Are Tax Reforms Delivering?

The 1973 Constitution provides for eliminating all forms of exploitation on the basis of, ‘from each according to his ability, to each according to his work.’
Deviating from this fundamental principle, our successive governments have failed to develop a fair taxation system.
The tax system is defined by three factors: capacity to tax, ability to collect taxes, and the willingness to tax.
Capacity to tax is the potential an economy has for taxation. Usually measured by the tax-to-GDP ratio, it depends upon the type of government, the nature of the state, the role it wants to play in the individual life of its citizens, the type of economy, etc.
Currently, the tax- to-GDP ratio hovers between 9-10 per cent, well below the potential of 60 per cent increase in revenue at the current GDP level. The ability to tax is a mix of law and tax administration. The best tax policy will be a failure if implemented badly.
Willingness to tax is essentially a political question. The majority in our legislatures belongs to a class which itself does not pay any tax. It want ‘others’ to pay taxes. The ‘others’ are not selected on the basis of their ability to pay but because of their lack of ability to resist unfair taxes.
The willingness to tax is directly influenced either through bilateral ‘aid’ agreements or through institutions like the World Bank and the IMF. The lenders have their own agenda which badly hurts local businesses and employment environment. But millions of dollars are received as ‘loan’ to carry out tax reforms recommended by the so-called ‘donors’.
The latest round of reforms began in the initial years of the last decade. How much change is visible because of it in the Federal Board of Revenue? A lot! Costly foreign-aided training to almost all the important bank officers, expensive vehicles for the only route—- home-office-home—- and internet for social networking. Facilitation of the workforce is a welcome step. But for what?
The purpose was to enable the workforce to achieve fair taxation which could generate enough resources for the national welfare. Have they achieved their goal? Are they on the right path to achieve it? Unfortunately, the answer is a big ‘NO’.
Our ex-finance minister is on record admitting corruption of Rs600 billion annually in the FBR. However, the present finance minister states innocently that there was no corruption last year. When the head of the fiscal team is not aware of the rampant corruption, how will he take measures to eliminate it?
The finance minister needs to study the latest figures about maladministration in the FBR as released by the Federal Tax Ombudsman (FTO). In 2010, the FTO received 1446 individual complaints. Of these, 1261 (87 per cent) complaints were decided by December 31, 2010, 83 per cent in favour of the taxpayers.
As against refunds of Rs94 million in 231 individual taxpayer complaints in 2009, the amount refunded in 685 individual cases during 2010, on the FTO intervention, exceeded Rs1,972 million, up more than 21 times. After presenting these figures, the FTO states that problem is systemic and needs concerted efforts on the part of the FBR.
The FBR requires taxpayers to file a number of statements and returns, etc. online for increasing its efficiency and facilitate taxpayers. This should result in reducing the time taken to make decisions. Alas! That is not the case. The FBR has become more lethargic and the lethargy is inbuilt in the tax law.
In the Finance Act, 2009, the period required to pass order on online refund application was extended from 45 to 60 days.
The officers did not feel satisfied and yet another provision was added through which the FBR was empowered to condone delay. Even otherwise, the period provided is ‘directory’, so its non-compliance does not lead to any accountability of any tax authority.
For taxpayers, on the other hand, the date of filing of return has been brought forward from September 30 to August 31 in a large number of cases. As expected, the FBR has to extend this date always ‘on the request of their taxpayers.’ They like that the taxpayers feel obliged to them for such ‘benevolent’ favour, a typical colonial power mindset.
Sales tax returns are a source of perpetual nuisance. Format of returns is defective, and the system not integrated. You revise one return, and you will have to request your tax collector for all the subsequent returns manually despite computerisation of records. It is their sweet will (called Commissioner’s discretion) whether they allow you that or not. In one case, due to technical glitch of the online system, a taxpayer has so far been denied refund of millions of rupees.
There are two paradigms in tax compliance; one treats taxpayers as criminals who never abide by tax laws unless deterrence of fines, penalties and prosecutions is in the field; the other treats taxpayers as clients who are to be facilitated. Tax facilitation centres have been established which is commendable. But when a taxpayer wants to fulfill his/her tax liabilities, he/she starts facing hurdles. And most of the hurdles owe their presence to the men working for the FBR.
For example, previously taxpayers used to get National Tax Numbers with ease and any change in the particulars was a matter of hardly two days. The process has been made cumbersome and time consuming under the pretext of ‘verification of particulars.’ If verification of particulars from the concerned officer was at all necessary, in the computerised environment, it should have been a matter of hours, but thanks to red-taps it takes weeks and months.
No objection certificate is sought for minor changes. What causes harm to the FBR if a new person gets a National Tax Number? Previously, only sales tax registration was a source of corruption, now a new source in the form of issuance of/change in National Tax Number has been added.
Similar is the case with other miscellaneous tasks. Guess what could be the reason for not passing an order by the commissioner even after two years (against prescribed period of 30 days), on the application of a big taxpayer seeking permission to make a payment to a non-resident without tax deduction for valid reasons given in Section 152 of the Income Tax Ordinance, 2001. Such cases include:
* delaying the approval, for more than two years, for change in the name of an approved provident fund in line with change in the name of the taxpayer company.
* not issuing advance ruling to a non-resident by the FBR itself, even five months against prescribed time of three months.
The ‘reformed’ FBR should understand that such actions do not promote tax culture.
Taxation policies affect business decisions. Before a measure is taken, the FBR should conduct an impact assessment. For example a few months back, the FBR withdrew zero-rating available to local manufacturers of power generation plant and machinery while sales tax levy on the same machinery, if imported, continues to be exempted. It has rendered the local production uncompetitive, particularly when foreign governments like South Korea give export subsidy on plants and machinery. The local manufacturers are closing down their businesses, resulting in unemployment; the time spent on import of power generating units delays projects.
A request was made to the FBR either to exempt local manufacturers or also levy sales tax on the imports to provide a level-playing field for domestic producers. Was it an unjust demand? Certainly not! But the FBR prefers losing revenue by keeping the files, ‘pending for decision.’
When a taxpayer gets an unlawful treatment, he approaches the Commissioner (Appeals) who is also departmental officer with a departmental bias. No doubt, the best orders of the department are quashed, not on merit but for a ‘nazrana’. If you fight on merit, the worst action will follow dubbed as, ‘in accordance with law and facts of the case.’
There is no meaningful monitoring of these decisions. Second tier of appeal is the Appellate Tribunal whose benches can be categorised into ‘Usooli’ (principled) and ‘Wasooli’ (‘facilitation fee’). It is your luck where your case is fixed.
Some taxpayers manage to get their case fixed in the bench of their choice by paying ‘fixation fee’ to the concerned officials. If a case is fixed in a ‘Wasooli’ bench and the taxpayer does not pay them ‘their money’, the order will be written in such a manner that it becomes difficult even for the High Court to frame a question of law. What a tyranny is our system of tax law!

Decision Making – How to Dismantle an Atomic Bomb?

