MYTH OR REALITY

Presented By:

Abdul Razzaq FCMA

(BenjaminFranklin)

Inthisworldnothingcanbe I thi ld thi b saidtobecertain,except id t b t i t deathandtaxes. d th d t

Contents
Basic Terms BasicTerms History VATVSGST EffectsofVAT

BasicTerms Basic Terms

DirectTaxvs.IndirectTax ec a s d ec a Advalorem,ValueaddedandSpecificTax I InputTaxvs.OutputTax tT O t tT Fake,FlyingandVATInvoice Exempt,ZeroRatedandTaxable Goods/Services

DirectTaxvs.IndirectTax Direct Tax vs. Indirect Tax

A tax that cannot be shifted by the Ataxthatcannotbeshiftedbythe taxpayertosomeoneelse.(incometax) The person who sales collect tax from Thepersonwhosalescollecttaxfrom thebuyerandhencethebuyer ultimatelypaysthetax.(VAT) yp y ( ) CollectionoftaxinPakistan33%:77%

Advalorem,ValueaddedandSpecificTax Ad valorem, Value added and Specific Tax

Ad valorem: a tax with respect to value. Advalorem:ataxwithrespecttovalue. Valueadded:ataxwithrespecttovalue addition. addition Specific:Ataxwithrespecttoquantity.( Re.1perLiter) Re 1 per Liter)

InputTaxvs.OutputTax Input Tax vs. Output Tax

Input Tax: Sales tax paid/payable with InputTax:Salestaxpaid/payablewith purchases. Output Tax: Sales tax OutputTax:Salestax received/receivablewithsales.

Fake,FlyingandVATInvoice Fake, Flying and VAT Invoice

Fake: Nongenuine invoice or a self created Fake:Non genuineinvoiceoraselfcreated invoice. Flying: Receipt of invoice without receipt of Flying:Receiptofinvoicewithoutreceiptof goods/services. Vat Invoice: Which is genuine and bear the VatInvoice:Whichisgenuineandbearthe GSTnumbersofboththesupplierandthe buyer

Exempt,ZeroRatedandTaxableGoods/ Services i
Exempt:Whereinaninputtaxisapartofcost p p p Zerorated:Whereinanoutputtaxisbeing chargedattherateofZeropercentand taxpayerisentitledtoclaimrefundofinputtax Taxable:Whereinanoutputtaxisbeing chargedattheprescribedrate(say15%)and taxpayerisentitledtoadjustinputtaxagainst outputtax p

Exempt,ZeroRatedandTaxableGoods/ Services S i Exempt: Exempt: Taxable: InputispartofCost Input is part of Cost Inputispayable/adjustable

ZeroRated:Inputisrefundable

Accountingentriesincaseexemptandtaxablegoods g p g
PaymentofElectricityBillincaseofexemptgoods ElectricityExpense Taxdeductionatsource Bank 115,000 10,000 125,000

PaymentofElectricityBillincaseoftaxablegoods ElectricityExpense InputTax Taxdeductionatsource Bank 100,000 15,000 10,000 125,000

Our20yearsHistory Our 20 years History

Revenue has fallen from 18% to 9% of Revenuehasfallenfrom18%to9%of GDP This ratio is one of the lowest in the Thisratioisoneofthelowestinthe world Non development expenditures has Nondevelopmentexpenditureshas increased350%duringthisperiod
2%richowns80%ofcountryswealth A Acorruptionof500BillionRupees/Annumis i f 500 Billi R /A i onlyinFBR(ShoukatTareen)

MajorSourceofRevenue Major Source of Revenue

Import Export Oil,Gas,Communication
1600Companiesarepaying85%ofTotalTax.

