• Imposition of the Value Added Tax in Pakistan a fait accompli in relation to Pakistan�s agreement with the IMF
• Loopholes and exemptions in the Sales Tax should have been focused on to increase tax revenue, instead of VAT
• Pakistan�s agreement/ Letter of Intent with the IMF should have been discussed and approved by the Parliament

Islamabad, May 13; While imposition of the Value Added Tax in Pakistan may appear to be a fait accompli in relation to Pakistan�s agreement with the IMF, the estimated VAT benefits are highly exaggerated. The imposition of the VAT is subject to Parliamentary approval which can the imposition of the VAT in view of lack of preparedness both at the societal level as well at the FBR, believed speakers at the PILDAT Legislative Forum on the Federal Value Added Tax Bill 2010 (VAT 2010). Sales Tax already implemented in Pakistan is in VAT-mode and focus should have been on removing exemptions and loopholes in sales tax to increase tax revenue instead of introduction of VAT, believed experts. Parliamentarians believed that the Government should have tabled its Letter of Intent and agreement with the IMF in the Parliament for discussion and approval by the Parliament beforehand.

Senator Muhammad Ishaq Dar, Chairman Senate Standing Committee on Industries and Productions and former Finance Minister, Mr. Abrar Ahmed Khan; Member Sales Tax/Value Added Tax FBR and Mr. Abdullah Yusuf, Former Secretary and Chairman FBR, reviewed the bill at the PILDAT Legislative Forum in the presence of Members of Parliament, business community and media representatives as participants.

Senator Muhammad Ishaq Dar, Chairman Senate Standing Committee on Industries and Productions and former Finance Minister said that the Senate of Pakistan has already sent its unanimous recommendations to the National Assembly of Pakistan, the House that can vote on the VAT Bill 2010, to postpone the imposition of value added tax for one year to allow for �preparation� by business community in particular and the country in general to pay this tax. Imposition of a 15% VAT will actually cost the final tax payer at around 21% therefore VAT rate is proposed to be reduced to 12.5%. He believed that the Government�s finance team that negotiated on these conditionalities with the IMF was actually at fault for having agreed to the introduction of the VAT in Pakistan. �Our negotiating team should have informed the IMF that Pakistan already has implemented GST in VAT mode over many years,� and instead may have focused on taking care of the loopholes of the existing tax regime,� he believed. �Our negotiating team does not owe its loyalty to Pakistan but has either come from the IMF or wants to get a job at the IMF or wants a job at the IMF for their children,� condemned a passionate Senator Dar. Implementation of VAT will be a problem if there is a missing link or double taxation if the provinces insist on collection of tax on services as has been the stance of the Government of Sindh, he believed. The federal government needs to resolve this scenario urgently. Senator Dar believed the imposition of VAT will create an inflationary impact on society and in an undocumented economy, the initial implementation will be problematic without a sustained and thorough mass education & awareness. He contested IMF and government claims of increase in tax revenue through VAT as highly exaggerated and said even if the Government claims were to be believed that the VAT will bring in an additional 500 billion, it will not be worth it at this stage of economic conditions of population. It is an alarming scenario that our previous tax-to-GDP ratio of 14.6% has been reduced to 9% today. While wider and comprehensive tax regime implementation is needed, this shouldn�t necessarily have come through VAT, believed Senator Dar. He favoured the imposition of a wealth tax saying everyone should be part of the tax net in a society whether or not the income has been generated inside Pakistan.

Mr. Abrar Ahmed Khan, Member Sales Tax/Value Added Tax FBR clarified that VAT 2010 will not replace FED but instead replace the GST. He believed that the FBR has the capacity to implement the VAT.

Mr. Abdullah Yusuf, Former Chairman, Federal Board of Revenue-FBR said that VAT is not essentially a new system of taxation as the GST was already in VAT mode. He however pointed out that application of VAT will not be possible if legislative authority for goods and services is not at one source, contending that the collection of tax on services by the provinces, especially as that has been the position taken by the Government of Sindh, will be problematic. Mr. Yusuf believed that there are gaps in the preparedness of the FBR to institute a fool-proof system especially that of refunds, contrary to the claims of the FBR. He said that a fool-proof system, without human intervention, should be such in which the businesses should be satisfied with the system of refunds credited within 72 hours into their account as opposed to just the FBR claims of preparedness. He believed that the Parliament must reconsider exemptions regime especially from businesses and investment point of view. He also recommended phasing-out of the application of VAT after a comprehensive information drive on VAT for consumers, retailers and businesses as key stakeholders.

Mr. Ahmed Bilal Mehboob, PILDAT Executive Director, who moderated the forum said that the Government of Pakistan is planning to implement the Federal Value Added Tax Bill 2010 from July 2010 if it gets approved from the Parliament of Pakistan. Tabled in the National Assembly of Pakistan on February 24, 2010 and in the Senate of Pakistan on February 26, 2010, the Bill is under consideration at the committee stage in the National Assembly while the Senate Standing Committee on Finance and Revenue, after reviewing the bill, has passed a set of 24 recommendations to the National Assembly. Similar laws are also pending before Provincial Legislatures. Mr. Mehboob said that as is PILDAT�s practice, the objective behind this forum is to assist Parliamentarians to understand the context, objective and issues relating to the VAT Bill 2010, especially in view of the Government�s agreement with the IMF. PILDAT believes that like all legislation tabled at the Parliament, MPs must take well-considered and informed position on the VAT Bill 2010. The PILDAT Forum strives to provide an objective understanding to MPs in this regard.

A Legislative Brief, containing technical analysis of the Federal VAT Bill 2010, has been prepared by PILDAT and can be downloaded here.