Our lives are ruled by impermanence. The challenge is how to create something of enduring value within the context of our impermanence” - says Daisaku Ikeda (A Buddhist Monk)
The same thoughts serve as the main impulsion behind every development of thought for value addition and the same is the case with decision making tools presented by management accounting; and at the same time, the same force pushes forward many more tools going to emerge day by day in this subject. The scarcity of resources all over the world and, in turn, also in business environment makes it necessary to develop tools for effective and efficient utilization of economic resources.
The everyday business environment in the state of continuing flux has resulted in the new problems of doing things rights instead of doing right things and the role of management accounting decision-making tools in this respect can hardly be questioned. This changing business environment ranges from uncertainty to probability, and also from single critical factor to multiple critical factors. The management accounting techniques have covered a long evolutionary process to emulate the arithmetical, mathematical and even statistical techniques to cater for this wide scenario.
Anybody can cut prices, but it takes brains to produce better articles. - P D Armour
Neoclassical theory, having rationality as a premise, is at the heart of management accounting. The decision-making, being a continuous process, may be about short horizon (operational decisions) and it may well relate to long horizon (strategic decisions). Different management tools are of interest both as compliments or substitutes to coup different scenarios.
Capital Budgeting
Capital budgeting decisions are of paramount importance in financial decision-making. In the first place, such decisions affect the profitability of a firm. They have a bearing on the competitive position of the enterprise. This is mainly because of the fact that they relate to fixed assets that involve a current outlay or a series of outlays of cash resources in return for an anticipated flow of future benefits. It, therefore, includes addition, disposition, modification and replacement of fixed assets. The fixed assets represent, in a sense, the true earning assets of the firm (Khan & Jain 1998).
Secondly, a capital budgeting decision has its effects over a long time span and inevitably affects the company’s future cost structure.
Thirdly, these decisions, once made, are not be easily reversible without much financial loss to the firm. It is because there may be no market for second hand plant and equipment and their conversion to other uses may not be financially feasible.
Finally, capital investment involves costs and the majority of the firms have scarce capital resources. This underlines the need for thoughtful, wise and correct investment decisions would not only result in losses but also prevents the firm from earning profits from other investments which could not be undertaken for want of funds.
The rationale underlying the capital budgeting decisions is efficiency. A firm must replace obsolete plant and machinery and acquire fixed assets for current and new products and making strategic investment decisions. Acceptance of a strategic investment involve significant change in company’s expected profits and in the risks to which these profits are subjected (Biermen, H.  and S. Smidt 1974)
Capital budgeting refers to total process of generating, evaluating, selecting and following up on capital expenditure alternatives. The firm allocates or budgets financial resources to new investment

Catalysing Venture Capital Funding

The importance of venture capital (VC) for business growth is critical, as the VC funding is available to nascent companies with little financial wherewithal and no track record but strong products or services and innovative business models.

Such funding helps these early-stage companies to grow beyond a certain level and also bring in innovation into the overall business landscape. VC funding is generally funneled into these companies after the seed capital infusion and is critical for them, as they often find it hard to get funding from other commercial sources.

The absence of any ‘angel investor’ networks also prevents these early stage companies to look elsewhere for capital. VC funds provide these companies the much-needed capital to take off the ground and these companies in turn generate employment, contribute to economic growth and more importantly help diversify the economic base. In a country like ours, venture capital can play a vital role in spurring new business activity and job creation.

Venture capital industry has had little success here so far, with only a handful of companies providing VC funding. The World Bank has ranked Pakistan 61 in the world in terms of venture capital availability, as opposed to Indonesia, Malaysia and India at 18th, 19th and 20th positions respectively. In recent years, one or two international VC companies have also looked at Pakistani market but so far have had little outstanding portfolio. Abraaj Capital’s investment in KESC may be only one of the exceptions, which despite being a private equitydeal was not a typical VC transaction.

Some of the international development agencies have also endeavoured to provide VC funding in Pakistan in collaboration with the private sector partners but these joint initiatives have also not been very successful. The situation has failed to improve despite the availability of a decent regulatory regime in the shape of initially the Non-Banking Finance Companies Rules of 2003 and more recently the Private Equity and Venture CapitalFund Regulations of 2008.

The key hurdles in VC growth do not lie in the form of a restraining regulatory regime. Instead there are scores of other issues, which prevent the VC companies to flourish, especially including a limited pipeline of potentialdeals and dearth of exit opportunities.

Most of the VC companies, invest in selected sectors in deals ranging within a certain transaction size. According to the US National Venture Capital Association, the average deal size in 2009 was close to $8 million. In Pakistan, not only these deals are rare to find, the average deal size is typically small. Furthermore the absence of a commercial complaint redressal system and poor contract enforcement discourage these companies in picking up a stake in local businesses. The local businessmen also have limited appetite for entrepreneurial ventures and control issues typically prevail in family owned businesses.

While implementing a better contract enforcement regime and providing alternate commercial dispute resolution may address the problem from the state’s perspective, changing the business attitude and breeding an entrepreneurial culture may be a slower process requiring initiation of change from multiple levels, including universities, etc. Another critical issue hampering VC growth is the lack of appropriate exit opportunities. VC companies’ investment horizon is rarely more than 5-7 years, after which they exit the market, making profits on their high-risk investments. Such exits mostly come through IPOs of the target companies or in some cases through strategic sales, etc. These exit opportunities are difficult to materialise due to limited public interest in IPOs and new stock offerings. The bourses are marred with speculative investments and investors are quite apprehensive in putting their money into new enterprises.

Day traders having short investment horizons, dominate most of the investment activity. This lack of interest incapital markets by general investors hints towards weak capital markets which must be strengthened, not only to support the VC investment but also to help grow the new companies from VC-funding stage to maturity and growth. The capital market reforms however, must be carried out with a strong political commitment along with developing institutional capacity for adequate surveillance.

While multiple efforts are required at various levels for promotion of venture capital, the state should take the driving seat, through adequate policy reforms, direct investment into targeted venture capital funds and availability of potential deals through divestment in state-owned enterprises.

In recent years, countries like China, Malaysia and India have adopted similar courses with successful results. The state initially should assume the role of catalysing a collaborative initiative for this purpose, involving various stakeholders, such as investors, academia and international donors to work towards breeding an entrepreneurial culture.

Pakistan remains a difficult destination for venture capital industry, especially for the international VC Funds considering the worsening law and order situation and the recessionary economic trends. However, timely interventions by the government and other stakeholders can definitely set the stage for venture capital growth.

Issues in Enforcing Value-added Tax

he federal government intends to introduce value-added tax from July 1, at a proposed flat rate of 15 per cent. The VAT will replace general sales tax in most cases and bring into the tax net some hitherto untaxed classes of retailers and suppliers.

The Federal Board of Revenue (FBR) has sent the draft of the Federal Value Added Tax Bill 2010 to the parliament. A Senate committee is currently examining it.

Meanwhile, businessmen are voicing their concerns over the manner in which the VAT is being introduced. A common complaint is that their input has not been sought. Business leaders also lament that the FBR has done nothing to create mass awareness about how VAT will be implemented. They fear that operational issues would crop up if VAT is imposed without taking them into confidence. That is why many business lobby groups have rejected it.

