Challenges in Implementation of Value Added Tax

1. Challenges in Implementation of Value Added Tax Asia Pacific Tax Conference 2006 17th-18th March, 2006 - Karachi Shahid Ahmad Member (Sales Tax & Federal Excise) Central Board of Revenue

2. Salient Features of Sales Tax in Pakistan • A VAT is a broad-based tax on sales, with systematic crediting of tax paid on inputs • Sales tax is levied on manufacturers & retailers (annual turnover of more than Rs.5 million), importers, wholesalers, distributors & dealers and specified services. Contd…..

3. Salient Features • Sales tax is charged and levied @ 15% of the value of… (a) Taxable supplies made by a registered person in the course or furtherance of any taxable activity (b) Goods imported into Pakistan • All exports are zero-rated, i.e. exporters can claim refund of tax paid on inputs.

4. FY Total Federal Receipts Collection of Sales Tax Sales Tax receipts as a % of total Federal Receipts 1 1999-00 357.1 116.7 32.7% 2 2000-01 392.3 153.6 39.1% 3 2001-02 404.1 166.6 41.2% 4 2002-03 460.6 195.1 42.4% 5 2003-04 518.8 219.0 42.2% 6 2004-05 580.0 240.1 42.9% 7 2005-06 (July-Feb) 416.4 178.5 42.8% Share of Sales Tax in Total Federal Tax Receipts Rs. in billion

5. Tax Policy Issues I. Design Issues • Three key Design Issues • Rate(s) • Exemptions • Threshold II. Scope of Zero-rating

6. Tax Administration Issues • Reducing compliance costs through self-assessment • Reducing administrative costs through automation • Reducing the gaps in the areas of registration, return filing and recovery Contd…..

7. Tax Administration Issues • Establishing effective audit programs • Introducing efficient refund mechanism • Changing the mindset of employees from excise-type controls to audit-based management • Tackling VAT losses

8. Estimating VAT losses • Two separate but complementary approaches: • Top-down- difference between theoretical amount of VAT that should be due and actual VAT receipts = “VAT Gap” • Bottom-up – uses operational and intelligence data to corroborate top-down approach and attribute losses to specific problem areas.

9. Top-down estimate • Involves… • Assessing the total expenditure in the economy that is theoretically liable for VAT; • Estimating the tax liability on that expenditure; • Deducting actual VAT receipts; and • Assuming that the residual element – the Gap – is the total VAT loss due to any cause including error, non-compliance, avoidance and fraud.

10. ‘Bottom-up’ estimates • Top-down measure gives no indication of the nature of the loss. • Use of operational and intelligence data to corroborate the top-down approach, so as to attribute losses to particular problem areas

11. Challenges for the Future • Choice between a single-rate and a multiple-rate VAT; • As a policy zero rate should apply only to exports; • Development of effective audit procedures; • Improvement in the operation of refunds; • Exemptions to be minimised; • Differentiated thresholds regime; • Strategic approach to VAT losses.

12. Conclusion • VAT is likely to remain a significant revenue source • Sustained and well-targeted efforts are required to reduce non-compliance and avoid undermining of VAT as a reliable method of taxation • Our vision entails creation of a culture of voluntary tax compliance in a taxpayer friendly environment.

13. Thank You