IMF asks govt to expand VAT to retail level

The International Monetary Fund (IMF) has called for expanding the VAT to retail level in the next fiscal year's budget.
The IMF suggestion came as the multilateral lending agency recently gave a 15-point reforms proposal to the National Board of Revenue (NBR).
The proposal also includes the enactment of new laws on income tax and VAT (value added tax).
“A committee formed by the NBR is now scrutinising the suggestions to accommodate in the existing laws,” said a senior NBR official.
The IMF also asked to identify all tax exemptions in the income tax legislation and provide a complete inventory of exemptions in a separate section of the law.
The multilateral lending agency also said the government should make an evaluation of all income tax exemptions. The government should also evaluate costing of tax exemptions in the FY09 budget.
Asked about the new laws on income tax and VAT, the NBR official said, “We got drafts of such new laws that suggest to replace the entire existing laws.” “Its not practical… we are now working on how to accommodate the IMF suggestions in the existing laws through amendments,” he said.
Regarding amendment to the income tax act, the IMF proposals say the Income Tax Ordinance of 1984 incorporates a number of modern income tax concepts. However, over the past two decades, countless amendments, deletions and additions have completely obscured whatever coherence the original structure of the ordinance had, the IMF says.
It asked for rewriting the income tax legislation to reveal the logical structure and underlying principles of the income tax.
A well conceived, structured and drafted income tax statute should be based upon tax principles -- the traditional tax criteria of equity, neutrality and simplicity as well as the prevailing international concepts and norms of taxation, the IMF suggested.
On the VAT law, the IMF called for approval of a new VAT law to introduce a modern invoice-credit based VAT system and separate excises (supplementary duties) from the VAT.
The current VAT causes severe economic distortions and administrative complexities, and joint administration of VAT and supplementary duties obscures the revenue inefficiency of the VAT, according to the IMF.
To address these fundamental issues, the VAT Act needs to be redrafted with references to best practices in other countries, the IMF said.
The multilateral lending agency said the government should continue to reduce the number of zero-tariff commodities in the FY09 budget and incorporate all existing regulatory orders that specify exemptions from customs duties into the customs law.
The IMF also suggested formulating and adopting a strategy for extending Universal Tax Identification Numbers (UTINs) for all taxpayers with a specific timetable.
It recommended establishing a tax policy unit within the Ministry of Finance and a separate the responsibility of tax policy from tax administration by appointing a head for the unit and providing for initial staffing.
But, the NBR sources said establishing such a unit in the finance division will make the things more complicated and preferred that the unit could be formed in the Internal Resources Division (IRD).