Mainreasonsoflowtaxcollection Main reasons of low tax collection

Exempt sectors such as agriculture, Exemptsectorssuchasagriculture, Property,Stocks,servicesetc. Lack of system Lackofsystem Corruption/Taxevasion Energycrises Lossingovernmentownedentities g AfghanTransit

PakistanSteelMills Pakistan Steel Mills

Earnedprofitfrom200001to200708. p GrosslossRs.19.5billionduring200809. 200% increase in administrative expanses in 200%increaseinadministrativeexpansesin 200809comparetopreviousyear. Pre tax loss Rs 22 1 billion in year 200809 PretaxlossRs22.1billioninyear2008 09 comparetoaprofitof3.6billioninprevious year. AbailoutpackageofRs.10billionwasgivento PSM. SamesituationisinPIA,WAPDA,Railwayetc.

AfghanTransit Afghan Transit

Example: PurchasePrice Purchase Price InvoicePrice AssessedValue A dV l CustomsDuty(10%) SalesTax(16%) S l T (16%) IncomeTax(4%) FurtherTax(2%) F h T (2%) TotalCost Afghaniofferthesameproductat110 f h i ff h d 0 5 8 2 1 16 16 (Govt.Revenue) 116 Rs. 100 25 50

WhatIsVAT? What Is VAT ?

VATissimilartoaSalesTax.Itisataxonthe marketvalueaddedtoaproductormaterialat eachstageofitsmanufactureordistribution, ultimatelypassedontotheconsumer.(Maurice ultimately passed on to the consumer (Maurice Laure)

HistoryofVAT History of VAT

ValueAddedTax(VAT)isaconsumptiontaxofupto25% thatisleviedonbothgoodsandservices inmostcountries aroundtheworld.ThissystemispresentinEurope,Japan, d h ld Thi i i E J andAustraliaandanumberofotherscountries.Theyalso allowarefundofVATtononresidentandResident persons. persons VAThasitsorigininEuropeanCountries(EC).Itwas pioneeredinFrance,whichintroducedavalueaddedtype ofconsumptiontaxongoodsin1954thatwasleviedatthe f ti t d i 1954 th t l i d t th productionstage. Intheworld,morethan160countrieshavesuccessfully , y implementedVATsystemoftaxation.Outof31member countriesofOrganizationforEconomicCooperationand Development(OECD),Mostofthecountrieshaveaccepted VATastheirmainconsumptiontax. VAT th i i ti t

RateofVATindifferentcountries Rate of VAT in different countries

Denmark D k France Netherlands Sweden Argentina Iceland Russia Switzerland S it l d Indonesia Nigeria Bangladesh 25% Finland Fi l d 22% 21% 20% Germany G Italy Spain 19% 20% 16% 22% 22% 15% 22% 14% 10% 12.50%

19.60% Ireland 19% 25% 21% Portugal UnitedKingdom Canada

17.50% Poland 5% Croatia

24.50% India 18% China

12.50% Mexico 17% 25% 18% 10% 15% Uruguay SouthAfrica S th Af i Korea SriLanka

17.60% Norway 17 60% N 10% 5% 15% Kenya Nepal Egypt

Source:EconomyWatch

VATVS.GST VAT VS. GST

Similarities: Bothareindirecttaxes. Both are value added taxes Botharevalueaddedtaxes. Differences (incaseofPakistan) Services Zerorating ExemptList DiscretionaryPowers y

 46(5)TheBoardmay,bynotice,canceltheregistrationofapersonifthe Boardissatisfiedthat

(a)thepersondoesnothaveafixedplaceatwhich thepersonseconomicactivityiscarriedon; (b)thepersonhasnotkeptproperrecords ofits business; (c)thepersonhasnotfiledregularandreliable returns;or returns; or

(d)thepersonhasnotcompliedwithitsobligationsunderothertaxation laws,includingthecustomslaws,andtherearereasonablegroundsto believethatthepersonwillnot k b li h h ill keepproperrecordsorfileregularand d fil l d reliablereturns.

