Introduction:
Value added tax (VAT) is sort of an indirect tax which includes such as sales tax and custom duty. It is a tax charged on market value added to a final product which is, ultimately passed on to the consumer. It not produced by the producer but is barred by the consumer.
Government is thinking of introducing value-added tax (VAT) in the country from July 1, 2010 which has taken a wave of fear across the business community that will create further problem for the economy as investor will get pessimistic about the situation. It is feared that it will adversely affect the economy of the country. Inflation will double and each segment of society will be heavily taxed. Cash-strapped Pakistan accepted a $7.6 billion IMF bailout in November 2008, later increased to $11.3 billion, as the government struggled to meet its international debt obligations. Conditions for the rescue package included cutting the fiscal deficit, imposing VAT and raising electricity tariffs.
Comparison with a sales tax:
The difference between vat and sales tax is that the VAT is levied on goods and services while sales tax is imposed generally on goods. Contrary to sales tax, the VAT has no cascading effect. The VAT is a multistage tax, levied only on the value added at each stage in the chain of supply of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. Thus, the VAT eventually becomes a single point tax. The objective of the VAT, according to the LoI ,is to meet the government's medium-term needs".
However VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.
Around 70 percent of the world's population in 130 countries now lives with a value-added tax (VAT), which is essentially an alternative method of collecting what most people would readily understand as a sales tax. By adopting VAT by six more countries, Pakistan shall become the 137th country to fall in line with the VAT mode of taxation. Basically VAT is a multi-point sales tax, which allows a set-off for tax paid on purchases, since only the value-added at each stage of manufacturing or sale is taxed at a percentage of the value added at cacti stage of production or sale.
Pakistan experience shows that the costs of compliance are also high because of the somewhat cozy relationship between some taxpayers and revenue staff, the frequent audits (commonly more than one per year) of those registered for the GST purposes and the endemic, and never likely to be resolved, problem of exporters being unable to get their refunds of the GST paid on inputs on a timely basis.
Sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. When the VAT system has few, if any, exemptions such as with GST in New Zealand, payment of VAT is even simpler.
HOW VAT WORKS:
Value added tax (VAT), or goods and services tax (GST), is tax on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A VAT is an indirect tax, in that the tax is collected from someone who does not bear the entire cost of the tax. To avoid double taxation on final consumption, exports (which by definition, are consumed abroad) are usually not subject to VAT and VAT charged under such circumstances is usually refundable.
VAT is a nationwide tax of 17.5% (or occasionally 5%) levied on almost all goods sold by retailers. VAT accumulates as a product's value increases. VAT is paid at all levels of production although it is generally consumers who are most affected by this indirect tax.
Now, when you know what VAT is, I will show you how you can calculate it. The one thing you will need is - a calculator. Although there are many online calculators online, you never know if they are correct or not. To be sure, calculate yourself.
Multiply the price of any product as a consumer by 0.175 to work out the amount you are paying in VAT. This will provide you with the VAT figure. For example, if you are buying a computer for £100, the VAT will be 17.5%. Multiply £100 by 0.175 to work out what you are being charged as VAT (£17.50).
Some items with perceived social benefits may have a reduced rate of VAT. Smoking cessation products and items that are useful for elderly people have a VAT rate of 5%. VAT is not charged on some items such as children's clothing in the UK. Other products with no VAT include postal services, medical care, lending, insurance and betting.
VAT is calculated on the price charged by a wholesaler or retailer to any other retailer or consumer. It is collected where it is paid and then passed on to government. It is the responsibility of the retailer to ensure this process runs smoothly as they will be financially liable if tax evasion occurs.
VAT is a tax on added value. This means when a retailer buys a product for a lower price and then subsequently increases the price for resale, they are liable to pay the government VAT on the value added to the product only. VAT on the original value will have been paid by the previous retailer.
To cover the cost of VAT added by the wholesaler, retailers may add this amount to the total price of the item, essentially passing the burden of VAT entirely on to the final consumer.
Basis for VAT:
By the method of collection, VAT can be accounts-based or invoice-based. Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method.
By the timing of collection, VAT (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds - no matter when the sale had been made. Checks are written when funds are available to pay bills, and the expense is recorded as of the check date - regardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.
