successfully implemented in 130 countries of the world and tax collection has been increased substantially in these countries after implementation of VAT. Mr. Israr Rauf, one of the members of VAT Team of FBR, says, Pakistan is 137th country where VAT would be applied. On the other hand, Senate Standing Committee on Finance has recommended deferment of VAT for one year, reducing its rate from 15% to 12.5% and lessening the powers of its arrears recovery from the relatives of defaulters. All members of the Committee were unanimous that it is too early to implement a new law without taking all the stakeholders such as business and trade community on board. The Committee has recommended deferment of implementing VAT for one year. This is necessary as the stakeholders particularly business and trade community is not ready to accept VAT at this stage. The entire business community has rejected the VAT law and at least one year should be given for deliberations on the new law. Few stakeholders opined that the time of consultation is too short as it should be at least two years from now onward, arguing that Singapore took two years to complete the consultation process and India postponed the introduction of VAT system for one year just to complete the consultation process as every country has its own economic structure and tax culture. Australia took more than 6 years to convince the Parliament for the enforcement of GST. It also did a lot of capacity building of the potential taxpayers. FBR has not published any material on the viability of the proposed Bill except placing FAQs on the website and conducting few seminars subsequent to moving of the bill in the Parliament. Since this Bit shall have far reaching repercussions, the print and electronic media also needs to sensitize on this core economic issue. The World Bank says Pakistan has a revenue system that is low yielding by international and regional standards. The tax-to-GDP ratio has been declining over the time despite several years of robust economic growth. At around 10 per cent, the country's tax-to-GDP ratio is among the lowest in the world. The impact of Pakistan's weak revenue performance is significant. The resources to finance necessary investments in education, health care and infrastructure remain limited, increasing Pakistan's dependence on external aid. However, the matter of levy of VAT is an issue of utmost importance and involves question of constitutionality. This appears to be the main stance of the Government to introduce VAT that Tax to GDP ratio in Pakistan is very low i.e. about 10.6%. It is also being said that VAT rate is directly proportional to Tax to GDP ratio. When we look at different developed countries of the world where VAT is successfully implemented, it does not appear to be correct as is evident from the following table:- SR.No COUNTRY NAME VAT RATE TAX-GDP RATIO 1 JAPAN 5% (27.9) 2 MALAYSIA 5% (15.5) 3 SWITZERLAND 6.5% (30.1) 4 CANADA 7% (33.4) 5 AUSTRALIA 10% (30.5) It is quite obvious from the above that by applying lesser rate, higher Tax to GDP ratio has been ensured by these countries. So, it cannot be said that higher VAT rate is directly proportional to the tax to GDP ratio. The matter is, in fact, of proper application of law in its true perspective. So, the Senate Committee and other stakeholders have rightly demanded the reduction of VAT rate from 15% to 12.5% but the Government appears to be still reluctant to reduce the proposed VAT rate. It is being commonly said by the stakeholders that the Federal as well as the Provincial drafts are not in consonance with the present spirit of Constitution. If we look at Article 142 of the Constitution which is basically the subject-matter of the Federal and Provincial Laws, there are four situations provided in this Article. First Situation says that this is the sole prerogative of the Parliament to make legislation in respect of the entries contained in the Federal Legislative List. In the Second Situation, it has been provided that regarding 47 entries contained in the Concurrent Legislative List, both Parliament vis- -vis Provincial Assemblies are authorized to make legislation. It is relevant to add that through 18th Amendment, the Concurrent Legislative List has been abolished and now both the Parliament as well as the Provincial Assemblies have been given authority to promulgate criminal laws and procedures/law of evidence. However, Article 143 still, after cosmetic changes through the 18th Amendment, says that in case of any inconsistency between the Federal and Provincial Laws on the same subject, the Federal Law would prevail. As per the Third Situation, all those matters, which are not enumerated in both the Federal as well as the Concurrent Legislative List, fall within the exclusive domain of Provincial Assemblies. After 18th Amendment, now except the entries contained in the Federal Legislative List, all the remaining matters fall within the jurisdiction of the Provincial Assemblies, to make legislation. In the Fourth Situation, it is provided that matters which are not provided in the Federal Legislative List, this is the prerogative of the Parliament to make legislation in respect of areas falling within the jurisdiction of the Federation. It is relevant to say that in the light of Article 142(1)(a), as per Entry No. 49 of the Federal Legislative List, Sales Tax Act, 1990 was promulgated to levy tax on