DifferencebetweenVAT&GST (incaseofPakistan) (i f ki )
The following points create difference Thefollowingpointscreatedifference betweennewlyintroducedVATand existingGST,incaseofPakistan:

TaxRate Tax Rate

VAT: Only one tax rate which is 15%. (9) VAT:Onlyonetaxratewhichis15%.(9) GST:Multipletaxratesuchas16%,18%, 21%and25% 21% and 25%

ExemptGoods Exempt Goods

VAT:In14entries,Exemptgoodsareclearly , p g y defined.(firstSchedule) GST:82(71+11)goodsambiguouslydefinedas perTableI&IIofsixthscheduleofSalesTax Act1990andwithalmost30SROs.
Fooditems,medical,educationalservices&materialis exemptinEUcountries.InUKandAustralia,theseare zerorated. Indianexemptionlistisverycomprehensiveeven coveringtextileandelectricity.

DomesticZeroRating (23and2 Domestic Zero Rating (23 and 2nd Schedule)

VAT:Exportandonlyfewothersuchas
Warrantyclaims,maintenance,saleofeconomicactivity,Basic medicineetc.

GST A number of sectors are zero rated such as GST:Anumberofsectorsarezeroratedsuchas:

Textile Leather Cookedandun cookedmeatbased products Carpet SportsItems SewingMachines Surgicalgoods DairyIndustry

StationeryIndustry Bicycles

ZeroratedGoodsinUK Zero rated Goods in UK

food food books,newspapersandmagazines youngchildren'sclothingandfootwear specialexemptitems forexample equipmentfordisabledpeople

Zero ratedgoodsinSouthAfrica Zerorated goods in South Africa

Brownbread. Brown bread. Driedbeans. Dairypowderblend. Vegetables. Vegetableoil. Culturedmilk. C lt d ilk Eggs. Maizemeal. Maize meal. Milkpowder. Rice. Fruit. Milk. Brownwheatenmeal. B h t l

ZeroratedgoodsinCanada Zero rated goods in Canada

Durugs and Biologicals DurugsandBiologicals MedicalandAssistiveDevices BasicGroceries AgricultureandFishing

RetailPrice Retail Price

VAT:Noconcept p GST:Manufacturerwillpaytaxaccording toretailpriceon17items.

SaleofretailpriceiteminGST Sale of retail price item in GST

SalePriceRetailPriceGSTTotalPrice

Manufacturer Distributor Wholesaler Retailer

90 92 95 100

100 100 100 100

16 16 16 16

106 108 111 116

SRO S(13) SROS (13)

VAT:Noexemptionorzeroratingcanbemade p g byanygovernmentdepartmentorauthority , exceptasexpresslyprovidedinthisAct. GST:BoardhaspowertoissueSROunder numberofsectionsevenregardingzerorating, exemptgoodsandlowerrating. exempt goods and lower rating

Transferofaneconomicactivity Transfer of an economic activity (5)

VAT:Zerorated GST:Noconcept

LateFilingorRevisedReturn Late Filing or Revised Return (56)

InVAT: Latefilingwiththeapprovaloftheboard. Revision within three years and after the Revisionwithinthreeyearsandafterthe approvalofBoard. InGST: In GST: Noapprovalfromcommissionerincaseoflate filling g Within120daysincaseofrevisionandafter theapprovalofCommissioner

Inputtaxadjustmentincaseof manufacturer f
VAT:100% GST:90%ofoutputtax

Secondhandgoods(21) Second hand goods (21)

VAT:SHGaresubjecttotax,Inputtax j , p adjustmentisallowedbytaxfraction GST:Notaxonsaleandpurchaseofsecond handgoods

Example(SaleandPurchaseofSHG) Example (Sale and Purchase of SHG)

PurchasefromunregisteredpersonofRs.100. Taxfraction=VATRate/100+VATRate(15/115) Input tax in purchase =15/115 100 13.04 Inputtaxinpurchase 15/115*100=13 04 SaletoregisteredpersonRs.115.(ValueEx. VATRs.100plusVATRs.15.) VAT Rs 100 plus VAT Rs 15 ) VATPayable=OutputTax Inputtax =15 13.04=1.96

InputTaxadjustmentincaseofpurchaseof FixedAsset Fi d A
VAT: 100% VAT:100% GST:Equalproportionintwelvemonths

VATandBadDebts(30) VAT and Bad Debts (30)

Supplier is entitled to adjust output tax Supplierisentitledtoadjustoutputtax paidwhichrelatetobaddebtsinthe periodinwhichhe/sheactuallywriteoff thesebaddebts.

