Sales Tax on Services and Value Added Tax

General Sales Tax: sailing ahead but…(2013). Federal Bureau of Revenue & International Growth Centre.

The authors shed light on the fastest growing stream of tax revenue in Pakistan. The need for globalization and accompanying trade liberalization policies has resulted in a stop in custom duties. Over the last five years revenues from customs have declined by 7.2 percent per year on an average. Therefore, the government will have to straighten out the sales tax regime to plug the growing federal collection gap. Sales tax is the single most important source of government revenue and deserves more attention from the senior management of the FBR. Currently the sales tax has a huge contribution to the treasury but it can grow even larger. The paper highlights that while some companies are taxed negatively the others are taxed highly. Only the top 1000 companies pay 97.4{5fae829be7f2ac2fe240ef3893666b371329fe804754bc76382cc5045395a053} of all sales tax and federal duty. The paper proposes conducting randomized audits. The paper also sheds light on the lack of communications between authorities in possession of data affecting sales tax, which is the most efficient of all taxes. This lack of communication springs from the tendency of the government of not asking for any information when a taxpayer is making a payment and the disconnect between the federal government’s database for the sales tax and income tax.

Burki, S. J. et al. (2013).The Economics of Tobacco and Tobacco Taxation in Pakistan.
http://tobacconomics.org/wp-content/uploads/2014/05/PakistanReport_May2014.pdf

This paper analyzes the changes brought about by the 2013 tax structure, which resulted in a two- tiered cigarette tax structure. A tax of either 880 or 2335 Rupees per 1000 sticks was levied depending on whether retail price (price before the addition of value added tax) was less than or greater than Rs2286 per 1000 sticks. The system replaced an even more complicated structure that imposed a specific excise tax on low-priced cigarettes, an ad valorem excise tax on high priced brands, and a combination of specific and ad valorem taxes on mid-priced brands. Tax on cigarette in Pakistan is below the level in countries that have taken a comprehensive approach to reducing tobacco use, where taxes account for 70{5fae829be7f2ac2fe240ef3893666b371329fe804754bc76382cc5045395a053} or more. Other factors for the low pricing of cigarettes are also identified. Existing evidence as well as new estimates produced for this report reiterate the finding that falling cigarette prices lead to increases in smoking, while rising prices reduce smoking, all else constant. The report goes on to model the impact of changes in the existing tax structure and rates. The authors end the report with several recommendations.

Arslan, S., Ahmed, V. and Donoghue, C.O. (2012). Policy Brief: Stimulating the Impact of Indirect Tax Reforms in Pakistan.
The authors suggest that in Pakistan, the scope of direct (income) taxes is not attractive. The government’s needs are met by indirect taxes. Tariffs, excise duties and surcharges are gradually being phased out due to their distortionary impacts. The GST in VAT mode contributes the most to the national exchequer. Researchers aimed to analyze the impact of possible reforms in indirect taxes on household welfare and national economy in Pakistan. Using a Computable General Equilibrium model of the national economy and micro data from the country’s Household Survey Budget (2001-2002 prices) four main simulations were conducted. In the first simulation, GST rate was increased by 33 percent, in the second simulation, a 10 percent GST was added on presently zero rated goods, in the third simulation, GST rate was increased by 33 percent while bringing services into the tax net and in the fourth simulation GST rate was increased by 33 percent while bringing services into the tax net and levying a 5 percent flat tax on agricultural incomes. The research suggests a differential GST rate, removal of the zero-rated facility, tax exemption on public services and establishing a basic income threshold to bring agricultural tax progressively in the system.

Ahmad, E. & Best, M. (2012). Financing Social Policy in the Presence of Informality. 
http://www.lse.ac.uk/asiaResearchCentre/_files/ARCWP54-AhmadBest.pdf

This paper attempts to provide a framework for the analysis of tax and benefit policy in countries with significant informality. The authors examine how various forms of taxation affect incentives for informality of workers and firms and how these feed into the overall labor productivity, efficiency and output of the economy. The authors suggest that payroll taxes give rise to particularly unfavorable incentives for formality and they depress incentives for participation in the modern sector labor force and reduce labor productivity and output. They also find that a uniform VAT preserves production efficiency, though it provides incentives to under report sales and incentives to under report sales depends on both the corporate income tax rate and the VAT rate and on their interaction. However, a properly designed VAT helps tighten administration. The balance across taxes depends on country circumstances and revenue needs, raising the VAT indefinitely will not be a sensible approach in the presence of informality. The authors propose inclusion of income taxation and labor informality in the context of a developing country with an informal labor market. In developing countries the existence of complex eligibility criteria makes it possible for rent seeking to arise by officials who can manipulate eligibility scores in order to extract rents from recipients. They propose information sharing by the various tax departments and optimally capturing and using the information from tax returns.