sale, purchase, importation, exportation, production, manufacture and consumption of goods. Whereas, in the light of Article 142(1)(c), the Provincial Governments issued Sales Tax Ordinances in 2000 to levy sales tax on certain services. In 2001, the President of Pakistan issued Islamabad Capital Territory (Tax on Services) Ordinance, 2001 to charge Sales Tax on certain services in the territory of Islamabad. The Entry No. 49 of the Federal Legislative List empowers the Federal Government to levy taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed. Through 18th Amendment the words "except Sales Tax on services" have been inserted in this entry. As per Entry No. 53 of the Federal Legislative List, the Federal Government is empowered to levy Terminal Taxes on goods or passengers carried by Railway, Sea or Air; taxes on their fares and freights. Both the above Entries are contained in the preamble of the draft VAT Bill. As per section 2 (XII), Federal List Services means "the carriage of goods or passengers by Railway, Sea or Air". As per section 2 (XIV), the Federal VAT means tax imposed under this Act on supply or import of goods or on supply of Federal List Services. As per recent Amendment i.e. insertion of words "except sales tax on services" in Entry No. 49 of the Federal Legislative List read with 7th NFC Award, the Federal Government has been specifically barred from levying sales tax on services and this has been declared the domain and sole prerogative of the Provinces to make legislation and collect VAT on services. Now, by inserting Entry No. 53 in the preamble and defining the Federal List Services, the Federal Government has been given Powers under section 9 to impose sales tax/VAT on said services under the garb of terminal taxes. Undoubtedly, these are two different entries defining the levy of two different taxes but surprisingly the VAT has been proposed to be levied on goods and certain services in the light of both these entries. In India, a separate law viz "The Terminal Tax On Railway Passengers Act, 1956" is available to charge Terminal Taxes. The Federal Government earlier imposed Federal Excise Duty on these services. Admittedly these are services as provided in Table II of the 1st Schedule to the Federal Excise Act, 2005, so when these are the services and as per 18th Amendment as well as 7th NFC Award, Provinces have been given authority to levy sales tax on services, then how the Federal Government can do so? Moreover, if any power was earlier available to the Parliament to impose Sales Tax on services that stands omitted as the later amendment would repeal the earlier one, if any available on the subject and doctrine of implied repeal would be squarely applicable in the given circumstances. As per section 8 of the proposed Federal Law as well as section 19 of the proposed Provincial VAT Bill, VAT shall be collected as an integrated tax regime. The draft Bills 2010 relating to Federal and Provincial VAT, reflect a gross violation of the Constitution of Pakistan, and these are totally contrary to the recommendations of the 7th NFC Award relating to Sales Tax on Services. On the issue of sales tax on services, there is a specific recommendation in the 7th NFC Award, which reads: 'NFC recognizes that sales tax on services is a provincial subject under the Constitution of Pakistan, and may be collected by respective provinces, if they so desire'. The deletion of this recommendation is a major deviation from the entire spirit of the NFC and is contrary to the interests of provinces. It is worth-mentioning that Finance Department, Government of Sindh has already placed its serious reservations to the FBR by submitting that the draft Bills on VAT, both federal and provincial, being contrary to Constitution "are not acceptable to Sindh." According to the Sindh Government, these Bills empower FBR to collect VAT on behalf of the Federation and the Provinces without providing any scope for provincial rights on collection of Sales Tax on Services. There are innumerable clauses which, in a way, encroach upon the provincial jurisdiction so much so that the role of the provincial government has almost been minimized to the promulgation of the Act only, as is the case in the existing Provincial Sales Tax Ordinances, 2000. The draft VAT Bills further involve a very complex system of input and output adjustments in such a way that it becomes impossible to ascertain what are "goods" and what are "services". Example--section 17--Federal Bill, section 6--Provincial Bill\ Ancillary or incidental supplies. Simplicity in tax structure is one of the basic principles under the cannons of taxation as a complex tax structure will always lead to evasion of tax. 