Basic Principal that a VAT regime follows are

1. Uniform rate of taxation

2. A minimum threshold for registration
3. Allowing of input tax adjustment
4. All export are zero rated
5. Minimum exceptions
6. Refund payments.
7. Extension of VAT at retailer’s stage.

In context of above a study of EU has indicated

Uniform Rate of taxation

At present there are differed rate of GST in Pakistan. Generally the rates on the
import stage are higher. This step has taken perhaps to collect more taxes at
source. However this makes it difficult to calculate “VAT efficiency”. VAT
efficiency is the ratio of VAT * GDP/standard rate of VAT. This principal by itself
is not effective, instead we need to calculate VAT bioency which is Tax * GDP
Ratio/effective rate of tax. In Sales Tax act 1990 there was single rate of GST
which under went many changes and presently there is a host of different range of
taxes.
There are now 27 VAT regimes implemented with 27 VAT laws, more than 12
different standard rates ranging from 15% to 25% and more than 16 different
reduced rates from 2% to 17%, 27 registration thresholds varying from zero to
more than 100.000US$5, 27 sets of exemptions, 27 registrations rules, 27
procedures for filing, payment and audit, and 27 processes for VAT refunds and
27 kinds of organizations and computer systems not being compatible with each
others.

All the transactions are to be taxed.

In Pakistan there exists a very large informal economy. We don’t have any reliable
research data to calculate its value. However the facility of collecting value
addition by commercial importer at import stage has largely contributed towards
this inform economy. Again we don’t have checks whether all the exporters have
filed there returns. Our emphasis to check the return is only against refund claims
filed. Here is need to do away with special procedures except for steel sector
where there is a success story. Before the current special procedures, the
collection was Rs.800 Million which touched Rs. 10 Billions.

A minimum threshold for registration.

We have currently a fix turnover 50 million per annum for registration. This
threshold is too low as noted by Prof Keen. This means that any body making
 sales of 13,000 to 14,000 is liable to be registered. Lowering of the threshold will
serve no purpose.

Zero Rating Exports

We have introduced Local zero rating of 5 sector including textiles, sports goods,
leather goods, carpets and surgical goods. The local zero rating is prevalent from
France where indirect export is zero rated in order to stay away from refund.
However this has created anomaly in our taxation system. Analysis of data
indicated, that raw material such a s packing material supplied to registration
person. However people making local sale to unregistered persons. There is thus
need to review this zero rating. A proposal could be to remove the zero rating
except from yarns and grey cloths.

Allowing input tax adjustment

This is one of the greyest areas in VAT world over. The sixth schedule directive
has laid out a lots of restriction to qualify for zero rating. On one hand all the
capital goods……………… but in accordance with allowing same in 12
installments. There doest not exist any concept of input tax allowed if supplies
made to unregistered persons. There is thus need to look into this issue. We may
note that currently there is no mechanism to verify input tax adjustment where as
we deal refund of Rs.10 billions annually but have not develop any system to
check the more than 100 billions in FY 2008-09.

Refund

In developed countries the refund are processed on risk bases and paid
electronically. However we are using a standalone client end software technology
which has become redundant in IT world. We need to use the internationally
accepted e mechanism for processing of refunds.

Reviewing of exceptions;

We have complete 6th schedule containing exceptions baring essential goods,

medicine, books is needed to review. Similarly the immovable property needs to
be taxed in form of lease, contract. Etc.

Lack of IT infrastructure

FBR staggered reform in 2004 noting that we have a rudimentary IT system. The
position is no more differed today as it was then. All the IT programs are driven
by IT engineers instead of domain expert as advised by World Bank Report 2008-
09. Unless we have a integrated and dependable IT systems in place no attempt
will succeed in VAT of any taxation system on solid grounds.