Transcript Post Budget Seminar FEDERAL BUDGET 2006-2007

Post Budget Seminar
FEDERAL BUDGET 2006-2007
Presentation
on
Indirect Taxes
Syed Shabbar Zaidi
Partner, A F Ferguson & Co
and
President
The Institute of Chartered Accountants of Pakistan
The Income Tax Bar Association Karachi
1
TABLE OF CONTENTS















Revenue Collection- Direct Vs Indirect Taxes
Compositional Crises and Adjustments
Import Substitution
Doctrine of Necessity
Expansion of Tax Net- VAT on Services
Sales Tax on Leasing Transactions
E-Intermediaries & Documentations
Disallowance of Input Tax- Tax not paid by supplier
Sales Tax on Retailers
Concept of Minimum Value Addition
Audit by Chartered Accountants
Double Entry for VAT Account
Integration of Documentation For Taxes
Returns
Conclusion & Suggestions
2
REVENUE COLLECTION- DIRECT VS INDIRECT TAXES
2005-06 2006-07
Increase
Rs Billion
DIRECT TAXES
INDIRECT TAXES
TOTAL
235 33%
481 67%
716
272 32% 37
569 68% 88
841
17
There is a projected increase of 17 % which is quite reasonable.
However the ratio of direct to indirect taxes needs to be improved,
otherwise the principle objective of equitable distribution of wealth can
not be achieved. Another important aspect is to analyze whether there
has been incidence of indirect taxes on essential items.
3
COMPOSITIONAL CRISES AND ADJUSTMENTS
 There has been reasonable improvement in tax collection
however our tax policy is going through compositional crises
which are:



Direct Vs Indirect Taxes
Incidence on Corporate Vs Non Corporate Sector
Geographical Imbalance
 Unless and until there is a serious effort to undermine these
imbalances a sustained increase in taxation revenue cannot be
achieved. There had been effort to improve the situation
however substantial efforts are still required.
4
IMPORT SUBSTITUTION- THE NATIONAL AGENDA
 Pakistan Economy is facing the following problems:




Trade Imbalance
Poverty
Unemployment
Inflationary trend in commodities
 All these issues have arisen primarily on account of the fact that
there has been substantial real decline in small and medium
sized industries in Pakistan. There had been substantial
increase in volume of trade versus industrial production.
5
IMPORT SUBSTITUTION- THE NATIONAL AGENDA
(Cont’d)
 The argument of WTO etc are raised to project and protect the trading
sector. In my view the issue is import substitution. I call it ‘Reverse
Exports’. There has been complete focus on promotion of export
however there had never been a serious economic study on the matter
of import substitution. Unless the issue of import substitution is taken as
a subject, real economic issues can not be tackled. This includes the
issue of cost of doing business, availability of finances, honeymoon for
certain sectors such as real estate and stock markets, etc. However the
important aspect to be examined is whether or not there are certain
fiscal incentives or loopholes in our taxation system which promote
trade versus industries. There are many at present. Unless the
government curb these measure, any future real growth in economy
and consequentially in economy cannot be achieved. Agenda for future
should be IMPORT SUBSTITUTION
6
IMPORT SUBSTITUTION - MAJOR AMENDMENTS
TOWARD IMPORT SUBSTITUTION
 Our
exporters are facing cut throat competition in the
international market. Government has given priority to allow the
industrial input at lower cost. Duty rate against 49 industrial
inputs have been reduced.
 The importance of IT and Telecom sector is well recognized. In
order to support this sector, government has reduced duty on 54
items to 5 per cent. The existing rate of duty on these items
ranges between 10-25 per cent.
 Cutting tools are the requirement of artisans, skilled and semi-
skilled workers. Duty rates on 12 cutting tools have been
reduced from 25 per cent to 20 per cent and 10 per cent to 5 per
cent.
7
IMPORT SUBSTITUTION - MAJOR AMENDMENTS
TOWARD IMPORT SUBSTITUTION (Cont’d)
 Steel and construction sectors are the fountain heads of most of
the down stream industries like cement, ceramics, wood, paints,
pipes and fittings, electrical fittings, wires and cables etc. In
order to reduce the input cost of construction, duty on secondary
quality flat rolled steel products has been reduced from 25
per cent to 20 per cent. Duty rates on 80 items of these
sectors have also been reduced.
 Government as a conscious policy is constantly reducing the
duty on plastic raw materials so that per capital consumption of
the item is increased. Customs duty on 11 items has been
reduced to enable the industry to produce more goods and
services.
8
IMPORT SUBSTITUTION - MAJOR AMENDMENTS
TOWARD IMPORT SUBSTITUTION (Cont’d)
 Duty on 95 items of machinery, equipment and parts has been
reduced.
 Textile is the major foreign exchange spinner of Pakistan. Bulk
of the production is exported. Duty drawback is paid to the
exporters to the extent of import duty incident paid at the time of
import of raw material etc. In order to give a free hand to this
industry 14 chemicals used in the textile processing
industry have been exempted from duty.
9
DOCTRINE OF NECESSITY- MOTHER OF DISTORTION
 In the Custom duty , Sales tax and Excise Regime there are various
distortions from international best practices and VAT regimes. It is very
disheartening to note that a substantial part of these distortions arise on
account of the fact that business community at large has not accepted
whole heartedly that ‘Payment of Tax and Documentation’ is not a desire
but a necessity. When there are mass scale evasions and malpractices
then governments adopts the doctrine of necessity and create distortions.
Some of the example and reasons are:




