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

2. 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. 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. 4 Share of Sales Tax in Total Federal Tax Receipts Rs. in billion 42.8%178.5416.4 2005-06 (July-Feb) 7 42.9%240.1580.02004-056 219.0 195.1 166.6 153.6 116.7 Collection of Sales Tax 518.8 460.6 404.1 392.3 357.1 Total Federal Receipts 42.2% 42.4% 41.2% 39.1% 32.7% Sales Tax receipts as a % of total Federal Receipts 2003-045 2002-034 2001-023 2000-012 1999-001 FY

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

6. 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. 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. 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. 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. 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. 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. 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