'Tax on goods' and 'tax on services' are two separate domains; thus they should be treated separately. Any integration of the taxes on sales and purchase of services in the provinces and cross-credit of each tax in case of 'Federal VAT' on integration ;with federal taxes on sales and purchases of goods and cross-credit of each tax in case a 'Provincial VAT' would lead to complexity in tax structure. Since Sindh was contributing more than 60% to the main pool of GST on services and in return, it had been receiving only 23% of the total kitty of the said pool. So Sindh has decided to opt for the collection of the GST on services by itself instead of assigning it again to the FBR. The Chairman Revenue Advisory Council, Dr Hafiz Pasha, has highlighted the importance of an integrated VAT at the level of provinces. He emphasized that there would be a major breakdown in the national integration of VAT plan in case the Sindh Government insisted on collecting VAT on services. A uniform collection mechanism is needed for all provinces for implementation of an integrated VAT in all provinces. The Finance Ministry is trying to convince the Sindh Government to allow the Federation to collect VAT on services till such time as the Provincial Government is able to develop infrastructure and enough capacity to effectively collect the levy on services. The Prime Minister has also constituted a Committee comprising of Advisor to Prime Minister for Finance, Secretary Finance and four Provincial Chief Secretaries. If Sindh or other provinces declined to implement VAT, then it would not be possible to invoke integrated VAT and a major portion of the Federal Draft Bill will be required to be modified/amended. As per present Sales Tax Act, 1990, section 13 deals with exemptions. As per 6th Schedule, there are 71 Entries in Tables I and II. Entries of Exemption are contained in Table II. There are about 30 S. R. Os . of Exemptions. In the proposed draft Law, section 11 provides for certain exemptions and in the 1st Schedule, 14 Entries of Exemption have been given like wheat, wheat flour, unprocessed peas, Ice & water, Table/iodized) salt, Books, newspapers, Holy Qur'an, Ambulances, Fire Fighting Trucks, Artificial parts of the body, infra ocular lenses, and Glucose testing equipment etc. FBR has been examining a proposal to levy lower rate of VAT on food items and essential commodities where exemptions would be withdrawn under the 6th Schedule from 2010-11. In this way the inflationary impact could have been avoided by imposing reduced rate of VAT on basic consumer items and food commodities. There was a news that FBR may propose 5-6% VAT on supply of consumer items sold in Pakistan on which presently Sales Tax is charged on the basis of Printed sale Price e.g. fruit juices, vegetable juices, ice cream, aerated water or beverages, syrups and squashes, cigarettes, toilet soap, detergents, shampoos, tooth paste, shaving cream, perfumery and cosmetics, tea, powder drinks, milky drinks, toilet paper and tissue paper, spices, sold in retail packing bearing brand names and trade marks and shoe polish and shaving cream. However, the final decision would be taken in view of analyzing the revenue implications by the Revenue Advisory Council and the FBR. In E. U countries, supply of food items, medical and educational services and materials are exempt from VAT. They have not specified items but have given blanket exemption on all such food, health and educational services and material. In fact all activities relating to day-to-day life, needed goods and those, which are required for the Socio Economic development of the society are exempt from VAT. In all these 27 countries, Tax to GDP ratio is higher than 20%. In U.K, food of all kinds used for human consumption including Products ..en as part of a meal or as snacks and products like flour are exempt. The food items for human consumption are not only exempt but entitled to input tax credit. Likewise all unprocessed food stuffs, such as raw meat and fish, vegetable and fruits, cereals, nuts and pulses etc. are zero-rated, so almost all the Agricultural Products are exempt from VAT and entitled for tax credit paid on any goods and services used in their Production. The exemptions available to farm products are world-over just to attract investment in this core activity of life. GST in Australia is proving a very smooth growth engine for the Economy. Basic food, education courses, medical, health and care services, medicines, exports, child care, religious services, charitable activities etc. are exempt. Australia has not only exempted Agri. Products, food items and socio-economic services but allows refund or input credit adjustment to the suppliers. This, in return, keeps them cost free of any taxes hidden or otherwise. In one decade, since the GST was introduced in Australia, it has become a success story. There is no VAT in USA. However, in US federating units, there is unadjustable GST. In California (largest State) grocery stores, unprepared food items are not taxed. All other food items e.g. fruits and vegetables are exempt from Sales Tax. US States rely upon GST as internal revenue i.e. with the Federal Government. For this reason, the States are continuing with non-adjustable GST instead of adopting VAT. Despite such heavy reliance on GST, the list of exemptions is not different from European Union, UK and Australia. Almost all food items, medicines, supplies to Federal Government, educational institutions are exempt from GST. The list of exemptions in the US may be very relevant to our Govt. as we have very strong strategic partnership with USA. The Indian exemptions list is also very exhaustive. It has even exempted the supply of electrical energy and textile as well as sugar sector. None of their agri products are subjected to VAT. Once the VAT becomes operational, (In the present shape) almost every commodity other than Peas, Wheat and Wheat Floor shall be chargeable to VAT. What would happen to a common person in a country where 40% of its population lives below the poverty line? As per section 12, following