Zero Rating for Export Oriented industries which arose due to
mass outflow of refunds
Minimum value addition on commercial imports
CVT on capital market which arose due to exemption for capital
gains
Disallowance of input tax if tax not paid by supplier which arose
due to fake and flying invoices
10
DOCTRINE OF NECESSITY- MOTHER OF DISTORTION
(Cont’d)

The message is that all such measures in the long run would effect the
system and we all would be at loss. We should not give Government a
chance to apply the doctrine of necessity. As a community we should
never promote any case which leads to non-documentation and short
cuts.
11
EXPANSION OF VAT ON SERVICES
 This year there has been a substantial increase in the incidence
of indirect tax on services. Major Examples are :




Tax on Non-Funded Banking services at the rate of 5
percent
Tax on Franchise
Expansion of Tax on Insurance Services
Expansion of Tax on Telecommunication services
 This expansion of taxes on services is the part of Government
policy to include services into VAT net which at present is
limited to goods only. In this regard Government has taken into
consideration the services provided by the organized sector
only.
12
EXPANSION OF VAT ON SERVICES (Cont’d)
 There has been no incidence on unorganized sector services
such as transport, doctors, etc. There has to be certain
mechanism to cover those areas also. Furthermore at present
this tax is a single stage tax. This mechanism is not correct. All
such taxes be levied on pure VAT concept and adjustment be
allowed.
13
SALES TAX ON LEASING
 In the original text of the Sales Tax laws there was a clear
provision that is in line with international practice that lease would
be treated as supply of goods thus subject to sales tax. However
over the time such definition was changed and all kinds of leasing
were taken out from the purview of sales tax. This happened
notwithstanding the fact that hire-purchase continued to be subject
to sales tax. Within the context of sales tax laws there is no
distinction between a hire purchase transaction and a finance
lease transaction. Thus, all such leases be taxed. Through this
budget this anomaly has been corrected.
 Consequently now all such leases would be treated as supply and
subject to sales tax.
 In Pakistan leasing is conducted by banks, DFI’s, modaraba and
leasing companies. This would be a big change for such persons.
14
SALES TAX ON LEASING (Cont’d)
 In my view the issue under consideration is not of any new incidence as even at
present such companies are passing the input tax borne to the customers. Any new
incidence would be limited to difference between lease price and the cash price.
 The real issue is the determination of mechanism through which such leasing
company should discharge sales tax and the financial impact for the reason that
timing of incidence of input tax does not commensurate with the output tax for the
period as output tax would be in relation to rentals received. This could effect the
cash flows.
 CBR would have to sit down and decide the mechanism. My suggestion would be
to review the VAT mechanism for Hire Purchase in UK and defer the
implementation for one year.
15
E- INTERMEDIARY AND DOCUMENTATION
 All corporate sector’s Sales Tax and Federal Excise
Returns will now be required to be filed electronically.
This requires introduction of e-intermediary being a
person authorized to filed return or information on behalf
of the taxpayers. There are specific rules for the same.
The issue to be settled by your institute and other
professional bodies is the responsibility and liability of the
e-intermediary. In my view the concept should not cater
for anything more than an authorized representative.
Nevertheless the question of sharing of responsibility of
filing wrong information and custody and supply of
information needs to be further clarified by the Board.
16
E- INTERMEDIARY AND DOCUMENTATION (Cont’d)
 The other aspect is the issue of documentation that has
substantially increased including filing of quantitative data
for 29 major commodities’ sales tax returns. This all leads
to major role for professional accountants.
17
DISALLOWANCE OF INPUT TAX IF TAX NOT PAID BY
THE SUPPLIER
 One of the important and strange amendment is the
introduction of the concept of disallowance of input tax if
the tax so claimed is not paid by the supplier. Within the
overall context of collection of tax by the exchequer and
the claim of input tax, the concept seems to be correct
however there are practical lacuna in the implementation
of this section.
18
DISALLOWANCE OF INPUT TAX IF TAX NOT PAID
BY THE SUPPLIER (Cont’d)
 The primary issue is the manner of awareness to the
buyer at the time of filing the return that such tax has not
been paid. This matter needs to be resolved otherwise
the law is not implementable.
 On
the contrary the underlying concept for the
introduction of this law seems to take into account the
situations where the input tax has arisen on account of
fake or flying invoice or the supplier has genuinely made
a default in the payment of tax. As identified earlier this is
a case of Doctrine of Necessity.
19
DISALLOWANCE OF INPUT TAX IF TAX NOT PAID
BY THE SUPPLIER (Cont’d)
 There is a need to reexamine the current provisions and
necessary amendments are required to be made to
clarify the manner of application of law if made
applicable. It would be my suggestion to withdraw this
provision unless a proper system is not introduced.
20
SALES TAX ON RETAILERS
 There has been a major departure on basis of taxation for
retailers. Now every retailer exceeding turnover of Rs 5 million
will be paying taxes equal to 3 per cent of the value of turnover
or at the option of the taxpayer on input / out put taxes at the
rate of 15 per cent.
 Previously such retailers other than, those engaged in one retail
business of Export Oriented products were subject to tax at 10
per cent minimum value addition on purchases.
 It is strongly recommended that this frequent swing for basis of
taxation be stopped and one system be consistently applied.
 Furthermore, it is reiterated that the term ‘Retail’ business be
defined in practical sense.
21
CONCEPT OF MINIMUM VALUE ADDITION
 It is reiterated that concept of minimum value addition on import
business is distortive in nature, however, such measures are
introduced on account of ‘Doctrine of Necessity’.
 This year, it has been further provided that in case of a
commercial importer, there would be a minimum value addition
of 5 per cent on local sale by such persons of locally
manufactured goods.
 This action is in principle a step to discourage under declaration
of value addition. This step though regressive in nature, should
on economic front assist in the ultimate goal for import
substitution.
22
CONCEPT OF MINIMUM VALUE ADDITION (Cont’d)
 It is recommended that in order to promote the documented
sector, such law should be made applicable for those corporate
entities which provide proper information and discharge
reasonable level of taxes (Income plus Sales tax)
23
AUDIT BY
CHARTERED ACCOUNTANTS
 A new provision has been introduced whereunder all refund claims for
export oriented would be ‘audited’ by a Chartered Accountant.
 We are thankful to the Government for reposing confidence on this matter.
 There has been certain discourse on the terms of reference and the
charges.
 It is my personal view (not as the President of the Institute) that role of an
audit viz-a-viz certification and the relevance of an ‘Agreed upon
procedures’ be discussed and finalized before entering into any such
process.
 Furthermore, the fee based on the amount of refund needs to be changed.
24
DOUBLE ENTRY FOR VAT
 This is a very important change that has not been fully
appreciated by the accountants.
 This means that all ‘Dr’ or ‘Cr’ entries related to Sales Tax would
be kept in a separate account in the books of the Taxpayer. This
would in effect mean the other side of a sales tax return.
 I consider this step as an in built check. An auditor, now by
implication would be required to give opinion on the validity of
‘Dr’ or ‘Cr’ is much clearer terms than earlier.
 This mechanism is in place in UK and other VAT model
countries and provide a reasonable check on the accuracy of
return.
25
INTEGRATION OF DOCUMENTATION FOR TAXES
 As a process of second generation reform now there has been
process of integration of return:



