Increase in tax-to-GDP ratio through VAT: lawmakers assure FBR of all-out support

Parliamentarians have assured the Federal Board of Revenue all-out support to increase the tax-to-GDP ratio by bringing the undocumented economy into the tax net through implementation of Value Added Tax by July 1, 2010. Senate Standing Committee on Finance met with Senator Ahmed Ali in the chair on Wednesday was of the view that Parliament should support the new system designed to increase the revenue collection.
The official of the FBR informed the Committee that 50 to 60 percent economy in the country was undocumented and revenue could be doubled by bringing it into the tax net. The Chairman of the Committee and other Senators have agreed that the government has to start from somewhere to increase the tax to GDP to become fewer dependants on international donors.
Senator Haroon Akhtar said the FBR has learnt a lot from the experience of sale tax and would not have problems in implementation of the new system. He said there is strong feeling in the committee for increase in tax-to-GDP ration and against the exemptions to various sectors. He said Parliamentarians would support every steps leading to the documentation of the economy.
The chairman also requested the representatives of the chambers not to reject the legislation outrightly rather they should engage in deliberations with the FBR over their concerns on the law. The meeting was informed that fundamental difference between the VAT and sale tax is removal of exemptions. The sale tax could not be improved because of exemption while there would be no exemption in the VAT.
The representatives of Sarhad Chamber of Commerce pointed out that the time of consultation is too short as it should be for two years from now on, arguing that Singapore took two years to complete the consultation process and India has postponed the introduction of VAT system for one year just to complete the consultation process as every country has its own economic structure and tax culture.
They highlighted the bitter fact that so far FBR's top officials have not gone to NWFP to hold the consultations on the issue. So it would be wise to extend the enforcement date of VAT and first take on board all the stakeholders in consultation processes. They were uncertain about the status of the tax relief package of sales tax announced for the war-affected areas under the new VAT regime.
Ms Sughra Imam, a senator with feudal background also advocated the VAT implementation and no tax exemption to any sector even the agriculture sector. However, she said the devil lives in the details when it comes to the implementation of VAT across the country. It may not be out of place to mention the starling fact that the agriculture sector which is 21 percent of the GDP currently contributing nothing towards the tax-to-GDP ratio that stands right now at 8.8 percent.
Ms Imam, however, argued that GST was basically imposed with the intention to increase the tax base and document the undocumented economy, but the GST system has failed to deliver.
So how is it possible to assume the future system will help the tax administration achieve the goals of documenting the 50 percent underground economy as the incumbent system has failed to this effect. However, she said whether VAT will be inflationary or not. The FBR people responded that it will be inflationary to some extent when it will be applied to the exempted sectors.