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VAT aspirations

April 21, 2019

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IF the government follows through on its interest, conveyed to the IMF, of implementing a value added tax, it will be the first strategic economic reform measure announced by the PTI government. All the other moves thus far have either been raw adjustments, or virtually dead-on-arrival schemes such as separating tax policy from the FBR, a move that has proved largely abortive. VAT is perhaps the oldest item on Pakistan’s structural reform agenda, brought into an IMF programme back in 1988. It has remained a key structural reform measure on most Fund programmes signed since then, with the latest Extended Fund Facility of 2013 being an important exception. It was meant to be the single-most important way to document the economy, by getting business enterprises to submit the input and output prices of every item they sell and pay tax only on the difference. And it was a critical component meant to replace customs duties as the main revenue earner for the government as the base of taxation shifted away from taxing international trade towards taxing domestic consumption. That move proved abortive in Pakistan, which is one of the principal reasons why the country’s tax-to-GDP ratio has lagged behind, the state has been running persistent deficits and the tax system weighs on the economy like an albatross.

If this government decides to pick up this three-decade-old agenda item and give it one more push, it would be well advised to learn a few lessons from past. The last attempt to usher in a value added tax was under the stewardship of none other than the newly minted financial adviser, Hafeez Shaikh, when he was finance minister under the PPP government from 2010 till 2013. That episode saw a spectacular collapse as the draft legislation failed to pass in parliament. Stiff opposition from traders which was capitalised upon by the PML-N led to that situation. VAT faces an uphill task because too many of the goods being sold in Pakistan cannot come into the documented economy as they are smuggled, under-invoiced, or transacted using black money. It has practically nil political support. And the tax bureaucracy itself is opposed to it. Besides, the PTI government lacks the numbers in parliament to see the legislation through. VAT is a good idea, but it has costs if it fails.

Published in Dawn, April 21st, 2019