But the Federation of Pakistan Chambers of Commerce and Industry appears to be somewhat accommodative. "We have invited the FBR Chairman on 15th of this month at FPCCI in Karachi. He would listen to our views and respond to them. Amendments can be inserted into the proposed law and sent again to the parliament for approval," said Mr Zakaria Usman, FPCCI vice-president.

"Before that, representatives of key business associations will hold a two-day brainstorming session at FPCCI to prepare a comprehensive presentation on VAT."

Pakistan’s tax-to-GDP ratio is about nine per cent—the lowest in the region. As such any move to enhance tax revenue should not be normally opposed. And businessmen do realise this. "What we are complaining about is that we were not taken on board when FBR finalised draft legislation for VAT," explained Mr S. M. Muneer, a former FPCCI president.

On March 8, Mr Asrar Raouf, FBR Member Policy (Direct Taxes) assured businessmen at a luncheon at Korangi Association of Trade and Industry that FBR was open to receive their inputs on how to go about introducing VAT.

He said even the proposed rate of 15 per cent VAT was open for discussion with business community. His boss, FBR Chairman Sohail Ahmed, is expected to say similar things when he visits FPCCI. "But VAT is to take effect from July 1."

"How on earth our issues would be taken care of in such a short span of time?" questioned Mr Anis Majid, Chairman, Karachi Wholesale Grocers Group. "Whereas imposing VAT on retail businesses with a turnover of Rs7.5 million is not a big issue, the requirement for registration of such suppliers making supplies worth Rs75,000 or more (during the course of an economic activity) would definitely create problems for many."

An ex-president of Karachi Chamber of Commerce Mr Anjum Nisar pointed out that as a matter of routine our bureaucracy is used to taking crucial decisions first and seeking stakeholders’ inputs later. This has delayed—and even failed many a good moves in the past. And I fear it can delay the imposition of VAT as well. Not only the businessmen required enough insight into operational issues of VAT, officials of FBR who would be involved in its collection also needed a certain level of training,” he added.

One of the issues, which businessmen fear they will have to face, is refund of taxes under VAT regime due to absence of effective electronic payment system. But FBR Member Policy Mr Asrar Raouf says that unlike General Sales Tax or GST regime, there will be a fully-automated refund system working under VAT.

He explained at a meeting with Karachi-based businessmen that refund system under VAT would operate on sale and purchase invoices and by the time next return is filed, a refund adjustment would already have taken place in the claimant’s bank account. Unlike in GST regime, no cheques would be issued against refunds. However complaints keep mounting against FBR over delays in refunds claimed under GST. Recently, Federal Tax Ombudsman Mr Shoaib Suddle revealed that 20 per cent of all disputes that his office received related to GST refunds.

Another VAT issue relates to determining the extent of value-addition in a product. Although FBR officials say all major agricultural crops would stay out of the VAT regime till processing stage, businessmen wonder how the tax authorities would determine the extent of value-addition in a crop that would make it liable for VAT. "We have been told that in case of pulses no value-add tax would be charged if the value-addition is less than five per cent," said Mr Anis Majid. "We however, don’t know how exactly they would determine it."

The draft of the proposed legislation for VAT finalised by FBR and posted on its website lists only a few food items as exempted from VAT. These include unprocessed peas; wheat and wheat flour; ice and waters except those for sale under brand names/trade marks; table salt including iodised salt but excluding salt sold in retail packing bearing brand names and trade marks.

This implies that all other edible items including fresh food items would be subject to value-added tax. Retailers fear that this might push up already high food inflation ."Besides, subjecting hundreds of food items to VAT would also increase the required paperwork," feared an office-bearer of Karachi Retail Grocers Group who declined to be identified.

Generating more tax revenue from retail business is principally a good idea. It would help in bringing a large number of businesses and individuals in tax net and documenting the economy and would yield roughly Rs400 billion additional revenue per year. "But literacy rate in our country is too low. Expecting the retailers to know the nitty gritty of the new tax within a few months does not make sense."

FBR had finalised the draft of the Federal Value-added Tax Bill 2010 on the last day of January and came up with its corrected version on February 27. "They should have done this at the start of this fiscal year giving all the stake holders a full year time to develop an understanding about VAT and debate its pros and cons at various forums," said a trader based in Jodia Bazar.

Some businessmen say instead of introducing VAT at the export, import, retail and supplies stage in one go, the government should impose it on one particular area and gradually expand its scope to other areas. That is what many other countries have done. They say that replacing various tax slabs under GST regime for different class of businesses with unified VAT in one go may create confusion as these businesses and individuals have got used to GST over a period of time. They fear that a sudden replacement of GST regime by VAT would increase the frequency and volumes of tax litigation.

As VAT legislation is also to be vetted by provincial legislatures, it seems that no meaningful discussions can take place on this subject if the federal government is determined to impose it from July 1. Sindh Chief Minister Syed Qaim Ali Shah has said that provincial assemblies’ input should be given due weightage in the proposed VAT law. One has to see how quickly the provincial assemblies’ inputs and recommendations of the trade and industry can be incorporated into the proposed law for introducing VAT.

Are Tax Reforms Delivering?

