Value Added Tax (VAT) Pakistan

Value added Tax(Or VAT for short) has been declared as the new sales tax in pakistan with effect from 01 July 2010. In an effort to keep you up beat with the new law, we have compiled this short guide to highlight the significant changes the new VAT law is bringing for your business.

  • Difference between VAT and Sales Tax:   VAT  is  levied  on  goods  and  services  while  sales  tax  is  imposed generally  on  goods.  Contrary  to  sales  tax  VAT  has  no  cascading effect. VAT is a multistage tax,  levied only on the value added at  each  stage  in  the  chain  of  supply  of  goods  and  services  with  the provision of a set-off for the tax paid at earlier stages in the chain. Thus, VAT eventually becomes a single point tax.
  • Scope of VAT: VAT will cover supply (including import) of both goods and services at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million  will be out of VAT net. 
  • Documentation  of  economy  and improve revenue collection
    Generally,  all  the  commercial  activities  involving  production  and distribution   of   goods   and   provision   of   services   are   brought   under tax net giving tolerance for a pre-fixed registration threshold level. This  results  in  documentation  of  every   body   in   the   supply   chain. Those who are not registered in the chain are not in a position to claim   or   deduct   tax   paid   at   purchase   levels.   VAT   promotes economic documentation with the help of its in-built invoice-based credit   mechanism.   Tax   invoice    is   blood   line   of   VAT-induced documentation.  VAT  has  self-enforcing  features  and  documents business transactions through tax invoicing. 
  • Impact of VAT on food prices
    In   Pakistan,   most   of   the  processed  packaged/branded  food items are already chargeable to sales tax. Basic food items being out of VAT  net,  there  will  be  no  tangible  price  increase  in  food  items usually   sold   in   processed   packaged/branded   form.   Consumer prices of the food items which are currently being charged to sales tax  on  retail  price  basis  are  likely  to  fall  because  VAT  will  be charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers.
  • Difference between goods and services
     Goods   are   tangible   supplies   (materials,   commodities   and articles) and  services  are   intangible  supplies.  VAT  will   regulate  mixed supplies  on  the  basis  of  their  contractual  character.  Under  VAT,  services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.  
  • Threshold of VAT : Since  standard  rate  is  being  decreased  from  16%  to  15%  and registration threshold is being increased from Rs.5 million to Rs.7.5 million and most of the exemptions are being withdrawn, people are generally expecting that VAT will bring economic equity and price stability in the market. 
  • VAT VS GST  
    VAT  is  more  broad-based,  equitable  and  efficient  and  is  without cascading (tax over tax) and hence, is preferable to narrow-based and cascading-ridden traditional sales tax. 
  • VAT and cost of compliance
    There  will  be  no  increase  in  compliance  cost  of  those  who  are already  registered  and  operating  under  sales  tax  regime  and  will automatically switchover to VAT. The new taxpayers will however, have  to  incur  nominal  expense  on  VAT  compliance.  Due  to  IT- based VAT processes, VAT compliance cost usually remain low for the taxpayers who discharge their tax obligations regularly on fair lines. 
  • Zero rating in VAT regime.  
    All exports of goods and services shall be zero-rated under VAT. The input tax involved therein shall be refunded expeditiously. 
  • Exemptions under VAT 
    Upfront  VAT  exemptions  are  available  under  the  First  Schedule each  of  the  Federal  and  Provincial  VAT  Bills.  Exemptions  will generally cover basic foods items, charities, public sector education and health and international commitments. 
  • Exempt goods VS zero-rated goods 
    Exempt  supplies  are  input-taxed  and  zero-rated  supplies  enjoy effective   exemption   because   the   input   tax   involved   therein   is creditable/refundable. 
  • Misuse of Discretionary  powers  of  VAT  officials regarding  recovery  and  raiding  business  premises. 
    Under section 61 read with section 90 of the Federal VAT Bill 2010, recovery  process  commences  only  after  the  undischarged  tax liability  has  been  adjudged  or  determined  through  adjudication observing  all  the  principles  of  natural  justice.  Detailed  recovery rules   shall   be   included   in   the   VAT   rules.   There   is   no   concept   of physical raids under the proposed VAT system. Section 75 of the Federal VAT Bill 2010 speaks of the lawful access of the authorized VAT functionaries to records and premises only for tax matters. 
  • VAT refunds
    VAT  refunds  will  be  paid  through  Expeditious  Refund Payment System.  This  system  has  already  been   installed   for   industrial exporters from the tax period April, 2010 onwards. This system will be  upgraded  to  make  electronic  refund  payments  directly  in  the bank  accounts  of  the  taxpayers.  The  scope  of  this  new  refund system  will  be  expanded  to  cover  all  other  categories  of  refund claimants in due course. 
  • VAT result in increase of cost of doing business? 
    Reduced VAT rate instead of multiple higher sales tax rates will in fact ease out the cash flow of compliant businesses. 
  • Books and record to be kept for VAT
     Under  section  54  of  the  Federal  VAT  Bill,  2010,  VAT records include  tax  invoices  (both  for  purchases  and  sales),  credit/debt notes  and  customs  documents  relating  to  imports  and  exports. Details   for  simplified  VAT   records  and  book  keeping  shall  be  provided in VAT Rules. 
  • Discounts available in VAT regime
    All  discounts  and  rebates  conforming  to  the  accepted  business  practices  are  permissible  if  accounted  for  at  the  time  of   supply.   VAT   Rules   will   explain   how   such bonafide discounts and rebates are to be accounted for in invoicing regime. For the time being, sub section (1) of section 4 of the Bill may be consulted.
  • Registration in VAT necessary if a trader is exclusively dealing in exempt supply: Not necessary, but a provision for voluntary registration has been made in section 42 of the Bill. Procedure for voluntary registration will be explained in VAT Rules. 
  • Controlling inflated refund claim
    The  newly  developed  Expeditious  VAT  Refund  Payment  System  based  upon modern IT applications will automatically conduct cross matching of input and output tax invoices and payments of tax. Thus no possibility of filing inflated refund claim will exist in VAT regime.   
  • Transfer OF Assets Abroad:  Actionable  claims,  money,  stocks,  shares  and  securities  are  not  covered  in  the definition of goods vide section 2(xv) of the Bill. Export of taxable goods and services by registered persons is zero rated under VAT. Sections 12, 23 and 37 and Second Schedule of  the  Bill  may  be  seen  to  understand  the   statutory  scheme  of  zero  rating.  In  nutshell, exports  are  not  taxed  under  VAT.  A  person  transferring   his   assets,   other   than   taxable goods and services exported by a registered person, shall not attract VAT at the time of such transfer. However, no refund of VAT paid at any earlier stage of the acquisition of such assets shall be admissible. 
  • Sale  personal Assets/Property and or car
     Direct  sale  of  personal  property  not  being   a   part   of   any   economic   activity involving supply of taxable goods and services will not be liable to VAT. However, car dealers will pay VAT on their commissions or brokerage charges if their annual turnover for such business is Rs.7.5 million or more (above exemption threshold). 

In case you have any other queries or would like to seek a qualified opinion on VAT and its implications on your business and how toplan the same, do let us know and we will be happy to assist you.