ProgressiveorPeriodicSupply(16) Progressive or Periodic Supply (16)

Supply that is progressive or periodic Supplythatisprogressiveorperiodic and that provides for progressive or periodic thatprovidesforprogressiveorperiodic payments shallbetreatedaseparatesupply.

DefaultSurcharge(88) Default Surcharge (88)

In VAT InVAT
Mistake Fraud F d 1%/M 2%/M

InGST
Mistake Fraud KIBOR+3% 2%/M

VATonGoods VAT on Goods

AllGoodsareTaxable,exceptfollowing: , p g Wheat Unprocessed peas Saltwithout
brandname

Wheatflour Waterwithout
brandname Books,Newspaper, Periodicals

Diaperforadults Diaper for adults Contraceptives

Artificialpartsof Artificial parts of body Preciousmetal

otherthanafirst supply

VATonServices VAT on Services

InVATservicesweredividedintotwo In VAT services were divided in to two categories Federal Services FederalServices ProvincialServices

FederalServices(2xiii) Federal Services (2 xiii)

Carriage of goods or passengers by Carriageofgoodsorpassengersby railway,sea,orair

ProvincialServices Provincial Services

AllservicesaresubjecttoprovincialSalesTax j p exceptthefollowing Funeral,burialorsimilarservices Servicesbyreligiousinstitutions Services by an approved nonprofit charitable Servicesbyanapprovednon profitcharitable organization CertainFinancialservices. Certaineducationservicesprovidedbyan institutiondulyregisteredbytheMinisterof education Certainsuppliesofimmoveableproperty.

ServicesinProvincialGST Services in Provincial GST

Onlythefollowingfourservicesare Only the following four services are subjecttotax
1 Hotels Marriage Halls Lawns Clubs and 1.Hotels,MarriageHalls,Lawns,Clubsand Caterers 2.AdvertisementonTVandRadio 3.CustomsAgents,ShipChandlersand Stevedores 4.Courier

VATandSupplyChain VAT and Supply Chain

VAT:A claim to complete supply chain VAT:Aclaimtocompletesupplychain frommanufacturerorimporterto retailer. GST: Distortion after manufacturer or GST:Distortionaftermanufactureror importer

VATandDocumentation(ChapterVii) VAT and Documentation (Chapter Vii)

Taxinvoices Salesreceipts Debit and Credit notes DebitandCreditnotes Periodofretentionforrecord. 1.Sixyearsfromtheendofthetaxperiod. 2.Untilthefinaldecisionismadeincaseofany audit,recovery,prosecutionandproceeding. di i d di

TaxInvoice(49) Tax Invoice (49)

Taxinvoicewillincludethefollowings: SerialNo. Date Name,AddressandNTNofSupplier. Nameaddress,NTNorCNICofBuyer. DescriptionandQuantity. p y ValueEx.Tax,TaxRate,TaxandValue Inc.Tax. Inc. Tax.

SalesReceipt(50) Sales Receipt (50)

Ifsalesareupto25,000andthebuyeris p , y unregisteredpersonthensupplierwillissue Salesreceiptwhichwillincludethefollowings: Date NameandRegistrationnumbersofSupplier Descriptionofgoodsorservices Totalamount Anindicationthattaxisincludedinamount

AnomaliesinSalesReceipt(50) Anomalies in Sales Receipt (50)

Salesreceiptcanbeissuedtothatunregistered p g personwhichisnotrequiredtoberegistered.( ashiftofresponsibility) Serialnumberismissing Nameandaddressofbuyerismissing Quantityismissing ManufacturercanalsoissueSalesReceipt. p Noperdaysalesreceiptslimitforsamebuyer.