The 1973 Constitution provides for eliminating all forms of exploitation on the basis of, ‘from each according to his ability, to each according to his work.’
Deviating from this fundamental principle, our successive governments have failed to develop a fair taxation system.
The tax system is defined by three factors: capacity to tax, ability to collect taxes, and the willingness to tax.
Capacity to tax is the potential an economy has for taxation. Usually measured by the tax-to-GDP ratio, it depends upon the type of government, the nature of the state, the role it wants to play in the individual life of its citizens, the type of economy, etc.
Currently, the tax- to-GDP ratio hovers between 9-10 per cent, well below the potential of 60 per cent increase in revenue at the current GDP level. The ability to tax is a mix of law and tax administration. The best tax policy will be a failure if implemented badly.
Willingness to tax is essentially a political question. The majority in our legislatures belongs to a class which itself does not pay any tax. It want ‘others’ to pay taxes. The ‘others’ are not selected on the basis of their ability to pay but because of their lack of ability to resist unfair taxes.
The willingness to tax is directly influenced either through bilateral ‘aid’ agreements or through institutions like the World Bank and the IMF. The lenders have their own agenda which badly hurts local businesses and employment environment. But millions of dollars are received as ‘loan’ to carry out tax reforms recommended by the so-called ‘donors’.
The latest round of reforms began in the initial years of the last decade. How much change is visible because of it in the Federal Board of Revenue? A lot! Costly foreign-aided training to almost all the important bank officers, expensive vehicles for the only route—- home-office-home—- and internet for social networking. Facilitation of the workforce is a welcome step. But for what?
The purpose was to enable the workforce to achieve fair taxation which could generate enough resources for the national welfare. Have they achieved their goal? Are they on the right path to achieve it? Unfortunately, the answer is a big ‘NO’.
Our ex-finance minister is on record admitting corruption of Rs600 billion annually in the FBR. However, the present finance minister states innocently that there was no corruption last year. When the head of the fiscal team is not aware of the rampant corruption, how will he take measures to eliminate it?
The finance minister needs to study the latest figures about maladministration in the FBR as released by theFederal Tax Ombudsman (FTO). In 2010, the FTO received 1446 individual complaints. Of these, 1261 (87 per cent) complaints were decided by December 31, 2010, 83 per cent in favour of the taxpayers.
As against refunds of Rs94 million in 231 individual taxpayer complaints in 2009, the amount refunded in 685 individual cases during 2010, on the FTO intervention, exceeded Rs1,972 million, up more than 21 times. After presenting these figures, the FTO states that problem is systemic and needs concerted efforts on the part of the FBR.
The FBR requires taxpayers to file a number of statements and returns, etc. online for increasing its efficiency and facilitate taxpayers. This should result in reducing the time taken to make decisions. Alas! That is not the case. The FBR has become more lethargic and the lethargy is inbuilt in the tax law.
In the Finance Act, 2009, the period required to pass order on online refund application was extended from 45 to 60 days.
The officers did not feel satisfied and yet another provision was added through which the FBR was empowered to condone delay. Even otherwise, the period provided is ‘directory’, so its non-compliance does not lead to any accountability of any tax authority.
For taxpayers, on the other hand, the date of filing of return has been brought forward from September 30 to August 31 in a large number of cases. As expected, the FBR has to extend this date always ‘on the request of their taxpayers.’ They like that the taxpayers feel obliged to them for such ‘benevolent’ favour, a typical colonial power mindset.
Sales tax returns are a source of perpetual nuisance. Format of returns is defective, and the system not integrated. You revise one return, and you will have to request your tax collector for all the subsequent returns manually despite computerisation of records. It is their sweet will (called Commissioner’s discretion) whether they allow you that or not. In one case, due to technical glitch of the online system, a taxpayer has so far been denied refund of millions of rupees.
There are two paradigms in tax compliance; one treats taxpayers as criminals who never abide by tax lawsunless deterrence of fines, penalties and prosecutions is in the field; the other treats taxpayers as clients who are to be facilitated. Tax facilitation centres have been established which is commendable. But when a taxpayer wants to fulfill his/her tax liabilities, he/she starts facing hurdles. And most of the hurdles owe their presence to the men working for the FBR.
For example, previously taxpayers used to get National Tax Numbers with ease and any change in the particulars was a matter of hardly two days. The process has been made cumbersome and time consuming under the pretext of ‘verification of particulars.’ If verification of particulars from the concerned officer was at all necessary, in the computerised environment, it should have been a matter of hours, but thanks to red-taps it takes weeks and months.
No objection certificate is sought for minor changes. What causes harm to the FBR if a new person gets a National Tax Number? Previously, only sales tax registration was a source of corruption, now a new source in the form of issuance of/change in National Tax Number has been added.
Similar is the case with other miscellaneous tasks. Guess what could be the reason for not passing an order by the commissioner even after two years (against prescribed period of 30 days), on the application of a big taxpayer seeking permission to make a payment to a non-resident without tax deduction for valid reasons given in Section 152 of the Income Tax Ordinance, 2001. Such cases include:
* delaying the approval, for more than two years, for change in the name of an approved provident fund in line with change in the name of the taxpayer company.
* not issuing advance ruling to a non-resident by the FBR itself, even five months against prescribed time of three months.
The ‘reformed’ FBR should understand that such actions do not promote tax culture.
Taxation policies affect business decisions. Before a measure is taken, the FBR should conduct an impact assessment. For example a few months back, the FBR withdrew zero-rating available to local manufacturers of power generation plant and machinery while sales tax levy on the same machinery, if imported, continues to be exempted. It has rendered the local production uncompetitive, particularly when foreign governments like South Korea give export subsidy on plants and machinery. The local manufacturers are closing down their businesses, resulting in unemployment; the time spent on import of power generating units delays projects.
A request was made to the FBR either to exempt local manufacturers or also levy sales tax on the imports to provide a level-playing field for domestic producers. Was it an unjust demand? Certainly not! But the FBR prefers losing revenue by keeping the files, ‘pending for decision.’
When a taxpayer gets an unlawful treatment, he approaches the Commissioner (Appeals) who is also departmental officer with a departmental bias. No doubt, the best orders of the department are quashed, not on merit but for a ‘nazrana’. If you fight on merit, the worst action will follow dubbed as, ‘in accordance with law and facts of the case.’
There is no meaningful monitoring of these decisions. Second tier of appeal is the Appellate Tribunal whose benches can be categorised into ‘Usooli’ (principled) and ‘Wasooli’ (‘facilitation fee’). It is your luck where your case is fixed.
Some taxpayers manage to get their case fixed in the bench of their choice by paying ‘fixation fee’ to the concerned officials. If a case is fixed in a ‘Wasooli’ bench and the taxpayer does not pay them ‘their money’, the order will be written in such a manner that it becomes difficult even for the High Court to frame a question of law. What a tyranny is our system of tax law!

Issues in Islamic Banking

Islamic banking has achieved growth rates that tremendously outpace conventional banking. While there are banking norms common to both Islamic and western financial systems, certain norms are exclusive to Islam. Some of the Islamic restrictions render certain western banking practices and transactions void.

The main prohibitions are riba and gharar. Most of the present-day Islamic scholars are of the view that riba includes both interest and usury. Gharar signifies ambiguity, uncertainty or lack of specificity in the terms of a financial contract.

As riba is prohibited, suppliers of capital become investors instead of creditors. Also, investment can only be made in permitted commodities and activities. For instance, one cannot deal in import and export of alcohol and narcotic substances. Similarly, money is not allowed to be invested in a casino.

A variety of Islamic banking instruments and transactions are available in different markets. These may be classified as equity, debt or fee based services/ products. The first includes musharaka and mudaraba; the second consists of salam, istisna, istijrar, qard, murabaha, ijara, bai-bithaman-ajil, bai-al-einah, bai-al-dayn, and tawarruq; the third comprises services based on wakala and kafala.

On the validity of some of these transactions and instruments, there is a difference of opinion among Muslim scholars. There are scholars who oppose certain practices because they find hidden elements of riba and gharar in them. They claim that some products appear Islamic only in form, not substance. Tawarruq, bai-al-dayn, and bai-al-einah are among transactions either disallowed or, at best, deemed controversial by some of the prominent scholars.

Most banks conducting Islamic operations have a panel of Muslim scholars, called shariah committee or shariah board, that determines whether a product or practice complies with Islamic provisions. Certain banks have a single shariah consultant or shariah advisor. Whether it is a sole shariah adviser or a shariah board, a particular scholar hired by a bank to accredit new products can give it an edge vis-a-vis its competitors.

Shariah scholars usually receive a fee for their services. Sometimes the fee depends on a deal going ahead. In fact, there have been cases where scholars approved conventional products as Islamic for the right price. Thus, the critics of Islamic banking came up with the term rent-a-sheikh.

According to different estimates, the number of these religious experts is between 100-200. However, there are about 12 of them who are the most sought after. As reported in Financial Times, they are making millions of dollars in yearly income. There have been mutterings not only about these scholars serving on too many shariah boards, but also about their advising direct competitors. In order to address this issue, Malaysia, in 2005, restricted scholars from serving on more than one board or committee.