local supplies would be zero-rated: (i) Sale/Transfer of an economic activity or part as an ongoing concern by a registered person to another registered person. (ii) Supply of stores and provisions for consumption aboard a conveyance proceeding abroad. (iii) Basic Pharmaceuticals or medical supplies Specified by FBR'. (iv) Supply of Precious metals (v) Supply of International Transport Services As per the present Law, section 4 deals with zero-rating. Besides all exports, there are 8 Entries in the 5th Schedule where zero rating has been allowed. About 32 S.R.Os. relating to zero rated items are being abolished along with the 3rd Schedule. Zero-rating is being confined to exports only as per section 23 of the proposed draft Bill. However, section 13 provides that the new Law would withdraw the powers of FBR as well as Ministry of Finance, regarding exemptions through S.R.O. or special orders and it will be the sole prerogative of the Parliament to grant exemptions whatsoever. This appears to be a positive change as the present Sales Tax Act, 1990, was also promulgated in the VAT mode but due to continuous violations, deviations and departures from the basic spirit of VAT by FBR as well as the Federal Government, its shape has been entirely changed which has resulted into promulgation of a new Law in the shape of proposed draft VAT Bill. None is happy on proposed plan of the Government regarding withdrawal of all exemptions. Recently, the Pakistan Dairy Association has tendered an appeal to the Prime Minister of Pakistan demanding that let the milk industry survive and let Pakistan grow its dairy sector through the white revolution. The Government will only get revenue if the industry survives. Continue the zero-rating for dairy and this is the part of engine of growth in the country and the market link for thousands of small farmers associated with this industry. As per section 95, subsection (4), old registrations shall be deemed to have been effected under the new Law and there will be no need for any fresh registration on coming into force of the new law. The concept of voluntary registration has been introduced through section 41. However, voluntary registration once obtained cannot be withdrawn before 12 months at least, as per subsection (4) of section 46. The list of Registered Persons shall be published by FBR on 1st July, 2010 and as per section 48, it shall be available on the website of the Board. As per section 41, threshold has been enhanced from 5 million to 7.5 million and the decision regarding the registration or refusal will be issued within 15 days. This section provides right of appeal against the refusal order. However, section 79 dealing with the appeals does not provide the right of appeal to the persons whose applications for registration are refused. This anomaly is required to be redressed. Further more, en block exemption threshold of Rs.7.5 million has been provided whereas in the present Law there is no threshold for the importers, whole-sellers and exporters. Now the Government may find it difficult to collect VAT from the importers at the import stage, if their total imports for the last 12 months remain below the threshold of 7.5 million. So, it would be better, if no threshold is provided to the importers. The section 9 of the proposed VAT Bill speaks about the imposition of VAT. Only two tax rates are provided i.e. 0% and 15%. As per subsection (3), the VAT will be charged on ad valorem basis. The section 7 defines taxable supplies including supply of goods and Federal List Services. Different rates of sales tax presently prevailing would be abolished to apply a standard rate of 15% on all the taxable supplies including retail sector abolishing multiple sales tax rates. There would be no fixed tax, reduced tax or enhanced tax, retail price based tax, or any special tax scheme. As earlier discussed about VAT on Federal List Services, it may be reiterated that as per present Federal Excise Act, 2005, FED is being already paid on Services by terminal operators at the rate of 16% and likewise shipping agents, inland carriage of goods by air and facilities for travel are being also taxed under the Federal Excise Act, 2005, which is being paid in VAT mode as provided in section 7 read with S.R.O. 550(1)/2006 dated 5-6-2006. As earlier stated, Entry No. 53 of the Federal Legislative List of the Constitution has been incorporated in the preamble of the proposed VAT Law to levy VAT on all these services in lieu of Federal Excise Duty, despite the fact that there is no Constitutional Guarantee for the levy of Sales tax on services by the Federal Government. In sections 55, 56, 57 and 58 dealing with filing of returns and declarations, the taxpayers would be allowed to file their returns manually or electronically. However, FBR's permission would be required to file the return after the due date or to file revised/amended return. The time limit for furnishing amended return has been extended to three years which was 120 days as per the present Law i.e. section 26(3). However, there is a news that a provision is going to be added in the proposed Law to remove the restriction of FBR permission for furnishing the revised return. Recently, a Notification No. S.R.O. 278(1)2010 dated 28th July, 2010, has been issued by the Federal Board of Revenue to insert Rule 14A in the existing Sales Tax Rules, 2006, to provide that approval of the