Sales Tax with Federal Excise Duty (One Return)
Annual Sales Tax Return reconciled with Annual
Turnover as per accounts.
Qualitative information in the return.
 The message in quite clear. Now there has to be relationship of
information being furnished to various organs of CBR.
26
RETURNS
1) Retailers - Export Oriented Items
- Others
2) Commercial Importer
3) Manufacturer - Quantitative Importer
(29 items)
- Others (20th following
month)
4) Third Schedule Items
5) Others
6) Service Providers
Previous
Proposed
Monthly
Monthly
Monthly
Monthly
Monthly
Quarterly
-
Yes
Monthly
Same
Monthly
-
Monthly + Yearly
Same
Monthly
Monthly
27
CONCLUSION AND SUGGESTION
 In 1996, when I stood at this forum and talked about ‘Tax
Reforms’ and ‘Sales Tax’ there was a aura of ‘hopelessness’. I
was hopeful then and today after a decade I am even more
hopeful. We cannot show gloom to our future generations.
 Now
Defence expenditure is Rs 250 billion whereas
Development Budget is 415 Billion. This is the result of positive
thinking, framing fiscal laws with economic rationale and
adoption of international best practices. However, we should not
be complacent. We have yet to bridge a wide gap.
28
CONCLUSION AND SUGGESTION (Cont’d)
 Now the role has changed. It is now the matter of capability and
capacity of spending by the Government.
 My sincere request to the nation is to agree on a ‘Mesaaq
Economics’.
 There is no difference in the economic policies of almost all the
parties and groups. If it is so, then why do we not agree that
such policies will continue to be consistently applied. This would
bring ‘Trust’ and improve investment climate.
 Our future is bright.
Thank you
29