As shariah can be given different interpretations, the shariah committees, at times, give conflicting rulings. A product approved by one committee can be rejected by another board within the same jurisdiction. For instance, in Jordan, a prominent shariah scholar criticised the penalty imposed on a defaulting client in murabaha, and declared that it is a kind of riba. Similarly in Britain, a famous Muslim scholar advises against taking out Islamic mortgages due to the structure being interest-bearing debt in disguise. Difference may also arise and exist between countries or regions. For example, in Malaysia, Islamic financial restrictions are construed more liberally than in the Middle East.

There are bodies and organisations--- Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is one of them--- that are trying to address this lack of Islamic standardisation. However, without a consensus of religious experts there cannot be a binding, universal set of Islamic banking rules. In fact, there is a proposal to set up a supreme shariah board. Indonesia serves as a good example where a national shariah board issues rulings that are mandatory for all shariah boards in the country.

Malaysia has also proposed that a meeting be held in Kuala Lumpur for setting up global standards for Islamic banking and finance. The prime ministers of Malaysia and Qatar recently discussed this at a meeting in Doha. Such standards would eliminate confusions and resolve issues with a common approach.

Another shortcoming confronting Islamic banking is the shortage of qualified professionals at all levels. There are not many people who are equally skilled in conventional banking and Islamic law. A person well acquainted with conventional banking can easily understand any Islamic product; however, one cannot successfully develop or market such a product without knowing the rules and institutions unique to Islam.

Originating in the 70s--- Dubai Islamic Bank was the first Islamic bank established in 1975--- Islamic banking has developed into a global industry and has assets exceeding $900 billion. Though the share of Islamic banking is very small in the worldwide banking industry, it is showing an impressive growth, i.e., 15-20 per cent per year. According to an estimate by Moodys, it could hit $4 trillion in five years. Islamic banks have been set up not only in Muslim countries, but also in non-Muslim jurisdictions, like England and the US that have Muslim minorities.

Islamic banks take pride in the fact that, unlike their conventional counterparts, they have emerged relatively unscathed from the global financial crisis. In fact, in England, two Islamic banks, European Finance House and Gatehouse Bank, were launched in 2008, while governments in Europe were busy bailing out their banks. And while Lehman Brothers collapsed, Islamic Bank of Britain launched an Islamic residential mortgage.

Islamic banks have avoided complex debt-based structures and have relied more on retail deposits and financed real estate, private equity, and equities. In other words, Islamic banks have never been exposed to the risks that have affected their conventional counterparts. Even now, western governments and banks are considering possible regulation instead of giving up interest based and speculative transactions. Just surviving the financial crisis does not mean that Islamic banking will influence conventional banking.

To summarise, lack of uniformity in laws and deficiency of skilled professionals are some of the main hurdles faced by Islamic banks and their clients. However, the industry has a promising future--- the Arab oil money is often claimed to be the main driving force. This is evident not only from the growing number of banks established specifically for practicing shariah compliant finance, but also from the increasing number of conventional banks--- Citibank, HSBC, RBS, Standard Chartered, UBS, etc--- engaging in shariah compliant operations.

Most importantly, Islamic banking is mainly for Muslims. Due to the prohibition of riba and gharar, Islamic banking products generally tend to be less efficient than conventional ones. Islamic bankers must be careful not to blur the lines between Islamic and conventional banking in their eagerness to attract wealthy non-Muslim clients or Muslim clients that are more interested in profits than piety.

Overcoming Mistakes Made During the Recession

The recession has put managers to the test in ways they likely had not experienced in the past. Often, choices were made to reduce costs that weren't planned out as strategically as they would have been in other times, and companies already are beginning to regret some decisions that were made too quickly.
Does that make these supervisors bad managers? No. Hindsight is 20-20. But there are lessons that can be learned from these missteps now that an economic recovery may be on the horizon.
Here are a few of the most common staffing mistakes made, along with suggestions for getting your team back on track:
Mistake #1: Cutting personnel levels too deeplyMany organizations operating with lean teams are discovering being short-staffed is hampering their ability to conduct business and contributing to burnout of remaining employees. As conditions begin to change but uncertainty persists, gaining staffing flexibility through the use of temporary financial professionals can provide a particular advantage. Your firm can expand or contract your personnel levels as needs dictate far more quickly and less expensively than if your organization is composed entirely of full-time employees. At the same time, you can evaluate temporary professionals for potential full-time positions should your needs shift. This flexible staffing strategy can leave you better prepared for any changes ahead, making it a useful business practice to implement on an ongoing basis.
Mistake #2: Overlooking opportunities to strengthen core staff
Many companies have failed to see opportunity along with the turmoil in the recession. With top accounting and finance professionals still in the job market, firms now have the chance to hire highly skilled individuals who might not have been available to them in the past.
By making strategic additions, employers can upgrade the skill set and expertise of their teams. This improved knowledge can be particularly valuable as you plan for future expansion and needs. For instance, you might hire an accounting manager proficient with eXtensible Business Reporting Language who can guide your department through the learning process.
Mistake #3: Feeling employees are just lucky to have jobs
While certainly understandable to a degree, some companies have been so caught up in their efforts to survive the recession that they have given little thought to maintaining employee job satisfaction or loyalty. As economic conditions improve, this mistake can prove costly as unhappy workers pursue other job opportunities.
Even if budgets remain tight, there are steps you can take to create a more positive work environment. Providing flexible scheduling options or access to a mentoring program, for example, cost very little if implemented wisely. Also talk to your employees to find out what improvements they would like to see in the workplace. If you aren’t able to fund a suggested idea right now, explain the situation and brainstorm alternatives. By showing a sincere interest in what employees have to say and following through on their recommendations when possible, you can help reconnect with your staff.
Also meet individually with personnel to discuss their professional goals. What would they like to be doing at your company two years from now? Are they being given the necessary tools and guidance to achieve those objectives? Outline the steps that will be required for them to advance professionally. The more you can give people a vision of a future at your firm, the less likely they are to want to leave.
You may not be able to remedy these mistakes overnight. For instance, it may take time to rebuild employee satisfaction. With the right steps in your staffing strategy, however, you can improve the efficiency and morale of your team, which can pay off particularly as the economy gains momentum and business plans shift.