Ahmad, E. (2010). Why is it so difficult to implement a GST in Pakistan? 
http://eprints.lse.ac.uk/36379/1/Why_is_it_so_difficult_to_implement_a_GST_in_Pakistan.pdf

The author points out that Pakistan has received more advice on tax reforms from academics and international agencies than most developing countries. An IMF technical assistance mission broached the issue of VAT in 1970s. In 1980s the analytics were further refined with the GST featuring as the main innovation to address efficiency and incentive effects while also addressing distributional concerns. This should have been supplemented by a strengthened income tax with a reformed land tax assigned to the local levels of government. Despite the reforms in the last decade, at the end of it, the tax to GDP ratio was under 9 percent. The author analyzes the policy prescriptions and explains reasons for the outcomes of these policies. The author also discusses the role of special incentive groups- in particular for a rent seeking bureaucracy as well as the role of informality and the constraints faced within the context of a weakened center and resurgent provinces keen to score points in maximizing access to resources.

2010. The VAT on Services. Institute of Public Policy, Beaconhouse National University.
The contribution of services to excise duty and GST revenues combined in 2007-08 was only about 14 percent. The remainder 86 percent was from goods (Khan, 2008). Hence, significant potential still exists for revenue generation from services. The study attempts to size the potential tax base for the VAT on services. It reveals that additional net revenues from replacement of GST and an expansion of VAT to services not covered under the GST regime could yield an additional Rs. 82 billion, in 2010-11, equivalent of 0.5 percent of the GDP. VAT on services could eventually generate 1.5 percent of the GDP and a five-percentage point increase in compliance rate implies additional revenue of about Rs. 9 billion for the government. The annual household expenditure on consumption of services is Rs. 2177.7 billion in 2007-08 (view table 3.2 for consumption expenditure on services). The provincial shares in this are as follows: 60.4 percent in Punjab; 23.7 percent in Sindh; 13.0 percent in Khyber-Pakhtunkhwa; and 2.8 percent in Balochistan. The share of Punjab is slightly higher than its share in population, while the share of Balochistan is lower than its population share. The consumption shares of Sindh and Khyber-Pakhtunkhwa are very close to their population share. The study reveals that there is a high premium on improving tax compliance. A five-percentage point increase in compliance rate implies additional revenue of about Rs. 9 billion for the government.

The general perception of VAT is that it will disproportionately burden the lower income groups who are already under stress given the high level of inflation over the last two years. The deliberations of the Revenue Advisory Council (RAC) have clearly highlighted that bulk of the additional revenue generation is expected from the expansion of the VAT to the service sector. The incidence of VAT on services is likely to be mildly progressive according to the study. To the extent that bulk of the incremental burden of VAT is due to the extension to the services sectors, the additional incidence of the tax is not likely to be regressive. This observation is further strengthened by the design of the VAT on goods proposed by the RAC, whereby basic food items remain exempt.

Ahmed, S. Abbas, A. & Ahmed, V. (2007). Taxation Reforms: A CGE- micro simulation analysis for Pakistan.
http://www.pep-net.org/sites/pep-net.org/files/typo3doc/pdf/files_events/ahmed-pa.pdf

In this paper authors provide an assessment of the taxation reforms being considered in Pakistan to tackle the existing weaknesses namely the narrow tax base of the country and the rate structure of different taxes. The study also analyzes the revolution of the tax structure in Pakistan. The authors analyze the general equilibrium effects of existing taxes by removing them one at a time from the system and study the micro- macro impact of 4 policy experiments: non-uniform VAT, changing direct-indirect tax mix in favor of VAT and ensuring revenue neutrality, doubling of existing VAT rate and introduction of a 7 percent agricultural income tax. The authors decompose the personal income tax system in order to obtain the contribution of rate, allowances, deductions, exemptions and credits towards progressivity. Results from the study show that non-uniform VAT deteriorates investment, distorts consumption, and increases wage inequality. Doubling of VAT rates showed similar results in the study except a greater decline in investment. The results of the study show that a flat agricultural income tax results in a decline in consumption level of farmers, rural workers and urban poor. The study stresses on the need to look at both the macroeconomic considerations i.e. level and composition of tax revenue and the macroeconomic aspect of design.