The unprecedented success of consumption-based Value Added Tax emergence in developed countries greatly influenced its adoption by other developing countries. Development of which proved difficult to implement as reported by several developing countries.
Pakistan, on the other hand, was determined to implement the initiative hoping to advance it into a major national tax revenue source, an initiative which will soon become an accepted part of the nation’s fiscal system documenting an increase of US $806 million in early 1990 to the US $2.6 billion between 2000 and 2005 from Value Added Tax collections alone. Economic study proves a strong growth and economic impact between 1991-1992 to 2011-2012. One percent of VAT revenue growth causes 0.24% of economic growth. Granger causality test result also proves a piece of factual evidence between VAT revenue growth and economic growth during the period under review.
Value Added Tax is currently implemented in over 160 countries around the world, a reported 80% of sub-Saharan African countries implement the VAT system. Its advantages are evident by the widespread adoption of VAT across the world.
What is a Value Added Tax?
Value Added Tax (VAT) is a consumption tax that is generally termed as the ‘sales tax’. This tax is applied to various products when the product goes through different stages of manufacturing or production chain. Firstly, the product is supposed to be supplied through a supply chain, then it reaches the production and then to the shops or markets for sales. The tax is applied to each stage by some percent.
For example, if a product or service costs for about 1000 PKR and the value-added tax is levied to be 15%. The buyer has to pay 1150 PKR to the merchant for that particular product or service.
The VAT is assessed on the value of products, services or goods every time there is a sale or purchase. As mentioned above, at every stage of the product, the value gets bigger. The user pays the amount of VAT along with the cost of the product. This makes the actual price of the product more expensive for consumers. The seller charges the VAT from the consumer and then pays it to the government.
It is important to consider the difference between VAT and a National Sales Tax as those two are often used interchangeably. The VAT system is an invoiced based system that involves collection at several points during the production of items, value addition, and per sale. A Sales Tax is a one-time collection tax paid only by consumers at the final point of purchase.
How is Value Added Tax Calculated?
More than 160 states in the world take the sales tax in order to become an economically strong nation. The VAT also means the end-user tax.
Value-added tax is calculated by percentage. If the government has declared VAT to be 15 percent, then the businesses are supposed to charge the VAT price and send it to the government. A consumer must pay whatever the price of the goods or products are mentioned in the shops.
Merchants take the cost of their goods or services and they subtract any material costs that were previously applied when they bought it on wholesale rate. After that, they add the VAT percentage onto their specific products to supply it to consumers.
Value Added Tax in Pakistan
The percentage applied for value-added tax in Pakistan is by 17% on the value of goods, services, and products. However, the exports of various goods from Pakistan such as rice, wheat, cotton, surgical instruments, footballs, etc are subjected to 0% tax.
The sales tax or value-added tax is levied by all four provinces of Pakistan from Sindh, Balochistan, Khyber Pakhtunkhwa, and Punjab. Moreover, the Islamabad Capital Territory, Gilgit-Baltistan, Kashmir, and Azad Jammu have several different rates of VAT on their goods and services. It ranges from 13 to 16 percent, still less than the other cities and provinces.
Furthermore, the sales tax is considered to be adjustable with other taxes that include the federal sales tax on goods and federal excise duty on goods. These adjustments are applied to various goods that are then rated with zero percent tax particularly for goods that are exported.
Goods that have VAT in Pakistan are:
- Animals and live poultry
- Plants and vegetables
- Pulses and spices
- Fruits and sugar cane
- Stationery items
- Periodicals, etc.
- Agricultural production such as cotton.
Significantly, sales tax on services, federal sales tax on goods, and federal excise duty are adjustable against each other — with an exception of some supplies. Significant zero-rated goods which consist of:
- Repair and maintenance supplies of certain ships and aircraft
- Raw materials, component supplies and goods for export processing zones
- Locally manufactured plant and machinery to export processing zones supplies and supplies of certain specified machinery to the exploration and production sector
In addition to sales tax payable at the standard rate at the import stage, all commercial goods importation attracts a 3% VAT. Local supplies made within the export-oriented sectors attract a sales tax rate of 17% which in certain cases provides a reduced rate facility.
In conclusion, taxes in Pakistan including income tax, value-added tax (VAT), and trade tax are highly important as they are a major source of tax revenues used for balancing government budgets. For the past 15 years, Value Added Tax, in particular, remains the most prominent source of tax revenue in the country and its growth of which holds a tremendous positive impact on Pakistani economic growth.