Commissioner would not be required to file revised return if more tax is required to be paid and the limitation of 120 days prescribed in subsection (3) of Section 26 would not be applicable. Although, this insertion is beneficial to the tax payers as well as the national exchequer but yet this is the sole prerogative of the Parliament to make amendment in Law. However, powers of subordinate legislation are there with the FBR but it does not mean that FBR should over-rule the provisions of the existing law framed by the competent legislature as has happened in the shape of this S.R.O. The section 26 is, in fact, a part of the Sales Tax Act, 1990 which was made by the Legislature and it has been over ruled by the FBR in exercise of the powers vested by the Parliament in it to make subordinate legislation. So, it would be better to insert the proper provision in the proposed Law instead of making additions, deletions, adjustments etc. after the promulgation/approval of the proposed Law. There is a new concept contained in section 57 of the proposed Law providing for minor corrections which says that FBR may allow minor corrections in the subsequent returns without imposition of penalties/default surcharge/interest. The word "interest" is infructuous here. This concept does not relate to the proposed VAT law. However, this phrase is defined in UK VAT Law. So this word should be deleted from this provision. This new section is meant only to make minor corrections and relates to the cases, where additional tax payable does not exceed Rs.1000. This provision has not been seriously drafted and needs re-appraisal and reconsideration by the drafters. As per section 58, FBR may require filing of additional tax returns. This provision seems to be the pari materia of sections 27 and 28 of the Sales Tax Act, 1990. It is being claimed by the FBR that the invoice-based documentation is the key idea for implementation of VAT. Almost 50-60% Economy in the country is undocumented and revenue could be doubled by bringing it into the tax net. This, in fact, is not a new idea. The basic objective of every statute is always to collect revenue as well as the documentation of national economy. VAT is not going to be the first ever in this regard; rather, this is the prime objective of other fiscal statutes as well. If, we talk about the present sales tax law, it also contains the same mechanism. As per section 23, invoice has to be issued for every transaction and as per section 22, every transaction is to be recorded in the books of accounts. Further, sales tax is being paid on self-assessment and self-clearance basis. So, VAT is not bringing a new concept. This is already there. It is relevant to mention that in the year 2000, a special piece of legislation was issued titled as "Documentation of National Economy Ordinance, 2000". The basic objective of this law was that our economy could be brought under the documentation regime. Despite hectic efforts of the stake-holders, this could not be a successful attempt. So, we cannot say that no law or idea is not in force previously in our society. Law is there in proper shape but the question relates to the rule of law. It would not be advantageous to change the law again and again and it would not be sufficient just to substitute the nomenclature of any fiscal statute but the need is to evolve a proper mechanism to properly implement the law in letter and spirit in accordance with the prevailing circumstances, norms, standards and specific circumstances of our society. There is another provision i.e. section 87 which, inter alia, provides that no suit shall lie to High Court in its original jurisdiction against any action of the Department. Such-like efforts are usually made by the lawmakers but have never been approved and ultimately struck down by the judiciary. There is a Constitution effectively prevailing in Pakistan and the jurisdiction of the Superior Courts cannot be barred by making laws which after all are subservient to the Constitution. The Senate Committee has also expressed its reservations on this scenario and there is a news that FBR has agreed to delete these words i.e "High Court" to appropriately amend this provision. As far as the mechanism of refund is concerned, there are various provisions in the proposed law like sections 37, 38, 39, 40, 82 and 93. Excessive input tax shall be carried forward to the following six months and if residual credit is not more than 1000 it may continue after the six months; otherwise refund shall be issued by the Department within 45 days of the application of the taxpayer. There are certain situations provided in section 38 where refund could be issued without carrying forward. In fact this is an over-riding provision and says that if FBR is satisfied that 50% of the turn over of the tax payer is zero-rated or 50% purchase/import is meant for zero-rated export. In other situation, where FBR is satisfied that the specific nature of business of the taxpayer would result in excessive input tax; the FBR may allow the issuance of refund within 45 days of the receipt of the application. As per section 39, refund shall not be issued, if up-to-date Returns are not filed by the taxpayer and all the arrears have not been adjusted and refund is not more than 1000 Rupees. However, where documents furnished by the taxpayer are not genuine then the refund claim shall be rejected through proper