Criticisms:
This new tax system is heavily criticized by all corners as it has put burden on personal and consumer of the product. This tax system looks to be quite confusing as many analyst thinks that this tax system is aggressive which means poor has to pay more as percentage of their income than rich one. Some critics consider it to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. So to keep balance tax system governments have to adapt a progressive nature of tax system which will result into less burden on lower income earners and result into direct transfer payments to lower income groups and resulting in lower tax burden on poor. There are other reasons which resulted into heavy criticism on vat such as small businesses which deal in predominant cash transactions now have to pay vat to the government. As the small business has to pay some of the value added to the government from his earning.
There's a big transparency problem which is heavily criticized by the general public. The main focus was on reformation of taxation system including plugging leakages in general sales tax. There are also huge vat frauds such as carousel fraud.tn this sort of transaction when one country traded with another country. During these transaction some companies owe vat, other acquire a right to claim vat. The first company called missing trader go bank corrupt without paying. The second row of company can pump money straight out from national treasuries.
Opposition has heavily criticized this new vat system and certainly not a people will. One of the Member of Parliament said it was not even constitutionally correct since it did not implement national finance commission awards, now did it implement the 18th amendment in letter and spirit. Due to high corruption and mismanagement in tax department there is less revenues generated from value added tax as people has less faith on these departments. The other reason of low revenues from value added tax is cause of inefficiencies from enforcement agencies such as smuggling.
Unequal distribution of income and inadequacy of income to the general public to meet it basic need and low living of standard has resulted into different facets of poverty. That has lead to low tax payments which has dented the economic growth of the country and lead to high inflation and high unemplymet.
VALUE ADDED TAX IMPACTS ON CONSUMERS:
Now days Pakistan is facing a double digit inflation in every sort of commodity which has resulted the cross price index to record high level of 21%.
all nonfood component remain in double digit figure throughout the course of fiscal year which resulted into inflation and reduce purchasing power of the consumer. That has add up pressure on the consumer
So by having a vat system it is unfortunate that the common man had been ignored in the budget. The sharp increase in the prices of commodities such as items of daily necessity will made the life of the people more miserable, sending a large number of people below poverty line.
In order to reduce the incident of poverty, the government may turn its attention to certain basics:
1) cut down in its expenditure,
2) introduce progressive tax system
3) Increase its development expenditures in public welfare programs
Scope of vat in Pakistan economy:
This is important for Pakistan to increase revenue to become less dependent on friendly countries and also to invest in social sector.
The inflation and availability of credit to private sector are major challenges for the country. The IMF country representative said the government has to maintain downward path of inflation and provide credit to the private sector. The decline in inflation would help reduce poverty.
Paul Ross said Pakistan's policy priority should be now to focus on building growth momentum as stabilization is proceeding. The role of private sector would be very significant in growth and employment generation and would largely depend as to how much credit would be available to the private sector.
The IMF has projected 11.8 percent Consumer Price Inflation (CPI) of Pakistan for 2010, which will decline to 6.3 percent in 2011. According to the IMF projections, total exports of Pakistan would be $23.6 billion in 2010 and $23.9 billion in 2011 while imports are projected to be $38.8 billion in 2010 and $40.9 billion for 2010.
Later talking to media, he said that Pakistan debt repayment would start from February 2012 with first installment of $400 million. He said Pakistani economy may be affected from the Dubai financial crises as 10 percent remittances of Pakistanis come from the country as a substantial labor force is working there.
The IMF survey disclosed that the economic prospects for the countries of the Middle East and Central Asia are improving along with the global recovery, although the latter remained fragile. Growth in the region, comprising Middle East, North Africa, Afghanistan and Pakistan (Menap) will gather momentum but remain below pre-crisis levels. While the impact on the region of the Dubai crisis and the unfolding events in Greece has been limited so far, a re-pricing of sovereign debt cannot be ruled out, adding an element of uncertainty to the outlook.
Scope of vapistan economy:
The Senate Standing Committee on Finance is of the view that VAT is inflationary in nature and pointed out that 15 percent VAT will have a burden of 21 percent on taxpayers therefore; initially the VAT rate should be reduced from 15 percent to 12.5 percent. FBR authorities also accept that imposition of VAT will have inflationary impact and to offset this impact, FBR has proposed to reduce the VAT rate from 16 percent to 15 percent and exempt 1 percent special excise duty on imports as well as local manufacturing.