Registration(41) Registration (41)

TurnoverforRegistration: VAT:7.5Million/Annum Decisionregardingregistrationorrefusalwillbeissued within15daysandanappealcanbemadeagainst ithin 15 da s and an appeal can be made against decision(41) Section79,dealingwithappealsdoesnotprovidethe rightofappeal. i h f l GST:ForManufacturernotbeingacottageindustryand retailerwhoseturnoverexceeds5Million/Annum ALLwholesaler,trader,distributor,importer dealerwithoutanylimitationofturnover and

4.Requirementofregistration.Thefollowingpersonsengagedinmakingoftaxable suppliesinPakistan(includingzeroratedsupplies)inthecourseorfurtheranceofany taxableactivitycarriedonbythem,ifnotalreadyregistered,arerequiredtobe registeredinthemannerspecifiedinthischapter,namely: registered in the manner specified in this chapter namely

(a)amanufacturernotbeingacottageindustry (b)aretailerwhosevalueofsupplies,inanyperiodduring thelasttwelvemonthsexceedsfivemillionrupees; ( ) i (c)animporter; t (d)awholesaler(includingdealer)anddistributor; (e)apersonrequired,underanyotherFederallawor Provinciallaw,toberegisteredforthepurposeofanydutyor taxcollectedorpaidasifitwerealevyofsalestaxtobe tax collected or paid as if it were a levy of sales tax to be collectedundertheAct;20[and]
(f)acommercialexporter,whointendstoobtainsalestaxrefundagainsthis zeroratedsupplies.

VATPayable(21) VAT Payable (21)

VAT Payable=(OutputTax+Increasing VATPayable (Output Tax + Increasing adjustments) (InputTax+Decreasing adjustments)

CarryForwardandRefund(37) Carry Forward and Refund (37)

VAT Carry forward =If(InputTax+ VATCarryforward If (Input Tax + Decreasingadjustments)aregreater than(OutputTax+Increasing adjustments) Carryforwardcanbemadeuptosix y p month If C/F remains unadjusted up to six IfC/Fremainsunadjusteduptosix month,itwillbeclaimedrefund.

RefundofVATwithoutcarryforward(38) Refund of VAT without carry forward (38)

If If (i)50%ormorepersonsturnoverisorwill bezeroratedexport; be zero rated export; (ii)50%ormoreinputrelatetozerorated export. export theninputtaxwillberefunded.(38)

RefundincaseofAdv.TaxorWithholding Tax(24) g ( )
If advance tax paid + tax withheld by Ifadvancetaxpaid+taxwithheldby others(GovernmentdepartmentorLTU) isgreaterthanoutputtax+increasing adjustmentsthentheamountshallbe refundedwithoutcarryforward.

TimeofRefund Time of Refund

Within 45 days after application (37,38) Within45daysafterapplication(37,38) Incaseofdelayadditionalrefund@ KIBOR(93) KIBOR (93) WhereanofficerofIRSsuspectsor believes that some documents are not thatsomedocumentsarenot genuine,trueorcorrect,hemayreject theclaim. the claim. (82)

Increasingadjustment(24) Increasing adjustment (24)

Postsupplyadjustment(29) pp y j ( ) Baddebtsadjustment (30)

Private use adjustment (31) Privateuseadjustment(31) Cancellationofregistration(32) Changeinrate(34) Withholdingtax(36) Defaultsurcharge,fine,penalty,feeetc.

Decreasingadjustment(24) Decreasing adjustment (24)

Advance Tax (35) AdvanceTax(35) Withholdingtax(36) Postsupplyadjustment(29) Baddebtsadjustment(30) Registration(33) C Carryforward(37) f d (37)

Advancetax(35) Advance tax (35)

VAT: 3.75% (25% of 15%) VAT:3.75%(25%of15%) GST:2%

VAT(15%) GST(16%) ImportValue Import Value Inputtax Add.Tax TotalInput SalePrice Sale Price OutputTax =100 100 =15 =3.75 =18.75 =125 = 125 =18.75 100 16 2 18 112.5 112 5 18

Ifthesalepriceislowerthan125,theimporterwillclaimrefund.