adjudication process provided in section 82. As per section 93, compensation as per annual KIBOR rate shall be allowed for delayed refund. There is another provision likely to be inserted in the draft law which would allow the adjustment of input tax paid on fixed assets within a period of two months instead of 12 months as is prevailing presently as part of the current Sales Tax Act, 1990. The subject of audit is also very important under the present Sales Tax Act, 1990 as well as the proposed Federal VAT Bill, 2010. In the proposed Law, there are three sections i.e. sections 69, 70 and 71. As per the present Law, audit of any Registered Person can be conducted once a year as provided in section 25 of the Sales Tax Act, 1990. However, in case of any tax fraud by the taxpayer, the Collector is authorized to conduct inquiry/investigation under section 38 of the Sales Tax Act, 1990. As per recent amendment, a provision was also inserted to over rule the audit conducted by the Auditor-General of Pakistan. So, regular audit can now be conducted irrespective of the fact, whether or not, audit has been conducted by the Auditor-General. Then, there is another provision regarding special audit which can be conducted through Chartered Accountant/ACMA as provided in section 32A of the Sales Tax Act, 1990. In the proposed Bill, section 69 provides that audit can be conducted after issuance of notice and the audit includes forensic audit. The service of notice may be dispensed with where tax fraud is suspected. The concept 'forensic audit' has not been defined so it would be difficult to invoke this provision as this is a new concept. Earlier, audit has not been defined in the present Sales Tax Act, Federal Excise Act or Income Tax Ordinance, 2001. Likewise, in the proposed draft, again the term "audit" has not been defined. The concept of forensic audit has been introduced but it has not been defined anywhere. However, as per dictionary, meaning "forensic audit" is the method of the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzle ment or fraud. It also calls forensic accounting. The concept of adjudication has been duly incorporated in the draft law which was earlier omitted from the present law. The special audit is also provided in section 70. However, section 71 prohibits multiple departmental audit in normal circumstances. However, if the Commissioner has reliable information about the tax fraud, he can issue orders for re-audit. The section 89 of the draft Bill deals with offences and penalties and in the Third Schedule, 17 penalties have been prescribed for different situations. On comparison of the present provision i.e. section 33 of the Sales Tax Act, 1990, it may appear that there are four prominent changes:-- As per first change a minimum penalty of 100,000 has been provided for non-compliance of the compulsory registration. This appears to be a very harsh provision and it would not be justified to invoke the same without providing an opportunity of filing appeal against this penalty order. In the second situation, penalty has been enhanced from 25,000 to 500,000 in tax fraud cases. Yes, of course, the persons who are committing fraud with the Revenue as well as the State must be handled with iron hands and in established tax fraud cases maximum penalty should be levied as every law applies under the threat of penalty and not otherwise. As per third situation, in case of issuance of false and forged documents, penalty of Rs.25,000 or 100% of the tax whichever is higher has been proposed. As per fourth situation, submission of false documents for claiming refund would entail penalty of Rs.50,000 or 50% of the tax whichever is higher. In the present Law, Serial No. 18 of section 33, provides that where an officer acts or omits or attempts to act or omit in a manner causing loss to the sales tax revenue or otherwise abets or connives in any such act, he shall, after trial by the Special Judge, be imprisoned for three years after conviction or fined equal to the tax involved or both the punishments can simultaneously be awarded. It is very distressing to point out that this provision has totally been omitted from the proposed law and there is no pari materia provision incorporated in the VAT Bill, 2010. This omission seems to be a deliberate attempt on the part of the Government to protect and safeguard the illegal and criminal actions of the beaurucrats. It cannot be said with certainty that only one sector of the society can cause injury to the revenue and all the revenue collectors are supposed to be honest and trust-worthy. It is more than evident that deficiencies, problems and evils are always there, on both the sides. So, the Department should also be made accountable for its violations, negligence and wrong-doings. Therefore, it is strongly suggested that an identical provision should definitely be incorporated in the proposed VAT Bill. The mechanism of adjudication is provided in sections 76, 77 and 78 of the proposed Bill which is self speaking. However, in subsection (6) of section 77, it is provided that limitation provisions prescribed in section 91(3) should be applicable for the purpose of limitation. This appears to be a mistake on the part of the drafters. The limitation is provided in subsection (3) of section 90 and not in subsection (3) of section 91. The mechanism for appeals including first appeal, second appeal, Reference