The latest budget aims to increase tax revenue by 133 billion rupees in an effort to meet a fiscal deficit target of 4% of gross domestic product (GDP), compared with estimates of between 5.1% and 5.6% in the year ending June 30, both higher than the IMF target of 4.9%. The government claims the overshoot is due to increased security spending and a delay in receiving funds promised by donors last year to help the country fight terrorism.
The new budget targets economic growth of 4.5%, up from 4.1%, in the 12 months to June 30.
The government proposes to increase overall spending by 10.7% to 3.26 trillion rupees, while raising 2.57 trillion rupees in revenue, with total tax revenue targeted at 1.78 trillion rupees. The Federal Board of Revenue will collect 1.67 trillion rupees of this, or about 9.8% of GDP.
TAX RATE IN GST
Tax rate in the GST rate system is more complicated. There is a standard rate of 16% in the GST. Besides, there are 11 more GST rates above and below the standard rate, which are payable on certain specified supplies. For example, ship-breakers pay GST at the rate of Rs 4848 per metric tone.
The GST rate on supply of sugar is 8% and the rate on supply of natural gas to the CNG station is 25%. Commercial importers pay GST at the rate of 18% on commercial imports.
Tax rate in VAT:
The VAT has a single standard rate of 15% on any supply/import.
Effects of vat in Pakistan:
Under the VAT Act of 2010, only three categories of food items would be exempted from tax, but with a limited scope. These include:
Unprocessed peas, wheat and wheat flour
Ice and waters, excluding those for sale under brand names or trademarks
Table salt, including iodized salt, but excluding salt sold in retail packing bearing brand names and trademarks.
In comparison, food items and products on which the tax exemptions would be withdrawn include live animals and live poultry, meat of animals, fish and crustaceans, eggs, live plants including bulbs and roots etc and pulses. Food items (excluding bottled, canned or packaged under brand names) which were exempt from GST would come under the VAT mode. These include vegetables, fruits excluding imported, red chillies, ginger, turmeric, fruit juices, ice and water, table salt and cereals and products of milling industry.
Similarly, agricultural and livestock products that were exempt from GST but would be subject to VAT include seeds and fruits from sowing, cinchona bark, sugar beat, sugarcane, milk preparations, poultry and cattle feed, tractors, bulldozers and harvesters etc.
The zero rating on following foods items would be removed - oil cake and other residues, uncooked poultry meat, milk, flavoured milk, cream, milk and cream concentrated, yoghurt, whey, butter, desi ghee, cheese, processed cheese, sausage and similar products of poultry meat or meat offal, frozen or preserved meat offal including poultry and fish, preparations for infant use.
MEDICAL EQUIPMENT:
Six items in this category were exempt from GST but some of these would be subject to VAT. These include surgical taps and ultrasound gel. Diapers for adult patients, dextrose and saline infusion giving sets, artificial body parts, lenses and glucose testing equipment and contraceptives would be exempted from VAT.
The documents suggest that withdrawal of exemptions on major sectors like fertilizers, pesticides, pharmaceutical, tractors, carpets, leather, sports goods and surgical goods along with 145 raw materials used in these sectors under the VAT regime would fetch additional revenue of Rs16.8 billion.
Similarly, the withdrawal of zero rating on apparel, textile and footwear would fetch another Rs13.8 billion and another Rs10 billion from inputs due to withdrawal of zero-rating.
The VAT on services would yield additional revenue of Rs82.2 billion, making total additional revenue of Rs130.5 billion in 2010-11. However, an amount of Rs50 billion would be lost to the transitional cost. This would leave a net tax addition of Rs80.5 billion, accounting for 0.47 per cent of gross domestic product (GDP).
Other exemptions under the VAT regime would include books, newspapers and periodicals, other than material wholly or pre-dominantly devoted to advertising the Holy Quran in all forms, ambulances and fire-fighting trucks, precious metals other than a first supply of precious metal after refinement that is zero-rated, personal wearing apparel and bona fide baggage imported by overseas Pakistanis and tourists exempt from customs duties under the Customs Act and import of goods chargeable to zero rate of customs duty under relevant specified 23 headings.
