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.