to High Court and alternative dispute resolution; is also duly provided as per sections 79, 80, 81 and 83 of the proposed Bill. There is no phenomenonal change in the hierarchy of Appeals and it would not be advantageous to further discuss this matter. On account of advance payment, it is provided in section 35 that advance payment equivalent to 25% of the VAT rate shall be collected under section 9 at import stage for prospective value addition. Presently, importers are paying 2% excess tax as compared to the other tax payers who are paying sales tax at the rate of 16%. The Senate Standing Committee recommended that advance payment of tax on prospective value addition is not justified. FBR has responded that advance tax payment in supply regime is an international VAT practice, especially in countries where State expenditures are met mostly from tax revenue. However, such tools are applied not as general measure but as special measures to ensure compliance of down stream suggests of the supply chain. As per section 36, the concept of withholding by Government and Large Tax Payer Units, has again been provided which should not exceed 25% of the VAT rate under section 9, on pur chases. Both these appear to be the violations of the pure form of VAT. This practice is not prevailing in any developed country where VAT is successfully implemented. The drafters claim that VAT is being introduced in its pure form but the deviations, already made and inserted in the present Sales Tax Act, 1990, are being repeated. Besides, Federal proposed Bill, four Provincial VAT Bills have also been drafted and all the provinces have placed them in their respective Provincial Assemblies for approval. There are 22 sections and two schedules in the Provincial VAT Bills. The Schedule I provide for exemptions and the Second Schedule has provided a brief list of zero-rated supplies. Only six categories of services have been declared exempt, like funeral services, religious services, financial services, educational services, supplies of certain immovable properties and services of NGOs. As per Second Schedule, transfer of economic activity, as an on going concern, has been declared as zero-rated. It is relevant to add that for the territory of Islamabad, as earlier discussed with reference to Article 142 of the Constitution, this is the sole prerogative of the Parliament to make legislation for collection of sales tax on services but no draft has so far been prepared for collection of sales tax on services in respect of the areas which do not fall within the jurisdiction of the Provinces. As per earlier experience, four Provincial Ordinances were made in 2000 whereas Ordinance for Islamabad Capital Territory was issued one year later i.e. in 2001. Apparently previous practice is going to be repeated. In fact, it was better to frame a model law to collect sales tax on services from those areas where the jurisdiction is duly vested in the Federal Government. It was also possible to draft the Federal Bill in such a way that VAT on services could also be levied in respect of the areas, the jurisdiction over which does not fall within the Provinces. As per the present Provincial Ordinances, there are only 8 services which are subjected to the sales tax i.e. Hotels, clubs, caterers, advertisements on TV and Radio, customs agents, ship chandeliers, stevedores and courier services. At the time of promulgation of Provincial Ordinances, there were 14 services which were subjected to sales tax. Later few entries were omitted from the Schedule. Now surprisingly all the services are proposed to be brought under the VAT-net excluding very few. In the last 10 years, none of the Government could dare to increase the list of services for levying sales tax on services. How this U-turn will be taken especially when the Provincial Governments are not convinced to charge this levy on the services. If, we look at the proposed law, the phenomenal changes include reduction of tax rate from 16% to 15%. Increase in threshold from 5 million to 7.5 million, omission of Third Schedule , inclusion of Federal List Services for levying VAT on carriage of goods or passengers by railway, spa or air, omission of exemption, reduction in zero-rated items, enhancement of penalties, granting the power of exemption to Parliament, addition of services in the tax net, introduction of 26 new concepts, strengthening of recovery measures. No other phenomenal change appears to be made in the newly proposed law except as enlisted above. If this is the only object of the Government to bring all these changes then there was no harm to change and modify the existing law. Even the nomenclature of the law could have also been changed and it is also not essential to change the nomenclature. In Australia this tax is being collected successfully under the title of "GST" and not as "VAT". However, without going further into the technicalities, it is rightly pointed out by the Government that tax to GDP ratio in Pakistan is very low in the region and we need to increase this ratio without burdening the existing taxpayers and VAT is the best way to achieve the desired targets. Our country needs VAT but its design needs to be tailored around to meet the local economic and Constitutional conditions, otherwise this would be a failed attempt and will mar the current administration with this policy of taking one step forward and two steps back.