The following zero-rated items under GST would also be subject to VAT - exports, supply, repair and maintenance of ships and aircraft (above 8000 kg), machinery for air navigation services, pilot age, salvage or towage services, supply to diplomats and missions and privileged persons and organizations, supplies to duty free shops, international tenders, raw material, plant and machinery for export processing zones and petroleum exploration and production companies and supplies to exporters under the DTRE rules.
The zero rating would also be abolished on cotton seeds, soybean meal, petroleum crude oil, colors sets for writing and drawing, inks, erasers, exercise books, pencils, sharpeners, drawing and mathematical calculating instruments, pens and ballpoint, non-chemical fertilizer, energy saver lamps, sprinkle and drip irrigation materials, wheel chairs and import and supply of polyethylene and polypropylene for manufacturing of mono-filament yam and net cloth.
In cottage industry, exemptions for glass bangles, bricks and building cement block would also go under the new scheme. Likewise, silver, gold and monetary gold would also come under VAT.
On items related to social service, exemptions would be withdrawn on incinerators of waste management, supplies under grants in aid, goods received under natural disaster relief, CNG Euro-2 busses and CNG equipment, computer software, hospital goods either donated or purchased. Likewise, goods imported by UN agencies, diplomats and Gulf sheikhdoms, Afghan transit trade goods would also come under VAT.
GOVERNMENT DEPARTMENTS TO ACT AS WITHHOLDING AGENTS:
A provision has been introduced in the VAT law to declare government departments/autonomous bodies as withholding agents for deduction of VAT as far as transaction of supplies made to these departments is concerned.
Even if the "Sales Tax Special Procedure (Withholding) Rules, 2007" is being abolished under the VAT rules and regulations, a provision of 'withholding of VAT' has been introduced in the Federal Value Added Tax (VAT) Act 2010. Under section of the Federal VAT Act, "the Federal government may specify any person or class of persons as withholding agent for the purpose of deduction and deposit of tax on the purchase of goods."
Presently, the government departments are working as withholding agents under the "Sales Tax Special Procedure '(Withholding) Rules, 2007". The board had declared government departments/autonomous bodies as withholding agents for deducting 3 percent of the total 15 percent payable sales tax involved in transaction of supplies made to these departments.
The FBR has also made it mandatory for the units registered with the Large Taxpayer Units (LTUs) to deduct and withhold one percent of value of taxable supplies as sales tax from those suppliers, who do not fall within the jurisdiction of LTUs.
The government departments are required to make purchases from the registered suppliers. At the time of issuing bills, departments pay sales tax to these suppliers, but the amount was not deposited in the national kitty. To check this violation, it was decided to deduct 15 percent sales tax on supplies by withholding agents. But, 15 percent deduction had created problems in claiming input tax adjustment. Later another procedure was notified for deduction of three percent tax on supplies made to the government departments.
WHO COLLECTS GST OR VAT?
The GST is collected by the Federal Board of Revenue under the Sales Tax Act. The VAT will be collected by the Federal Board of Revenue under Federal VAT Act and Provincial VAT Acts.
VAT EXTENDED TO AJK, GB, TRIBAL AREAS:
The VAT regime would be extended to Fata, Pata, Azad Jammu and Kashmir and Gilgit Baltistan from July 01, 2010 provided that the National Assembly and provincial assemblies pass the Federal and Provincial VAT Bills.
Presently, Sales Tax Act is not applicable in Fata and Pata and extension of the VAT in tribal areas would bring manufacturing units and retail sectors located in Fata/Pata into the VAT regime. Any unit engaged in manufacturing activity or wholesaler, dealer or supplier having annual turnover of Rs 7.5 million in Fata/Pata would operate under the VAT regime.
Similarly, the FBR has to issue rules to deal with the supplies made to the Azad Kashmir for VAT enforcement. Presently, excise duty in the VAT mode is applicable on ghee and cooking oil units located in Fata/Pata. Referring to AJK laws, sources said the AJK government has adopted the entire Sales Tax Act and implemented the same in their territory.
The AJK sales tax laws, which are a copy of the Sales Tax Act, 1990, is applicable in their respective territories. The AJK is an independent territory under the AJK Interim Constitution Act, 1974 and the AJK Board of Revenue under the AJK Sales Tax (Adoption) Act, 1993, is empowered to levy sales tax on taxable supplies in the AJK territory.
