By now it is obvious that revenue generation is the only way forward for the country. Bitter as it may be, the donors have made clear their demands that no further cushion would be provided in the absence of legislative agreement on VAT, in all five assemblies of Pakistan.
Keeping that in mind, resolving the row between Sindh and the Federal Government over collection of VAT on services had attained high priority on Dr Hafeez Shaikhs to do list.
Under the constitution, provinces have the right to collect taxes on services. The presidential order on distribution of revenues and grants in aid, 2010, initially awarded collection rights to FBR on behalf of the provinces for an administration charge of one percent.
When a series of meetings between the two camps failed to resolve the crisis, all eyes were set on the President himself to intervene. An amendment to the Presidential order has now allowed the province to collect tax on services on the basis of multiple criteria, when it gets implemented in the next fiscal year.
Provincial revenue agency officials are due to present the readiness of their tax collection mechanism to the Ministry of Finance and FBR. Arguably, revenues from the province will suffer, at least in the first few years of implementation, due to lack of adequate capacity.
A new debate has emerged regarding the distinction between services and goods on transactions that could fall in either bucket. For example, do restaurants provide a service when they serve dinner or is the food on the plate a good? It may be worthwhile for the authorities to iron out the wrinkles before implementation begins.
VAT, integrated or not, will only be successful, if stakeholders in the economy, the business community, politicians and consumers embrace it. At present, the developing situation is one of aggression against the new regime.
Commerce associations, from large textile manufacturers to the small traders have expressed their reservations against the comprehensive tax. Even sections of the political spectrum have spoken out against the tax. Most recently, in what appeared to be a statement to garner voter sympathy, PML-Q leader Pervaiz Elahi lashed out against VAT, claiming injustice to traders.
Citing inflation as the major threat, Pakistan Dairy Association is lobbying legislators on being exempted from the new tax. Since PDA has quoted international instances of essential food items being zero rated, their case would be stronger in front of the IMF.
For smooth operations of any country, revenue generation through taxation is vital. Business associations across the country hold the cash-starved economy responsible for the negative impact on their businesses. But, instead of embracing the tax, they are busy trying to slip out of its domain.
Pakistan is caught in a tragedy of the commons. Everyone wants to derive the benefits of a well functioning society but almost no one is willing to pay the cost of maintaining it. There is a general mistrust between the donor and the country, the center and the provinces and also of the collector amongst the citizenry.
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