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Best option VAT regime

September 21, 2013

THE IMF requires Pakistan to roll out value added tax in two years under its $6.64bn loan programme. If implementing the full-fledged VAT regime is not possible because of political opposition, the government will have to consider other permanent tax policy measures to come closer to it through wholesale reductions in tax exemptions and concessions. In either case, VAT remains the first best option (for Pakistan) to raise tax revenues. Indeed, the IMF has a point. VAT isn’t important only to boost the ever dwindling tax revenues to 13pc of GDP in the next five years under the agreement with the IMF. It also remains the best option to document the economy, to bring those into the net who aren’t paying their share of taxes. Pakistan’s present tax structure is distorted, corrupt and outdated, and needs to be drastically revamped if the economy is to march forward. It helps powerful lobbies stay out of the tax net, supports cheaters, and punishes honest taxpayers. Successive governments have dithered on reforming it for fear of a political backlash. The previous coalition government had to terminate the IMF programme midway because it couldn’t muster enough support to implement GST in VAT mode in spite of renaming it Reformed General Sales Tax.

The PML-N, which had then, as the largest opposition party in the National Assembly, opposed VAT, has chosen to tax the already taxed, directly and indirectly, instead of broadening the base. It has promised the Fund to “move the existing GST regime to a full-fledged integrated VAT-style modern indirect tax system”, through policy decisions to keep down fiscal deficit to 5.8pc of GDP this financial year. Yet it doesn’t seem confident about, or willing to execute, its plan. After all, it is always a tough decision to collect taxes from those who form your core political base — traders, industry, real estate speculators, etc. It’ll be unfortunate if even a government with such a strong mandate fails to take tough decisions.