In the same manner the Azad Jammu and Kashmir can also adopt the Federal VAT Act or any other arrangement could be implemented as prescribed by the Federal government. Following clearance of Federal and Provincial VAT Bills by the National Assembly and provincial assemblies, the VAT would also be enforced at the business units located in the area of Gilgit Baltistan.
The FBR has recently issued a simplified procedure for issuance of sales tax registration certificates to the importers, manufacturers and other business units of Gilgit Baltistan. The FBR has allowed authorised representatives of the applicants of Gilgit-Baltistan area to obtain new sales tax registration certificates on their behalf.
The mandatory personal appearance of the applicants for receiving certificates has been abolished by the board. Once the Federal and Provincial VAT Bills are through by the National Assembly and provincial assemblies, the VAT could be extended to the Fata through a Presidential Order and Pata through a Governor Order.
VALUE OF SUPPLY IN VAT:
For purposes of valuation, the VAT divides goods/services into two categories: 1. imports and 2. Domestic supplies. For imports, valuation rules are the same under the GST the and VAT except that under the VAT, cost of services treated under provincial VAT law as part of the imported goods will be added to the value determined under the GST. For domestic supplies, there are Actual Value Supplies and Market Value Supplies. Actual value of a supply is the consideration for the supply excluding an amount equal to the consideration multiplied by the tax fraction (tax fraction means the amount worked out according to the formula R/100+R where R is the value added tax rate).
THE VAT APPLIES MARKET VALUE IN THE FOLLOWING SITUATION:
(1) Supply between associated persons for no consideration or for a consideration lower than the open market price. (2) The associated buyer would not be entitled to a full input tax credit on his purchase. In such a situation, value of supply shall be the open market price reduced by an amount equal to the tax fraction of that price.
The GST on imports is paid along with the customs duties at the same time and in the same manner as the chargeable customs duties. The same rule applies under the VAT. For domestic supplies, a record of monthly purchases and sales is maintained under the GST and the amount of Sales Tax chargeable on the value of purchases and sales is calculated.
The amount calculated as chargeable on purchases is paid to the preceding seller in supply chain. The amount calculated as chargeable on sales is collected from the buyer next in supply chain. The amount of sales tax paid to the preceding seller is deducted from Sales Tax collected from the succeeding buyer and the differential amount is paid in a designated branch of National Bank every month along with return.
Under the VAT, sales tax return will be filed every month with Federal Board of Revenue in manual or, where so required, in an electronic format. The concept of tax adjustment has been given a broader scope under the VAT. Apart from deduction of Input Tax from Output Tax as in the GST, the VAT has introduced the concept of a series of increasing and decreasing adjustments to the amount of tax payable. An increasing adjustment increases the net amount payable. A decreasing adjustment decreases the net amount payable. The concept of increasing and decreasing adjustments has brought the provisions of VAT in line with the business practices.
GOODS/SERVICES SUBJECTED TO GST OR VAT:
The Federal VAT Act levies VAT on the import and domestic supply of all goods except a few exemptions and zero ratings. The Federal VAT Act also levies the VAT on transportation of goods and passengers through railway, sea or air. Provincial VAT Acts levy the VAT on services. All services excluding those exempted and specified in first schedule to the Provincial VAT Acts are chargeable to value-added tax.
The services exempted from the VAT include services provided by religious institutions, educational institutions, charitable institutions, certain specified financial services and the funeral/burial services. Certain supplies relating to immovable property have also been exempted from the VAT.
These include supply of vacant land, supply of land to be used for agricultural purposes, supply of hotel accommodation for continuous period of more than 45 days and the lease/hiring of residential immovable properties.
From the above-mentioned basic facts about the GST and the VAT, it becomes apparent by now that VAT is nothing new. It is already in force in the country in the form of the GST. Introduction of the VAT is just a change of name accompanied by a broader scope. The VAT is, in fact, the GST minus aberrations from the concept of value addition. The GST incorporated these aberrations in the form of numerous exemptions and zero-ratings.
The VAT is left with only a few non-avoidable exemptions and zero ratings. Not only have the aberrations been removed from the GST to change it into VAT, the mechanism of subordinate legislation through SROs which brought about many of these deviations has also been eliminated. Under the VAT, any exemptions or zero ratings can be granted only by the statute.