Accounting Article

Cash Accounting and Budget Deficit

by Dr Abdul Karim | Published on 9/13/2010

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Budget is not just a book-keeping exercise for recording government receipts and expenditure. It is a significant instrument of economic management and has important basic functions of stabilisation, allocation, distribution and resolution of conflict.
The way funds are raised and spent has far-reaching implications for the economy and the society at large. From that angle, budget should be very transparent so that all stakeholders may be able to understand and respond rationally to the proposed measures.
It has been customary for the finance minister, to sum up, while presenting the annual budget, the financial impact of the proposed measures. This vital information is conspicuously missing in the Federal Budget for 2010-11 with the result that the size of the budget deficit-- a crucial element for fiscal and economic management-, cannot be determined by an outsider.
The fiscal deficit-GDP ratio has assumed added importance because of the conditionalities of the current standby arrangement with the IMF. Compliance with this condition has been a sticky issue. In the past, all sorts of devices to show compliance on the due date were used such as advancing receipts, and postponement of payments. If this did not do, there was no hesitation in resorting to figure fudging even at the risk of being detected and fined.
In this connection, it must be remembered that the US is a major shareholder of international financial institutions including the IMF. In case a borrowing country is on the right side of the US, the Fund, like its other sister institutions, will be very soft and more than willing to grant waiver after waiver. For this, the attitude of the US authorities needs to be watched very carefully. This has been the experience of Pakistan, which is being repeated in case of the current standby facility.
The concept of GDP embraces goods and services produced in a year. There is no problem with budget deficit-GDP ratio, if the goods and services acquired by the public sector are paid off during the same year. If not, the relationship will be distorted to the extent these are not paid or those acquired in the previous year are paid.
In Pakistan, budget accounting is on “cash basis” and only payments during the year are taken into account regardless of the date of transaction. As a result, there are huge arrears because of slack financial discipline, to say the least, and also deliberate efforts to show a better fiscal position for reasons mentioned above. Recently huge arrears of electricity charges due from the federal government departments, including the Presidency have appeared in the press.
The massive circular debt, which is primarily responsible for energy crisis is a glaring demonstration of the phenomenon. The same should be the case regarding other charges and that can be an endless story. The total amount involved could be staggering. To that extent, the ratio understates the expansionary impact, and its contribution to inflation, of fiscal policy. As a matter of fact, no one in government knows the total outstanding liabilities of the public sector.
A very low tax-GDP ratio is bemoaned and there is demand to increase it to a reasonable level commensurate with other similar developing countries. One effective step in this direction, which is also a condition of the IMF standby, is the imposition of value added tax (VAT). How the matter is proceeding makes an interesting case study. In any shape, VAT or revised GST is going to be an indirect tax adding to the already very heavy burden on the common man who also ultimately bears the cost of rampant corruption.
The real problem is not low tax-GDP ratio but the nominal direct tax-GDP ratio. Direct tax revenue at the federal level is shown as 36.4 of tax revenue and 4.2 per cent of GDP. Even this is artificial as some indirect taxes are, without any justification, included in Income Tax and treated as direct taxes. Budget documents do not give any details about income tax.
The State Bank in its Annual Report FY 2009 gives this detail for the first time, which is quite revealing. The components of income tax collections during FY09 were Call on demand- Rs77 billion, Voluntary- Rs142 billion, Withholding- Rs2 41 billion, adding to Gross Income Tax- Rs460 billion. Withholding tax collections were more than half of income tax and consisted of imports- Rs30 billion, salaries- Rs27 billion, dividends-Rs7 billion, bank interest- Rs12 billion, contracts-Rs83 billion, exports-Rs14 billion, cash withdrawals- Rs12 billion, electricity bills- Rs13 billion, telephones- Rs22 billion, Others- Rs23 billion, adding to Gross- Rs241 billion.
The basic distinction between direct and indirect tax is that the former is imposed on income and wealth while the latter is on goods and services. By this definition, of withholding tax only salaries, dividends, and bank interest qualify as direct tax and they accounted for Rs64 billion. If this is adjusted, income tax collections (net) fall to Rs244 billion and direct tax revenue to Rs363 billion. The ratio of direct taxes to GDP would come down from 4.2 to meagre 2.8 per cent-- one of the lowest in the world.
As pointed out, information in budget documents has to serve several analytical purposes and this makes the accounting classification of crucial importance. The first basic revision of the classification was made in mid-1970s when functional-cum-economic classification was adopted. Even prior to that special effort was made to prepare an economic analysis of budget, and this was released with other budget document at the time of presentation of the federal budget.
The new classification facilitated that task but was discontinued after some time. Now another functional-cum-object classification has been introduced. However, that leaves much to be desired. For instance, the legislature, the judiciary and the executive are important state functions and their individual fiscal position should be given.
Functional classification 011 reads, “Executive and Legislative Organs, Financial and Fiscal Affairs, External Affairs.” Budget-in-Brief is of common interest but does not contain functional classification. Budget in Brief needs to be improved to serve its basic purpose of educating the ordinary citizen. Economic analysis of budget should be resumed as this will also serve the economic managers.
Economic managers need to realise that devious ways can at best help them gain some time but can never alter the harsh economic realities. Honesty has been and will ever remain the best policy. For a proper grip on public finance, the “accrual basis” of accounting should be adopted like in many other countries.

Data Governance for Business Development

In today’s fast-paced, highly competitive and extremely volatile market place, data governance is one of the key topics of contemplation in large organisations.
One of major contributor for effective monitoring of market trends, to gain competitive edge, innovate and achieve revenue growth, is reliable business analytics. Quality analytics are only possible if the underlying data is complete, accurate and of the best achievable quality.
The term data governance implies an effective and efficient management of data that flows through an enterprise. The key factors that contribute to effective management of data are consistency, quality, completeness (re-)usability, security, availability, and data categorisation. A data governance organisation, defines data policies, processes and standards and monitors them through support of appropriate technology.
Data governance is not specific to IT function. Everyone is involved and affected: from the data originators to data consumers, from the operational staff to C-Suite executives, and from internal to external stakeholders. A typically effective data governance organisation involves resources from across multiple business functions and lines of business (or business units).
To be a lucrative data governance enterprise, data governance will be viewed as a multidisciplinary endeavour, with a clear framework. Implementing a successful data governance programme that operates on three key principles.
The first key principle is accountability. If there is no clear ownership of data, the data objectives will become unattainable and adrift from the business objectives. As mentioned earlier, data governance is typically viewed as an IT initiative; consequently the business doesn’t feel the need to support or pitch into the data related efforts. The accountability must come from the business and IT function will be leveraged as a support structure. The business must define the objectives of data and align them to the enterprise-wide objectives.
To successfully achieve the data objectives, a multilayered data governance organisation is defined. Data council or steering committee sits on the top that consensually decide the strategic direction for data, (or use of data) define the policies, processes and standards. The following layer identifies the data owners, the folks responsible for their respective data domains and make day-to-day data related decisions. Finally the data stewards, who work cross-functionally, ensure compliance to policies, processes and standards. This typical governance organisational structure may vary from enterprise to enterprise, however the principle of accountability must be religiously observed.
The second principle is establishing necessary policies, processes and standards. The policies, processes and standards pertaining to data must be implemented to the entire enterprise, rather than lines of businesses or business functions in silos. Policies, processes and standards that are observed and monitored in business silos will lack data completeness, quality and accuracy of data; and once again, the data objectives, and consequently the business objectives, will be negatively impacted.
Finally, leverage technology to ensure consistency, quality, completeness (re-)usability, security, availability, and categorisation of data. Technology must be used as means to accomplish data objectives and not to direct the data objectives. Technology enables a data governance enterprise to effectively manage data in three ways. It implements data models to retain complete, well-categorised and high-quality of data. Secondly, technology ensures that the data is secure and compliant with the industry and government regulations. Thirdly, the data is appropriately utilised and made readily available across all lines of businesses, business functions and external stakeholders by leveraging data management, business intelligence and reporting tools and applications.
A formalised data governance programme provides intangible benefits and potential cost savings through unification of existing data related initiatives, addresses data gaps and provides synergies. Additionally, data governance establishes a cross-functional model with clear ownership and boundaries that promotes an environment for long term collaboration and coordination among business functions, lines of business and technology.

