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IMF tells govt to introduce VAT

January 24, 2013

IMF.-Reuters Photo

KARACHI: The International Monetary Fund (IMF) has asked Pakistan to implement Value Added Tax (VAT) in its original form without which the fund’s future assistance or standby arrangements would not be forthcoming.

During a recent visit to Islamabad, the IMF’s technical team was reported to have conveyed this message to the high-ups of the Ministry of Finance that there could be no assistance or standby arrangement provided the long-standing condition of implementing VAT in its original form was met.

Official sources from Islamabad told Dawn that IMF team clearly told the government that without removing distortions from the economy and withdrawing exemptions from taxation system the country could not improve its tax-to-GDP ratio which presently stands the lowest in the region.

Though Pakistan has imposed General Sales Tax (GST) in VAT mode but due to exemptions and zero rating of several industries the supply chain could not be completed and this was causing huge leakage of revenue, sources said.

The Fund is also seeking inclusion of other sectors such as retail business, transport sector and agriculture under the GST because these sectors are contributing substantially towards GDP of the country.

The IMF team argued that around 140 countries are strictly following VAT mode then as to why Pakistan is failing to implement GST under its true form particularly when it was faced with acute budget deficit.

The IMF had been insisting for the removal of all sorts of subsidies including those given on energy, bringing to an end the special procedures and cancellation of a large number of concessionary SROs which are causing billions of rupees in revenue loss, they added.

Sources said that the IMF team headed by Jeffery Frank, Fund Advisor for the Middle East and Central Asia Department after concluding Post Programme Monitoring (PPM) of Stand-By Arrangement (SBA) held marathon meetings over these issues with the finance ministry officials.

The IMF had been opposing tax amnesty scheme and sources said that the issue was again raised by the visiting team and expressed their disapproval over the scheme.

The Federal Board of Revenue (FBR) in the budget 2010 presented new GST scheme which removed all sorts of exemptions and also put all zero rated sectors under the ambit of sales tax to complete the supply chain.

The GST bill after getting approval from the National Assembly Standing Committee on Finance was also passed by the Senate, but since then it has been lying before the Upper House.

The new bill also barred the FBR from issuing concessionary SROs and only the parliament is empowered to make changes in the GST rules.

The FBR sources estimated that around Rs200 billion would have been generated if the new GST scheme was implemented.