DIFFERENCE BETWEEN GOODS AND SERVICES:
Goods are tangible supplies (materials, commodities and articles) and services are intangible supplies. The VAT will regulate mixed supplies on the basis of their contractual character. Under the VAT, services means anything that is not goods, immovable property or money. However, actionable claims, money, stocks and securities are not included in goods.
ZERO-RATED IN EXPORTS IN VAT REGIME:
All exports of goods and services shall be zero-rated under VAT. The input tax involved therein shall be refunded expeditiously.
EXEMPTIONS UNDER VAT:
The up-front VAT exemptions are available under the First Schedule each of the Federal and provincial VAT Bills. Exemptions will generally cover basic food items, charities, public sector education and health and international commitments.
The Federal Board of Revenue (FBR) has observed that exemption of the value-added tax (VAT) would be available on certain supplies relating to immovable property, including supply of vacant land, supply of land to be used for agricultural purposes, supply of hotel accommodation for continuous period of more than 45 days, and lease/hiring of residential immovable properties.
According to the FBR, the VAT has introduced the concept of a series of increasing and decreasing adjustments to the amount of tax payable from July 1, 2010. An increasing adjustment increases the net amount payable. A decreasing adjustment decreases the net amount payable. The concept of increasing and decreasing adjustments has brought the provisions of VAT in line with the business practices.
EXEMPT GOODS ARE DIFFERENT FROM ZERO-RATED GOODS:
Exempt supplies are input-taxed and zero-rated supplies enjoy effective exemption because the input tax involved therein is creditable/refundable.
VAT IS PRONE TO TAX FRAUDS:
Every tax is prone to fraud. The VAT, however, has edge over other consumption taxes as that the VAT fraud cannot escape detection sooner or later. Proper monitoring always reduces opportunities for tax fraud. The world experience shows that the VAT induces a strong tax culture.
MEANINGS OF THE FORENSIC AUDIT IN VAT:
Forensic audit involves a specialized examination of (mostly documentary) evidence to determine the accuracy or truthfulness of any assertion for judicial or quasi-judicial determination of any fact. The VAT Rules will explain the concept of forensic audit under the VAT regime.
DISCRETIONARY POWERS OF VAT OFFICIALS:
Under Section 61 read with section 90 of the Federal VAT Bill 2010, recovery process commences only after the undercharged tax liability has been adjudged or determined through adjudication observing all the principles of natural justice. Detailed recovery rules shall be included in the VAT rules. There is no concept of physical raids under the proposed VAT system. Section 75 of the Federal VAT Bill 2010 speaks of the lawful access of the authorized VAT functionaries to records and premises only for tax matters.
VAT formula:
The amount of the GST or VAT payable is calculated according to the following formula:
AMOUNT OF TAX PAYABLE = TAX RATE X VALUE OF SUPPLY
The two ingredients of equation on the right side of equality sign are a bit different in the GST and the VAT. Value of supply in GST: Supplies for GST purposes are divisible into the following two categories in terms of valuation rules:
(1) Actual value supplies and (2) Market value supplies.
In case of Actual Value Supplies, the value is the actual amount of money excluding GST, which changes hands between seller and buyer. In the case of Market Value Supplies, the value is the amount excluding GST which would change hands between seller and buyer in a transaction in the open market. Actual Value Supplies have one standard value with some deviations around the standard. The standard value is consideration in money for the supply plus all federal duties/taxes plus all provincial duties/taxes minus GST. Deviations around this standard apply in the following situations.
(a) When the seller makes supplies on a discounted price, the discount is deducted from the standard subject to the condition that the discount is in conformity with the normal business practices.
(b) When goods are imported, the actual value is the Customs value plus Customs Duties plus Federal Excise Duties.
(c) When the value declared in an invoice is doubtful, the actual value is the value as determined by a Valuation Committee.
Market Value Supplies are valued at a consideration in money, which the goods would generally fetch in the open market. Sales Tax Act provides the following situations in which market value applies.
(a) When the consideration for a supply is in kind or is partly in kind and partly in money, the value of supply shall be the open market price of supply excluding the amount of Sales Tax chargeable thereon.
(b) When the seller and buyer are associated persons and the supply is made for no consideration or for a consideration, which is lower than the open market price, the value of supply shall be the open market price excluding Sales Tax chargeable thereon.
(c) When the supply includes a markup and its price is higher than open market price, the value of supply shall be the open market price excluding Sales Tax chargeable thereon.
