Defective scheme

While the government's recently announced decision to implement an integrated VAT regime has generated a heated controversy between the Centre and Sindh, a BR report points to problems of a different kind. According to the report, the Federal Board of Revenue (FBR) is to find it extremely difficult to collect the tax in the absence of an effective monitoring system.
As per a new proposal, the threshold turnover for registration with the tax department is to be enhanced from Rs 5 million to Rs 7.5 million. But there are no rules and procedures in place to determine the actual turnover. A particularly troublesome issue pertains to smuggled items being sold at big and small outlets, without legal import permits and invoices that would make it almost impossible for the tax department to determine the real annual profits of retailers. Under reporting of sales is, and will, remain widespread.
Not surprisingly, as our story notes, during 2009-10, only 857 retailers filed their quarterly sales tax returns. Out of these, just 307 units deposited sales tax of Rs 90.86 million, along with sales tax returns. Wholesale dealers are almost out of the tax net. It is more than obvious that too many retailers and wholesale dealers have taken advantage of the laxity in the registration law, which allows them to escape the reporting system.
It is common knowledge that in many instances nondescript retail, as well as wholesale outlets, earn as much, if not more, incomes than some of the upscale stores. Yet taking advantage of the loopholes in the law, especially the turnover ceiling, they get away without paying any tax. All they need to do, to evade their responsibility, is to grease the palms of tax department inspectors. As long as such loopholes remain, no plan to raise the tax-to-GDP ratio can succeed.
The government must first ensure proper documentation of the system. Instead of leaving it to retailers/wholesale dealers and conniving taxmen to determine the turnover, registration must be made mandatory for all. Help for market-wise registration of businesses can be sought from various traders' and manufacturers' bodies who maintain membership lists for the purpose of electing their respective office bearers. Once they are duly registered, ways must be found to ensure they also follow proper record-keeping practices. No one should be allowed to hide behind the excuse of lack of education.
Anyone who buys and sells products, commodities, and services is competent enough and does maintain records of the same. As long as comprehensive documentation is not done and loopholes remain in the system, people will take advantage of them, bringing to naught government's hopes of increasing revenue.