Accounting Article

Implementation of Value-Added Tax (VAT)

by Muhammad Ashraf | Published on 4/28/2010

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Value-added Tax (VAT), or GST in VAT mode is usually implemented in robust/sustained economies but fortunately (or rather unfortunately ) these days Pakistan has become an economic laboratory of IMF which is in the process of experimenting with the effects of implementing VAT in a country passing through recessionary period. It is about to be experienced in a country which is at the moment riddled with a stalled economy, internal political problems and chaos among its provinces over the distribution even after NFC award.
This is not merely a personal opinion but has also been opined by the international press, such as Washington Post's Lori Montgomery who writes, "The latest sign: the emphatic rejection by both parties in recent days of a value-added tax, a sales tax imposed by nearly every other developed nation." After a White House economic adviser was reportedly speaking somewhat favorably about VAT, the White House this week vigorously denied that President Obama is looking to include the said tax in his deficit-cutting arsenal. "This is not something the president has proposed, nor is it under consideration," White House press secretary Robert Gibbs told reporters.
VAT isn't the only potential budget solution drawing fire. Republicans howled about cuts to Medicare in the recent health-care overhaul, and no one in Washington wants to raise taxes on the 98 percent of taxpayers whom the White House has defined as the middle class.
Anyways, VAT/GST has increasingly become steadily more important as source of revenue around the globe. In Mexico and Turkey, it contributes around 50% of Government revenues. This seems to be a trend, but a cautious one, and some commentators have asked why governments dont rely even more heavily on indirect tax revenues and introduction of VAT law in Pakistan may be the answer irrespective of recessionary economy!
But another answer is that higher indirect taxes are politically difficult to introduce as taxpayer often question the benefits of paying taxes. The link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services, but the link between lower corporate tax rates and increased inward investment often results in increased employment and infrastructure development which is less well understood by robust or sustained economies instead of recessionary one! This article is endeavoring to assess the ground realities pertaining to implementation of a comprehensive value added tax.

VAT and Reduced Direct Tax Rates

Indirect taxes seem to be playing in the revenue-gathering strategies of many countries around the globe and plan to introduce VAT in Pakistan is no exception. It may be correct that this is a worldwide trend but there is a clear tendency in competition to attract and keep inward investment, to reduce their corporate tax rates and seek to make up the shortfall with increases in indirect taxes. This is rather than relying solely on growth brought about by corporate investment to expand the tax base. These tactics suggest that as well as attracting new investment, retaining current investment is a success in itself.
In November 2006, Mr. Lee Hsien, the Prime Minister of Singapore while speaking to the parliament said, "if we have to bring our corporate tax down, every percentage point we bring it down will cost us $400 million a year. It is big money. Therefore, we need to consider raising indirect taxes, in other words, the Goods and Services Tax. It is now five percent; I think we need to push it up to seven percent. Even seven percent will still lower than nearly all other countries which have GST or VAT. But if we raise it from five percent to seven percent, it will give us precious extra resources to implement social programmes."
This is exactly what the Singapore Government did in its 2007 Budget, announcing a two percent cut in corporate tax rates to 18 percent from next year and an increase in GST to seven percent. There seems to be a clear deviation from this principle in Pakistans VAT introduction fiscal policy.
This nexus of introduction of VAT coupled with reduced tax rate is not based on any myth but on realities. For taxpayers, introduction of VAT has immediate consequences (discussed below). One of the advantages of VAT over direct profits tax is that they supply a steady flow of funds throughout the year, rather than lump sums at widely spaced intervals evidenced in direct taxes.
This present government failed to chalk out any strategy to communicate the benefit of a low direct tax strategy combined with principled VAT regime. It may well be in the long term interests of a country to follow this path, but voters may need persuading of the benefits of paying today for better economy tomorrow.

VAT Collection: Federation or Provinces

Prior to entering into the debate of VAT collection in Pakistan, one must look at the European Union experience. Work is underway to reform the basic structure of the tax in certain areas, such as those determining which EU jurisdiction is entitled to the VAT being collected at present. Much of the legislative debate has been focused on how to alter the system to better reflect taxation where consumption actually occurs, principally for services that can be supplied at a distance like e-commerce, telecommunication etc.
The outcome of any new legislation in this area in EU will see a shift of VAT revenue from one country to another, principally from low rate countries to high rate countries. And no mention of EU VAT moderanization issues would be complete without a reference to the need to tackle the carousel/missing trader fraud issue which is costing EU governments very large sums in lost revenue. This drove urgent legislative change across EU.
The issues faced by EU are not alien to Pakistan but will surface soon! For instance, if a person is registered as service provider in NWFP and delivers the service in Punjab on the instruction of a person registered in Sindh then where will the input and output be paid and claimed. This and other similar peculiar issues will crop up!
Further, one school of thought is of the opinion that if the provinces are finding it difficult to share then wouldnt that also be difficult for federation to allow input of services VAT adjustment against output of goods and federal services! Moreover, if the provincial VAT will be collected by the provinces themselves then this may tantamount to increasing the compliance cost by the businesses which are already overburdened with 47 compliances a year according to the World Bank survey conducted by PwC but actually they are around 58 if labor law compliances are included.

VAT or GST by Provinces

VAT is meant for allowing credit on expenses and purchases but it seems that even after NFC award the provinces are struggling for additional revenue owing to trust deficit. These issues were raised by a local expert in the VAT conference held by the FBR in Islamabad but was not made part of the recommendation of Dr. Hafiz Pashas report.
The ground reality of operation of taxpayers is that some of the companies registered offices are located either in Sindh, Punjab or Islamabad irrespective of the fact that their operations may be carried out in NWFP or Baluchistan. Consequently, the registration domain either at registered address or operational place is the key question when provinces come to know about their actual share.
Further, continuing with the example in previous paragraphs above, if a person is registered as service provider in NWFP and delivers the service in Punjab on the instruction of a person registered in Sindh then where will the input and output be paid and claimed.
In case if it is decided that this situation will avoided by slapping 15% on output of services in the province, as suggested by Mr. Kaiser Bengali in ACCA pre Budget discussion, where the service provider is registered and without allowing any input either in Punjab or Sindh then would such fixed rate cost be acceptable to businesses or could anyone call it VAT!
The Dayton Accord (2001) of Bosnia proved disastrous and they had to revert back to central government. Bird and Abel (2007) study also concluded that transferring the right to the federating unit is preferable when regional units either do not have the capacity or are in a process to build the same.

Rate of VAT

The hottest debate in town is about the rate of VAT on essential and non essential items. As stated above, the link between higher indirect taxes and higher prices is obvious to anyone who buys goods and services. However, the approach of all Pakistan Tax Bar Association Mr. Abdul Qadir at the pre budget proposal meeting called by the chairman KCCI Budget and Tax Committee Mr.Qamar is more rational which require a scientific study. The chairman FBR has also already hinted for a rate ranging between 5 to 7%. The impact can be understood through following comparative chart.