WithholdingTax(36) Withholding Tax (36)

VAT: 3.75% (25% of 15%) VAT:3.75%(25%of15%) GST:3.2%

VAT PurchasePrice p Inputtax Saleprice S l i Outputtax Withholdingtax =100 =15 =133.33 133 33 =20 =5

IfPriceislowerthan133.33,thesupplierwillclaimrefund.

MethodofPaymentinVAT(26,30) Method of Payment in VAT (26,30)

If the taxable supply including sales tax Ifthetaxablesupplyincludingsalestax exceedsfiftythousandrupeesthe paymentshallbemadebyverifiable bankinginstrumentfromthebank accountofthebuyertothebank accountoftheseller. t f th ll Ifthebuyerdonotmakepaymentwithin sixmonth,thebuyerwillmakean increasingadjustment.

ApportionmentofInputTax(27) Apportionment of Input Tax (27)

Where purchases of goods & services or Wherepurchasesofgoods&servicesor importsarepartlyforcreditablepurpose. A restriction on deducting the input tax Arestrictionondeductingtheinputtax partlyapplies. Criteria for apportionment is not defined Criteriaforapportionmentisnotdefined.

InputTaxinVAT(2xviii) Input Tax in VAT (2 xviii)

Inputtaxwillinclude: Input tax will include: VATpaidonpurchaseofgoods VATpaidonimportofgoods VATpaidonpurchaseofservices VATpaidonimportofservices

OutputTaxinVAT(2xxiv) Output Tax in VAT (2 xxiv)

Outputtaxwillinclude: Output tax will include: VATreceivedonsalesofgoods VATreceivedonsalesofservices VATpaidonpurchasesofservices

ClaimofInputTax(28) Claim of Input Tax (28)

The period in which buyer will claim Theperiodinwhichbuyerwillclaim inputtax,supplierwillconsideritout puttax. Sixsucceedingtaxperiodsafter consideringitoutputtaxbythesupplier. g p y pp

ForensicAudit(69) Forensic Audit (69)

means fact behind the figures meansfactbehindthefigures ForensicAuditwouldgiveunlimited powerstotheofficersofInlandRevenue powers to the officers of Inland Revenue togotoanyextentforcarryingout investigationagainstaregisteredunit. g g g The forensic audit involves the scope Theforensicauditinvolvesthescope beyondtaxrecordrequiredtobe maintained.

VATandInflation VAT and Inflation

Thepricesofthefollowinggoodswill The prices of the following goods will increase
DomesticzeroratedgoodsinGST g GoodsandserviceswhichwillbesubjecttotaxinVAT Valueadditioninsupplychain

Thepricesofthefollowinggoodswill decrease
Goodsandserviceswhicharesubjecttotax@16%,18%,21%, 25%inGST

VATandProduction VAT and Production

Increase in smuggling/Afghan Transit Increaseinsmuggling/AfghanTransit IncreaseinUndocumented production production

VATandEconomy VAT and Economy

Documentation of economy Documentationofeconomy IncreaseinGovt.revenue Broadbase

VATandIRS VAT and IRS

Lake of system or infrastructure Lakeofsystemorinfrastructure Nooneknowstheprosandcons Lakeofsupportoftrade associations/chambers

RoleofIMFandWorldBank Role of IMF and World Bank

StandByArrangements(SBA)of$7.6billiontobepaidin 23months EnhancementinJuly2009to$11.3billion Conditions: 1. 2. VATfromJuly2010 MonitoringofrevenuecollectionbyIMF MonitoringTeamconsistof : 1. 2. 6DirectorsofIMF 2DirectorsofWB

(JewishProverb)

Taxesgrowwithout T ih rain.

ThankYou h k