The government has replaced Finance Secretary Salman Siddique with Waqar Masud giving rise to various speculations as to its rationale.
These range from the need to find a scapegoat for the failure to convince the stakeholders that the Reformed General Sales Tax (RGST) is in the country's interests to extolling past performance of Masud in the Finance Ministry, especially in the context of his saying 'no' to government profligacy, to the perception that the Principal Secretary to the Prime Minister would be replaced by Salman Siddique (a coup she has survived again) while the new Finance Secretary would be the Special Secretary Finance Wajid Rana.
Reports emanating from the Finance Ministry indicate that the Finance Minister Hafeez Sheikh will go back to those political parties opposed to the levy of RGST, within and outside the coalition, and seek to successfully persuade them. The efficacy of the tax in theoretical terms, according to Dr Sheikh's reported statements, would be manifest through a marked increase in documentation which would compel those productive units currently outside the tax net into the net, and thereby increase the abysmally low tax to Gross Domestic Product (GDP) ratio in the country.
True that while the economy is experiencing a downswing, due to not only the continuing domestic energy shortage but also due to the ongoing international recession that has reduced demand for our exports, such a tax may not raise revenue in its first year of implementation. Additionally the birth pangs associated with its collection may also reduce total tax collections in the first few years of its implementation.
Stakeholders are agreed that the government has been unable to effectively sell the RGST idea due to its failure to respond to their genuine concerns. The tax would encompass around 700 additional items, in addition to the items currently under the sales tax ambit, which may exacerbate inflationary pressures.
In addition there is a concern, highlighted by a paper leaked by the Finance Ministry, that several items that are to be exempt from the RGST would also witness a price rise due to what is known as 'sympathy' price rise. If malfeasance in FBR is not checked first, and the Finance Minister is on record as having stated that he would deal with corruption subsequent to the implementation of RGST, then leakage from the RGST would be considerable. And last but not least the Finance Ministry never launched any effective and meaningful campaign that would deal with all these concerns - a campaign that was launched by all other countries that opted to impose this tax and for over three to four years.
The Finance Minister in his numerous presentations to political parties has time and again highlighted the theoretical advantages associated with the implementation of RGST, but has met with no success. RGST has become synonymous with two of the government's flawed policies. First, the government's refusal to tackle the expenditure side of the budget in an effort to reduce the pressure on revenue side of the balance sheet.
It has, like its predecessors, announced a massive slash (50 percent) of its development budget in an effort to reduce total expenditure - a slash that would negatively impact on jobs and output not to mention failure to deliver to the poor. A need for current expenditure other than pay like freeze at last year's levels represents a cut, says the Finance Ministry. Opponents of RGST feel this is not enough and more fat needs to be shed in terms of perks and privileges of those in power.
In addition, no effort has been made nearly three years down the line to restructure badly managed state-owned entities (SOEs) which require budgetary allocation in excess of 300 billion rupees per annum. The President has indicated in a letter to Nawaz Sharif that the process would be completed within 4 to 6 months; however, skepticism on this time line remains especially given the growing perception that the incumbent government is directly responsible for compounding losses of SOEs through not only appointing its loyalists to head these entities, without relevant experience or qualification, but also using them as employment exchanges for their grassroot supporters.
Secondly and equally importantly, the federal government's tax structure remains inequitable, besides the collection is estimated to be lower by 67 percent than the potential on account of flawed tax management. The question is whether Salman Siddique, as Chairman of the FBR, can plug this leakage, an objective that Sohail Ahmed simply failed to achieve. Even with the best of intentions the task is profoundly formidable and unlikely to succeed until and unless there is political ownership of the process.
There was considerable resistance from Sindh to allow FBR to collect sales tax on services (a provincial subject constitutionally), however the issue was resolved with the province agreeing to allow the federal government to collect the tax on its behalf for one year with the Centre agreeing to release the amount so collected directly to the province without sending it to the consolidated fund.
Thus the issue of integrated sales tax on services has been reportedly resolved. However, the government may well maintain that RGST is its solution to reform the tax system of the country. And in this context it has made efforts, and is expected to continue to make efforts, to convince the country's politicians to vote in favour of RGST if and when it is tabled for passage in the National Assembly. As matters stand today the PPP does not have the numbers to pass the bill in the Assembly; however a look at existing taxes may resolve this issue for the government without resorting to tabling the Sales Tax Bill 2010 for a vote.
It is fairly evident that the sales tax currently in effect is in the value-added mode though it is not at a uniform rate or encompasses all non-food items not consumed by the poor. It is equally evident that excise duty is also in the value-added mode and is not uniform, though its slabs have been considerably reduced over time.
Those political parties, including provincial governments, opposed to the VAT or the renamed RGST must acknowledge one fact: that the Value Added Tax (VAT) is already being implemented and that the government does not require approval from parliament to use the two existing taxes in VAT mode - sales tax and excise duty - to circumvent the parliament if the RGST is voted down. Needless to add, excise duty is not part of the divisible pool in which case the provinces would actually lose in terms of revenue.
The government's insistence on RGST in the face of concerted political resistance therefore is as inexplicable as opposition by some political parties that are part of a provincial government. If the International Monetary Fund is the entity that is compelling the government to get RGST passed from parliament to meet its criteria of widespread stakeholder ownership then there is a need for the government to challenge this condition and offer doable alternatives in the short-term.
It has been reported as aforementioned that the Finance Minister would approach political parties yet again and focus on the cost of failure to implement RGST. Few are convinced that he would succeed this time around. Such a focus is however unfathomable given that the federal government has the wherewithal to generate more than 4.5 billion dollars - or the sum total of external assistance envisaged in the current year's budget - in the six months left in this fiscal year if it slashes current expenditure, does not extend bailout packages for badly run SOEs, brings the rich landlords into the tax net and begins a massive campaign to plug leakages from the FBR. Some action is required under these proposals otherwise it is doubtful if Dr Sheikh together with the newly appointed Waqar Masud succeed in selling the idea of RGST.