PROPOSALS are afoot to revive a single-stage sales tax on goods in line with the Sales Tax Act 1951. Certainly, the proposals will surprise some advocates of a full scale Value Added Tax, with the popular argument that it has already been enforced in most countries.

Formula prescriptions are fraught with fallacies and are generally advanced oblivious of the dynamics of tax measures’ correlation with the country’s socioeconomic context. No doubt the European Union and some other countries have reaped rich harvest of VAT benefits: development of common markets, documentation of economies, better reporting of GDP growth, and curtailment of over-consumption.

Moreover, VAT has a tremendous revenue potential, but only in mass consumption societies. After all, it is a tax on consumption. Naturally, a consumption-starved society with more than 50pc of the population suffering from hunger and scarcity can ill afford to place VAT on the top of its economic agenda. Over-taxation of consumption in a semi-starved society is hardly a holistic approach.

In Pakistan, a VAT-model GST approach has increasingly degenerated into an oppressive tool of rampant corruption, widespread tax evasion and oppressive exploitation of masses. The reasons are many and varied. The initial stumbling block is the constitutional division of powers: sales tax on goods is a federal subject while sales tax on services and immovable property falls in the provincial domain. Inevitably, the success of VAT would depend on an integrated law that encompasses all the three subjects in one jurisdiction.

In continuous economic activities, it is hard to segregate value-addition attributable to overlapping events of purchase, sale and services. VAT on goods and services is inseparable. That is why the New Zealanders call VAT a ‘Goods and Services Tax’ (GST). On the other hand, tax authorities in Pakistan have dubbed it as the General Sales Tax (GST) to cover up the existing anomaly.

Pakistan is lagging far behind its neighbours, mainly because its legislature has run short of workable ideas and its taxation structure has been left entirely at the mercy of bureaucrats still living in the colonial age

Secondly, the design and drafting of the Sales Tax Act 1990 has degenerated into meaningless mumbo jumbo through successive amendments — rife with recurring cases of tax fraud, fake and flying invoices, bogus refunds and cascading of tax — which tend to stifle economic activity.

Thirdly, a VAT-model GST approach has failed to bring the informal sector of the economy to the surface for better GDP reporting. The tax-to-GDP ratio, too, has not improved, and is one of the worst in the world. The stagnation of economic activity is deepening the economic malaise.

VAT and its prevalent rate have direct correlation with economic development. Negative fallout of the 2pc increase in the sales tax in Japan evoked one of the most articulate and elaborate debates. On the other hand, social and economic impact of taxation is rarely analysed in Pakistan.

A wriggling out of the rut would, however, require a rational restructuring of tax measures and its rates. The proposal of the single stage sales tax and reducing its rate to single digits are steps in the right direction that may provide badly needed respite to the consumers, stimulate economic activity, and make up for the deficiency of revenue, if any, through accelerated GDP growth.

The indigenous design of the sales tax, suitable to the overall context and stage of economic development, may definitely spur economic growth, curtail corruption and curb tax evasion. Appropriate sales tax rates having correlation with value-addition may be determined for different stages of economic activity.

For instance, the rate of sales tax at import or manufacturing stage may be determined according to estimated value-addition — say 6pc. The wholesaler may pay a further 2pc, and the retailer may add 1pc. Thus, the end consumer will have to pay 9pc in all. The reduction in the rate will bring down inflation and cut the cost of production.

Both the steps will surely augment the savings of common people, providing them improved opportunities for better food, health and education. Relief will be available across the board, without discrimination, while the flawed pick-and-choose social sector programmes like the Benazir Income Support Programme will be replaced by universal fiscal relief for every citizen. This will help avoid the cost of tax collection and wastage in a politicised system of distribution to selected persons and families.

Successive governments have been adopting ambivalent policies on the documentation of the economy. While enforcement of VAT was supported for the expected improvement in documentation, the presumptive taxation of income tax did away with documentation altogether. Presumptive taxation, according to the design adopted in Pakistan, has practically transformed the income tax into the sales tax, and it has further fueled economic disparities.

Presently, indirect taxation is the name of the game, while direct taxation is negligible. Resultantly, the rich potential of taxation remains untapped while the overtaxed sections of society are over-squeezed. With the present dispensation, the prospects of improvement in the tax-to-GDP ratio and economic development are distant dreams. The scenario is increasingly offending the fundamental rights of citizens and the basic principles enshrined in the constitution.

For any meaningful restructuring of taxation, reform of the sales tax and abolition of presumptive taxation of incomes are prerequisites. Presumptive taxation is inherently unfair, and in the context of an inefficient tax administration, it is a bad recipe. Evidently, the present fiscal crisis is not accidental, but the logical outcome of tax policies adopted since the mid-eighties and particularly in the early nineties.

If, however, some breathing space is needed, research-based benchmarks for presumptive taxation should be determined, having correlation with capital, assets, taxpayers’ lifestyles, the market and technological conditions — providing taxpayers the option to rebut such presumptions with dependable accounts and documents.

The new approach will not only mitigate the injustice implicit in presumptive taxation, but also encourage documentation. Pakistan is lagging far behind its neighbours, mainly because its legislature has run short of workable ideas and its taxation structure has been left entirely at the mercy of bureaucrats still living in the colonial age.

Published in Dawn, Economic & Business, May 26th, 2014