The federal government has failed to convince parliamentarians that the Reformed General Sales Tax (RGST) bill, tabled in the National Assembly is in the national interest. It has been reported that the government now intends to begin a fresh round of presentations to political parties. For success this time around, it is critical to understand where the government went wrong.
Was the economic defence of the tax flawed, blame for which must be laid squarely on the Finance Minister? Or was it related to political opposition with an element of disgruntled coalition partners in the aftermath of recent speeches/actions of the government, as well as genuine concern of non-PPP parliamentarians over the impact of the tax on inflation?
Reports suggest that the economic managers of the country focused on the macro picture or in other words on the budget deficit and the balance of payment difficulties while politicians, opposed to RGST, focused on its inflationary impact. Thus the economic team was not responding to concerns of the politicians. And the political leadership of the PPP focused on deal-making with specific parties. Thus the MQM was targeted as was the PML (N). The PML (Q), according to Chaudhry Shujaat, was not consulted or given a presentation. Thus mistakes have been made by both the government's economic team as well as the political leadership.
Thus the government's strategy to date has been two-pronged led by two distinct groups. Minister of Finance Dr Hafeez Sheikh, a man with no political clout but armed with a bunch of impressive degrees from the United States, continues to spearhead the campaign to convince parliamentarians that the RGST is critical to meet the existing macroeconomic needs of the country.
Pakistan, Dr Sheikh claims, needs the second last tranche of the International Monetary Fund (less than 2 billion dollars). Failure to impose the tax, he has been painstakingly informing anyone who listens, may well compromise all other bilateral and multilateral assistance, including the 1.5 billion-dollar grant assistance, approved by the US House under the Kerry Lugar bill. Or in other words without the IMF green light, all other assistance may be withheld. As matters stand today, the bulk of the pledged assistance has still to find its way into the country's coffers a year-and-a-half after pledges were announced in the aftermath of the Friends of Democratic Pakistan (FoDP) meeting in Tokyo in April 2009; thus the threat of withholding pledged assistance is valid. In total terms the federal government may be unable to access the sum total of 4.5 billion dollars in foreign assistance if the 2010-11 budget documents are anything to go by. This is less than the 6.8 billion dollars of foreign assistance that the country received last fiscal year. In other words, the current incumbent Finance Minister has been able to generate less than Shaukat Tarin did last year but, of course, the bulk of last year's assistance was under the IMF Stand-By Arrangement (SBA) facility.
Dr Sheikh would, no doubt, argue in his own defence that the IMF programme was nearing its end when he was appointed the country's Finance Minister, with around 3.2 billion dollars remaining to be released to the country, and that the agreement to implement the RGST under the SBA was signed by Tarin, hence the blame lies with the former Finance Minister and not with him. His argument is valid only to the extent that the SBA and its associated conditions were signed during Tarin's tenure as Finance Minister.
However, Dr Sheikh's predecessor had undertaken valuable work that to all intents and purposes appears to have been shelved: (i) he had prepared a blueprint to cut down government profligacy (around 200 to 300 million dollars), (ii) he had also prepared a blueprint to restructure state-owned entities to reduce their annual 300 billion plus (3.5 billion dollars) budgetary outlay, and (iii) a blueprint to reduce corruption in government departments (currently over 500 million dollars of corruption is evident in Federal Board of Revenue alone). If these blueprints had been implemented, then together with slashing development expenditure the government could easily have been able to do without the entire 4.5 billion dollars that it expects to receive as assistance in the current year. In marked contrast, Dr Sheikh has focused all his energy on trying to sell the RGST to the politicians and is on record as having inexplicably stated that he would first impose the RGST and then begin to deal with corruption or restructuring.
Dr Sheikh accompanied Rehman Malik to convince the MQM to support the tax in parliament. And visibly failed. Recently, he also sought an audience with Nawaz Sharif in an effort to convince him that the RGST would be good for the country. His failure to convince the Sharif brothers and his statement that the PML (N) had earlier agreed to the tax and subsequently reneged on the deal may well have led to the PML (N) statement that the support would be forthcoming only if the government launches a drive to end profligacy and corruption.
Dr Sheikh's undiplomatic statement may also compromise any future support for his economic policies from the PML (N). One doubts, if the meeting between the President and Nawaz Sharif during the dinner in honour of the Chinese premier gave the opportunity to the President to convince Nawaz Sharif that the RGST is in the national interest.
The Finance Minister has stated that the RGST is necessary as it targets the undocumented sector and would raise tax-to-GDP ratio. The RGST does have the capacity to deliver on both counts theoretically. The undocumented sector that deals with the documented sector would be the first to be documented. The loophole that these newly documented companies may employ is to split the company to show a turnover threshold that would not be taxable. Tax-to-GDP ratio would rise as a consequence of the levy of the RGST because the tax would be at each stage of value addition and as value addition rises reflective of a rise in GDP so would the tax. Again in practice, this may not occur for two reasons: (i) the ongoing energy shortfall and recession in the West, major importers of Pakistani goods, has led to a reduction in demand for our exports of consumer products. The RGST may push several units of production towards bankruptcy by raising their cost of production and rendering their units economically unviable. And (ii) the sympathy element as analysed by the Ministry of Finance in a document that was quoted in Business Recorder may well lead to rising prices of even those commodities that are to be exempted from the RGST.
Politically, the government is in a fix and it really cannot blame either of its coalition partners for their refusal to endorse the Sales tax Bill 2010. The fault is clearly its own: allowing Zulfiqar Mirza, Sindh Home Minister, to launch his anti-MQM tirade at this time once again was ill-advised; and firing Maulana Swati of the JUI (F) without taking the JUI (F) leadership into confidence and thereby strengthening the hands of the hawks in that party, who were so far under strict check, was also ill-advised. The fault as Shakespeare wrote is not in the PPP stars, as they would have us believe, but in themselves.
Today as the National Assembly session commences the situation is difficult to say the least. All stakeholders have given a thumbs-down to the RGST. The only option left with the government to ensure its passage from the National Assembly would be to employ duplicitous means: be on the lookout when the PPP is in numerical strength in parliament on any particular day and compel the Speaker to invoke the constitutional clause, allowing her to take a vote on the bill that was not included in the agenda. Or it can employ the current two taxes that are in the value-added mode - sales tax and excise duty - to increase its revenue which would not require approval from parliament. Or it can do a National Reconciliation Ordinance (NRO): subsequent to presenting the bill to parliament, never ever take a vote on it. Either of these options is not shining examples of parliamentary democracy at work.
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