ISLAMABAD, Aug 27 Pakistan has informed the IMF that it will submit the Value-Added Tax (VAT) law to the Parliament by the end of December this year as a detailed time-bound action plan for the introduction of VAT will be prepared next month.

The International Monetary Fund has just released contents of the 'Letter of Intent' submitted by Pakistan for the augmentation of the Stand-by Arrangements and approval of the third purchase under the SBA of SDR766.7 million ($1,200.2 million).

Through the 'Letter of Intent', the government pledged that the main pillar of its medium-term fiscal strategy is the introduction of a broad-based VAT on July 1, 2010, covering all goods and services. An increase in the tax revenue-to-GDP ratio of three and a half per cent over five years remains a key pillar of the medium-term fiscal strategy.

This revenue effort, to be achieved through ambitious tax policy and administration reforms, will be essential to reduce macroeconomic vulnerability and scale-up infrastructure, security, and social spending in a sustainable manner, reveals the document. The government will begin next month a process of consultation on the VAT with the participation at the highest level of members of the federal and provincial governments, equally supported by the IMF, World Bank and the Asian Development Bank.

“To prepare for the introduction of a broad-based VAT in July 2010, we will ensure that the new expedited sales tax refund system is operational in all Large Taxpayer Units (LTUs) and Regional Taxpayer Offices (RTOs) by end-December 2009, and ready for full implementation by July 1, 2010, as part of the new VAT system,” says the document jointly signed by Finance Minister Shaukat Tarin and State Bank Governor Syed Salim Raza. By the end of September, the government will submit to Parliament legislative amendments to harmonise the sales tax, income tax, and the federal excise tax laws with a view to facilitate the work of the functionally structured tax administration.

This harmonisation will also include the elimination of the option for retailers with a turnover over Rs10 million to choose the presumptive tax regime.

To ensure fiscal discipline and the achievement of the deficit target of the general government, borrowing by the provinces will be strictly limited to the agreed level of Ways and Means advances. Most notably, the provinces will not be allowed to exceed the overdraft from the SBP beyond their agreed limits.

The federal government, in consultation with provincial governments, will introduce a binding Ways and Means ceiling of six weeks of the provincial wage bill. Moreover, agreements will be entered into by end-September 2009 between the provinces, the Ministry of Finance, and the SBP on a schedule of reduction of the overdraft stock.