COMPOSITE RATE
			Amount		VAT
Sale	5%		1,000,000.00		(50,000.00)
Cost of Good Sold (COGS)	15%		(700,000.00)		105,000.00
Other Admissible Expenses Input	15%		(100,000.00)		15,000.00
					------------
VAT - (Payable) / Refundable					70,000.00
					========
SINGLE RATE TILL COGS
			Amount		VAT
Sale	5%		1,000,000.00		(50,000.00)
Cost of Good Sold	5%		(700,000.00)		35,000.00
Other Admissible Expenses Input	15%		(100,000.00)		15,000.00
					------------
VAT - (Payable) / Refundable					-
					========
SINGLE RATE FOR SUPPLY CHAIN
			Amount		VAT
Sale	5%		1,000,000.00		(50,000.00)
Cost of Good Sold	5%		(700,000.00)		35,000.00
Other Admissible Expenses Input	5%		(100,000.00)		5,000.00
					------------
VAT - (Payable) / Refundable					(10,000.00)
					========

As evident from composite rate table above, multiple rates for essential items will be deteriorating. This process would result in unnecessarily blockage of funds of businesses in the shape of refunds meaning thereby cost of funds to businesses which will further increase the inflation. Similar results will also be evidenced where single rates are restricted to cost of goods sold. The ultimate solution is that the whole supply chain rates of essential items should be extended to business involved in essential items supply chain.

VAT and Taxpayers Accounting System

For taxpayers, introduction of VAT has immediate consequences. One of the advantages of VAT over direct profits tax is that they supply a steady flow of funds throughout the year, rather than lump sums at widely spaced intervals evidenced in direct taxes.
To deliver this benefit, taxpayers, in their capacities as tax collectors, have to have accounting systems that can provide accurate real time information on transactions and the associated tax liability.
Keeping systems up to date with tax authorities information requirement is a major cost and resource issue for the business sector. As indirect taxes become more important to governments, so regulators are intensifying their scrutiny of business tax systems to satisfy themselves that tax revenues are not at risk.
Further, till today, FBR has failed to issue the rules relating to registration, deregistration, filing of return, declaration, summaries, statements, record keeping, accounts, related documentation, tax invoices, credit and debit notes, refunds, prepayments, audit, alternate dispute resolution, charging of fee for processing of documentation and official acts, recovery of arrears including compounding of offence and appointment and management of e-intermediaries then how could it expect from businesses to cope with new law fortnightly.

VAT Liability Concept

The determination of VAT liability revolves around some important terms like input, output, adjustment (increasing and decreasing) for creditable purpose and second hand goods. Like Sales Tax Act, 1990, the VAT liability is also determined deducting the input from output. The liability may either be increased or decreased by any of the following adjustments.

1. Cancellation of Supply
2. Alteration in consideration for supply
3. Return of supply
4. Fundamental variation in the nature of taxable supply
5. Bad Debt
6. Goods applied for a private purpose
7. Registration or cancellation thereof
8. Change of rates
9. Advance payment of tax at import stage
10. Withholding by Government and Large Taxpayers

Taxpayers are cautioned that the concepts of progressive/periodic and ancillary/incidental supplies are of utmost importance and would have significant implications on supplies under contractual agreement and normal supplies.

Inadmissible and Defered VAT Input

Unlike the Sales Tax Act, 1990, the list of inadmissible input is exhaustive, that is, input of reverse charge, purchase or import of passenger vehicle or its spare parts or repair thereof, entertainment expense and membership of club etc. Further, taxpayers will be treated to have incurred input tax (deferred VAT input) at the time of sale of second hand taxable goods.

VAT Audit and Associated Person

The suggested legislation prescribes various types of audit like routine, normal, forensic etc but when, how and under what circumstances it will be conducted was absent suggested by senator Haroon and Professor Khursheed Ahmed. Further, they also rightly pointed out about the application of the concept of open market price and its implication over associated persons.

Grossing Up

The concept of grossing up of transaction for VAT is included in the law where the tax is borne by the taxpayer. Surprisingly, the formula of grossing up does not exclude withholding income tax. Consequently, the vicious cycle of grossing up computation would never end. The relevant provisions require afresh thought!

Legal Deficiencies

There seems to some conceptual drafting and typographical errors in the federal law. For instance, federal list services include carriage of goods or passengers but in the presence of FED and other indirect taxes it would be cumbersome for end consumers to bear the cost. Further, VAT law seems to be a deviation from policy of registration of taxpayers as it intends to give a separate registration number instead of relying over taxpayer registration number [formerly NTN] issued under the Income Tax Ordinance, 2001.
Moreover, the concept of Federal VAT services is missing in provisions relating to imposition of tax, person liable to pay tax, value of supply and time of supply. Further, it is beyond imagination to understand the rationale why the concept of exempt and zero rated supply was not incorporated in ancillary or incidental supplies.
In more furtherance, there seems to be a gross conceptual drafting error in sub-section (3) of section 18. The number 332 used in section 24(4)(d) should be corrected to 32 while clause (e) and (f) should be shuffled up to give the section numbering effect. Further, the Rs1,000 limit set is refund and carry forward sections is too low.

Conclusion

The Dayton Accord (2001) of Bosnia proved disastrous and they had to revert back to central government. Bird and Abel (2007) study also concluded that transferring the right to the federating unit is preferable when regional units either do not have the capacity or trying to build the same. EU has not yet concluded on distribution of taxes! Consequently, the centralized dual VAT system of Germany where revenue is shared with the state is the best system (TAT 1988).
For taxpayers, introduction of VAT has immediate consequences. To deliver this benefit, taxpayers, in their capacities as tax collectors, have to have accounting systems that can provide accurate real time information on transactions and the associated tax liability. Keeping systems up to date with tax authorities information requirement is a major cost and resource issue for the business sector.
As indirect taxes become more important to governments, so regulators are intensifying their scrutiny of business tax systems to satisfy themselves that tax revenues are not at risk. Contrary to this, FBR failed to issue the necessary rules then how could it expect from businesses to cope with new law fortnightly.
Multiple rates for essential items will be deteriorating as this would result in unnecessarily blockage of funds of businesses in the shape of refunds meaning thereby cost of funds to businesses which will further increase the inflation. The ultimate solution is that the whole supply chain rates of essential items should be extended to business involved in essential items supply chain.
One school of thought is of the opinion that if the provinces are finding it difficult to share the services VAT then wouldnt that also be difficult for federation to allow input of services VAT adjustment against output of goods and federal services!
The ground reality of operation of taxpayers is that some of the companies registered offices are located either in Sindh, Punjab or Islamabad irrespective of the fact that their operations may be carried out in NWFP or Baluchistan. Consequently, the registration domain either at registered address or operational place is the key question when provinces come to know about their actual share.
In case the provinces decides that they will slap 15% on output of services where the service provider is registered and will not allow any input then would such fixed rate cost be acceptable to businesses or could anyone call it VAT!
This present government has failed to chalk out any strategy to communicate the benefit of a low direct tax strategy combined with principle based VAT regime. It may well be in the long term interests of a country to follow this path and respective assemblies may need to reconsider this instead of passing the bill in haste, but voters may need persuading of the benefits of paying today for better economy tomorrow.