Prime Minister Yousuf Raza Gilani has reportedly requested Federal Finance Minister Dr Hafeez Sheikh to sort out the lingering dispute between the centre and the province over who is to collect value-added tax (VAT) on services, renamed the reformed General Sales Tax (GST) in deference to the simmering political and stakeholder sensibilities, as well as what service would be liable to pay the reformed GST and at what rate.
The foregoing indicates that the federal government continues to adhere to its commitment to the International Monetary Fund (IMF), as contained in all the letters of intent submitted by the government to the IMF Board, to levy VAT from this fiscal year. The implementation has been delayed till October 1, as stated by Hafeez Sheikh in his budget speech.
The delay is unlikely to raise concerns in the IMF for the simple reason that the Finance Minister announced a one percent increase in the levy of the existing GST - from 16 to 17 percent - which would generate adequate resources to meet any shortfall attributed to the non-implementation of VAT for the first three months of the current year. In a rather obviously politically naive manner, the Finance Minister expects the stakeholders to welcome the reform in his GST, come 1 October, when the tax would be brought down by 2 percent - from 17 to 15 percent.
What defies logic is his insistence that the VAT be imposed, as per the agreement with the IMF, in spite of the fact that the 2 percent raise in GST has been accepted by the public and may well generate more revenue than would a reformed GST. There is little doubt that the reforms in the GST would be vigorously resisted by those who operate within our large undocumented economy, as the VAT's main target is an increase in documentation.
However, economists argue that several third world countries, including Pakistan, suffering under the yoke of poor governance, both because of corrupt tax officials, as well as in their inability to formulate a tax system that is widely regarded as equitable and fair, are more likely to throttle economic activity in the thriving informal sector by bringing it into the tax net than if they would allow it to operate unfettered. Or in other words, unemployment may well rise and with it, public discontent.
In addition, Business Recorder has been tirelessly pointing out to the government that the collection of GST or VAT on services is constitutionally a provincial subject and the federal government must not try to hijack revenue from this source merely because it remains severely strapped for cash. It must, instead, must renegotiate with the IMF staff and provide alternate sources of revenue generation, which must include the ending of all exemptions on the rich and the influential. Thus, the federal government must turn its attention towards raising revenue from other sources, which after all, must be the over-arching objective of the IMF staff as well.
The dispute between Sindh and the federal government revolves around the telecommunication sector which is one of the few sectors in the economy that is fully documented, therefore it constitutes an easy-to-collect, large revenue base for the government. In addition, the federal government must be aware that the GST collected would automatically go into the divisible pool and therefore, less money in the pool would simply imply less money going out to the provinces. Thus logic and common sense, in line with the country's constitution, must dictate economic policy options, instead of blindly following an arrangement arrived at with IMF that may well be contrary to our constitutional provisions and thus, against the overall national interest.
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