The saner alternative

On April 15, the Federal Board of Revenue (FBR) disclosed that the estimated the cost of replacing the general sales tax (GST) with value-added tax (VAT) would be Rs 50bn (a fraction of current GST revenue), and in spite thereof, implementing the VAT regime would yield a 'net gain' of Rs 125bn during 2010-11. In other words, additional revenue of Rs 175bn would flow from the un-taxed retail sector.
Given the growing fiscal stress, this sounded promising even though deceptively because the preconditions were that the VAT must be levied at 15 percent at the retail level as well, while the Senate wanted the rate to be 12.5 percent. Later, the estimate of additional revenue was lowered because a question mark hanging thereon was that the bulk of the retail sales constitute sale of the hard-to-tax food items.
Recovering the VAT on the packaged/branded food items isn't a problem, but recovering it on the sale of unpacked food items certainly is. Besides, it is a sensitive issue right now; the ongoing rise in CPI (largely the handiwork of retailers and supply chain mafia that the state can't check) leaves little room for the VAT recovery at the retail level without escalating social tensions.
Street violence is already testing the law-enforces to the hilt; in the coming days politicians will fan more of it to achieve their aims after filing of petitions, challenging the constitutional changes legislated by the 18th Amendment, release of the UN report on Benazir Bhutto's assassination, ongoing power loadshedding, and leaks about malpractices in the award of huge tenders for purchase of goods and services by the state.
Besides, by July 1, will even the 6,200 or so retailers who reportedly have annual sales of Rs 7.5 million or more, get the electronic 'cash registers' (that the FBR proposes to provide free of cost) to calculate, record and print cash memos for their customers? Even if the FBR provides the cash registers, will electricity always be there to operate them and, will the ordinary Pakistanis accept the new levy submissively?
At present, the GST is printed by manufacturers/processors on packed items to eliminate the need for its calculation, and ordinary buyers don't question it either. But there will be disputes over prices of unpacked items sold on open market prices. Sensing these problems, the FBR now requires tax invoices to be issued only for 'taxable' supplies made by one registered person to another.
Section 50 of the VAT Bill 2010 requires a registered person (a retailer) to issue a receipt to an unregistered person (a citizen) only if the transaction value exceeds Rs 25,000. The FBR also expects retailers to offer discounts to attract buyers and, impliedly, will collect less VAT. Good for retailers and their customers, but will this retailer-buyer nexus and exempting the truly 'retail' sales ensure collection of Rs 175bn at the retail level?
Atop thereof are the realistic proposals to exempt VAT on basic food items. No responsible Pakistani wants the FBR to fail in collecting the amount of taxes it must collect to rationalise the skewed distribution of wealth and provide the state with resources it needs to responsibly perform its duties. But will the imposition of the VAT at the retail level with an unclear system for its collection help achieve these solemn objectives?
Time for self-deceiving number games is over; it is time to act responsibly and meaningfully. The current scenario, wherein people doubt the sincerity and competence of the administration, the saner alternative is to effectively and visibly plug the leaks in the existing tax collection system, not experimenting with systems that can't be implemented purposefully without an effective monitoring infrastructure.
Section 75 of the VAT Bill provides only for lawful access to the taxpayers' records and premises; there is no hint about clearly defined random checks of procedural compliance with the system. These measures fit societies wherein morality and social responsibility are widely practised values. We all wish it applied to us as well but, until the FBR makes it clear that it won't let any tax evader to go scot-free, that wish won't materialise.
Don't the tax frauds that we hear about frequently justify a stiff monitoring system? Or is it that the FBR knows it lacks the resources for netting wrongdoers in the huge retail network? Shouldn't the FBR also accept the genuine limitations - illiteracy, lack of cheap advisory - that most retailers have? Shouldn't the FBR publish (in provincial languages) the formats of standard retail books of accounts and guide books on maintaining them?
This technical support to the retail sector is long overdue. Then there is a huge category of tax evaders - the lot that must be made to realise that it can't get away with smart tricks. This corrective effort can succeed only in case of taxes about assessing and collecting which the FBR staffers have a fair idea, not new taxes that may be imposed virtually overnight at the vast, inaccessible retail sector.
The saner course is to closely monitor the collection, recording, and surrender of the GST and WHT - the big tax revenue contributors with potential for higher contribution. Experience gained in unearthing evasion of these taxes should assure the FBR a better chance of raising the tax-to-GDP ratio. The other plus is that these taxes are collectible from already registered medium/large taxpayers, not ones whose ability-to-pay is unknown.
All that the FBR requires is much improved vigilance, and reconciliation of sales records with recorded tax liabilities, and evidence of their timely payment to the FBR - jobs FBR staffer know and can be prodded into improving upon via stricter accountability and better rewards than those they get now. The same goes for collecting the customs tariffs, and paying export rebates and duty refunds, wherein the leaks are huge.
Other venues for increasing revenue from existing sectors are a graduated rise in taxes on salaries but on annual brackets of Rs 1.2 million and above, and capital gains on real estate and shares. The industry can't pay higher taxes, given the rapid withdrawal of subsidies on fuel and electricity. Above all (and as promised last year), it is time to tax income on agriculture now that this sector is also getting 'international' market prices for its crops.
Launching the VAT at the retail level at present is a mirage; the FBR doesn't have a credible database of retailers nor can most retailers quickly learn to comply with the IT-based systems and procedures. This project can be launched meaningfully only with a two-year preparatory effort, of which the retail sector must be an integral part to assure a workable understanding of what is expected of the retailers.