According to a Business Recorder exclusive, the blueprint of the federal budget for 2010-11 contains five tax measures. First, and foremost the introduction of a broad-based, value added tax that the present government committed to in the first Letter of Intent (LoI) it submitted to the International Monetary Fund (IMF) board, a prerequisite for the approval of the Stand-By Arrangement (SBA).
In its own words, the government, in November 2008, agreed to (in post-December 2008) "initiate a process to implement a full VAT with minimal exemptions, to be administered by the FBR." By March 2009, the government in the second LoI noted that with respect to tax reforms, "a key step will be the replacement, starting in 2010/11, of the GST with a broad-based VAT." The third LoI in August 2009 stated that in order "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 LTUs and RTOs by end December 2009, and ready for full implementation by July 1, 2010 as part of the new VAT system."
The fourth LoI, dated December 2009, pledges to "submit legislation to harmonise the existing tax laws with the VAT law by end April 2010. We will prepare the needed regulations for the full implementation of the VAT by July 1, 2010." Thus the government remains committed to implementing a broad-based VAT as a key objective and the IMF continues to uphold this objective as a structural benchmark, without which, a subsequent tranche release may be compromised. The VAT and the GST have the same effect on prices, due to the reimbursement element in the VAT. However, GST is assessed on the basis of value addition at each stage of production, while the VAT is assessed and collected on the value added to goods in each business transaction, wherein the government is paid on the gross margin of each transaction.
Thus VAT is preferred over GST and is considered neutral with respect to the number of passages that there are between the producer and the final consumer and requires extra accounting by those in the middle of the supply chain, which is balanced by the application of the same tax to each member of the production chain, regardless of its position in it and the position of its customers, thereby reducing the effort required to check and certify their status.
India favours reliance on sales tax/VAT as a key revenue source for the central government because, like Pakistan, it has low per capita income and high unemployment levels. However, at a provincial/state level, this tax is opposed as it leads to an overall reduction in revenue, as well as loss of financial autonomy. In Pakistan, this maybe further complicated by the recent consensus on the National Finance Commission (NFC) award. Thus, it is extremely unfortunate that neither the federal government nor the IMF have taken account of the NFC award's possible outcome, with respect to integration and broad-basing VAT.
The NFC award led to one province explicitly stating that henceforth it would collect GST on services, a provincial tax, a decision no doubt rooted in mistrust of the Federal Board of Revenue (FBR) collecting on its behalf. The question arises as to under what provincial and federal arrangement, with respect to collection, would the Centre integrate VAT (on goods and services)?
The remaining four sources of additional revenue for the government, as revealed in the budget blueprint 2010-11, are: (i) enhancement of excise duty on a number of services, including on insurance and banking; (ii) increase in withholding tax on imports; (iii) increase in excise duty on cigarettes. This, too, is included in the LoI of November 2008, where it is stated that "excises on tobacco will be increased in the context of the 2009/10 budget; and last but not least (iv) the introduction of capital value tax on real estate.
With the exception of the latter tax, and it is not certain that this tax would be politically implementable, the government has focused on enhancing existing taxes rather than on increasing the tax net, which is critical if the perception of a fair and equitable tax system is to spread amongst the public, leading to greater honesty in payment of taxes.
Neither of these five measures are original within Pakistan's context, as several past Pakistani governments have been debating them, or in the international context, as they are in force in several Western countries. However, by citing examples from the West - which has high income levels as well as a structured social security system that provides a certain minimum income for the unemployed that is above subsistence level - the Pakistani government maybe guilty of trying to duplicate a system that may not work, given the recent outcomes of the NFC award, as well as our high poverty levels. What is critical is that the government takes bold measures with respect to ending tax exemptions on the rich and the influential as a major revenue source of increased revenue.
Comments
Comments are closed.