The two-day meeting between the federal and provincial finance secretaries concluded without any agreement on the rate as well as the inter-provincial collection of the reformed general sales tax (RGST). The Federal Board of Revenue (FBR) has been directed to address the practical aspects of these concerns and another meeting is scheduled to be held on the matter on 17th December. That the RGST has become a political issue is patently evident.
The Opposition, led by PML (N) as well as the PPP-led government's coalition members, notably the MQM, have announced their opposition to the levy of RGST in the National Assembly. This opposition, the public is being repeatedly assured, will not be expressed through a protest walk-out from the chambers, enabling the government to pass the legislation by a simple majority but would entail casting a vote against the bill. Or in other words, the passage of the bill appears unlikely.
Thus the directive to the FBR to address practical concerns associated with the bill, as highlighted by the provincial finance secretaries may well be a waste of time if opposition to the RGST in the National Assembly is sustained. What is inexplicable about this exercise, led by the federal Finance Ministry under the tutelage of the Finance Minister Hafeez Sheikh, is that it is continuing given that opposition to the RGST is strengthening with time, across-the-board.
The failure of the Finance Ministry to convince its own coalition partners that the tax would be non-inflationary, which may account for the recent statement of support by the US Ambassador Munter in Karachi, requires the government to revisit its stance and consider alternative measures. To maintain that there are no alternatives reflects a mindset that is not willing or indeed able to undertake reforms by dodging legitimate hurdles - reforms that are desperately needed in the country's corrupt, inequitable and anomalous tax system.
The Finance Ministry would do well to begin considering alternatives and accept four major limitations that it proposed in the bill submitted in the National Assembly: (i) widening the RGST by levying the tax on 700 additional items is bound to fuel inflation, to argue otherwise is simply not logical; (ii) zero-rating our five major exports would once again lead to delayed refunds that would be an impediment to productivity as such delays compromise the cash flow of running concerns; (iii) levying a sales tax in value-added mode on some inputs, while claiming that the end product would not be taxed defies logic; and (iv) ignoring the impact on inflation in other countries that levied this tax, which led many to reduce income tax in an effort to ensure that the inflationary impact was minimised. In contrast, the Finance Ministry has proposed enhancement of the income tax that is largely paid by the salaried class in this country. Or in other words, those who do pay tax would be further burdened.
In defence of the RGST, the Finance Minister has emphasised that documentation would increase and that a large part of our parallel economy would eventually be brought into the tax net. What he has ignored is the fact that the parallel economy that he wants to bring into the tax net consists of small businesses who would simply fold if a tax is imposed on them; and as Hafeez Sheikh has no policy that is designed to increase jobs in the formal economy, such an objective makes little economic sense at this time. In addition, Dr Sheikh must also consider that large business concerns that would come under the ambit of the tax would simply split up their company to ensure that they do not pay the tax.
What are the alternatives to the RGST which would satisfy the IMF and our major bilateral donor, namely the United States as well as the Pakistani public? First and foremost an income tax at the same rate as applicable on other sectors must be imposed on the income of rich landlords. By arguing that a tax on farm income is not a federal subject as per the constitution holds no water, given that the government is perfectly willing to negotiate with the provinces on the imposition of a sales tax on services, also a provincial subject. Second, the government must tax the income, inclusive of income from shares and savings accounts, earned abroad. This would not only ensure that the Finance Minister himself finally begins to pay a tax to this country but would also open the possibility of taxing the income earned abroad by our politicians, who are on self-imposed exile.
The decision of the government to take the entire parliament along, instead of passing an ordinance must be lauded. However it does reflect the government's optimism in taking its coalition partners along - an optimism that was misplaced with respect to the National Reconciliation Ordinance and which appears to be misplaced with respect to the RGST. The option now is to identify the objective, namely to increase the tax-to-GDP ratio that would satisfy our donors, and look for alternatives, of which two have already been highlighted above.