Taxation: VAT - Frequently Asked Questions and Answers

VAT - Frequently Asked Questions and Answers
Thursday, June 24, 2010

Q 1. What is difference between VAT and Sales Tax?

Answer: VAT is levied on goods and services while sales tax is imposed generally on goods. Contrary to sales tax VAT has no cascading effect. 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, VAT eventually becomes a single point tax.

Q 2. What will be scope of VAT?

Answer: VAT will cover supply (including import) of both goods and services at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million will be out of VAT net.

Q 3. How VAT will be helpful in documentation of economy and improve revenue collection?

Answer: Generally, all the commercial activities involving production and distribution of goods and provision of services are brought under tax net giving tolerance for a pre-fixed registration threshold level. This results in documentation of every body in the supply chain. Those who are not registered in the chain are not in a position to claim or deduct tax paid at purchase levels. VAT promotes economic documentation with the help of its in-built invoice-based credit mechanism. Tax invoice is blood line of VAT-induced documentation. VAT has self-enforcing features and documents business transactions through tax invoicing.

Q 4.What will be impact of VAT on food prices?

Answer: In Pakistan, most of the processed packaged/branded food items are already chargeable to sales tax. Basic food items being out of VAT net, there will be no tangible price increase in food items usually sold in processed packaged/branded form. Consumer prices of the food items which are currently being charged to sales tax on retail price basis are likely to fall because VAT will be charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers.

Q 5. What is difference between goods and services?

Answer: Goods are tangible supplies (materials, commodities and articles) and services are intangible supplies. VAT will regulate mixed supplies on the basis of their contractual character. Under VAT, services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.

To See more questions and answers about VAT click here.

Labels: Pakistan Budget, Sales Tax, Taxation, Value Added Tax, VAT