Jan 18 - 24, 20

While government is all set to implement comprehensive value added tax sometime before the end of this financial year, questions over its plans to bring tax exempted sectors in to the tax net and to improve tax policy and administration are echoing in the circle of taxpayers. Obviously, new experiment without removing burdensome tax exemptions and evasions creates a sense of isolation in the small taxpaying class; that according to an estimate accounts for scantly one percent of the population. In the late eighties, government tried to replace sales tax with VAT as a part of structural adjustment program to correct anomalies in the tax regime. However, it did not succeed.

Under this mode of broadening tax net, the base of sales tax is to be extended to more retailers and manufacturers, and entire zero rating industries are to be brought into GST regime.

Small-scale traders and manufacturers are opposing the idea of VAT implementation. They think this would be akin to rubbing salt on the inflation-hit wounds. Federal government levies and collects two different set of taxes: direct and indirect taxes. Direct includes income, wealth, gift taxes, estate duty, capital value tax, and corporate asset tax, Indirect comprises of customs, federal excise, sales tax import, and sales tax domestic.

It is said that value added tax would increase tax-to-GDP ratio by three to four percent. However, VAT collects even less than quarter compared to what it would collect if a uniform rate of standard GST rate is applied on all the value added of the economy, according to FBR. The present rate of sales tax is 16 percent of value of supplies, however for some items it is 18.5-21 percent. Pakistan's VAT productivity is low at 22 percent in contrast to China 39 percent, Vietnam 49 percent, Japan 48 percent, and New Zealand 72 percent, because of massive exemptions, poor administration, low outreach of GST to all services, and lack of audit and enforcement. Lack of education and documentation is the snag of implementation of VAT comprehensively to all the consumption and services with a low threshold and minimum exemption for essential items.

Why there is an inhibition to bring tax exempted sectors, derogatory known as sacred cows, in to the tax net, enquired a taxpayer. Oft-repeated statement is why stock markets witnessing transactions of billions daily and incomes from them are saved from due tax impositions. Real estate sector in its heydays could contribute huge money in taxes to the government were it taxed. Government refrained from taxing million and billion rupees property transactions to the chagrin of taxpayers. An estimate put the exemptions of agriculture and real estate sectors at around 56 percent of total tax exemption.

When keeping fiscal deficit at 4.9 percent for the current financial year as the IMF's conditionality is important for Pakistan, government needs to do something not only to improve tax to GDP ratio but also to remove irregularities in the tax collection system. Government missed the deficit target of 4.3 percent for FY09 by 0.9 percent.

When there is tax revenue shortfall, government opts for cutting public expenditures as it did in the last fiscal year. Tax-to-GDP ratio for FBR in FY09 fell to 8.8 percent. There was a massive slash for the first time in seven years in the public sector development expenditures. This was not surprising that petroleum development levy made up shortfall in FBR tax revenue in last fiscal year. Removal of the subsidies was another irksome decision by the government to bring fiscal discipline, albeit, it failed to do so. Many economic experts are unanimous on the point that slash in public expenditures can make outcomes from economic stabilization programs ineffective. No doubt, government had no immediate recourse except putting cap on public investments to reduce fiscal deficit in the wake of endogenous and exogenous economic pressures. But, for many the curb on spending on public sectors was either not a good decision especially in time when unrestrained and extensive financial stimulus was to be administered to the ailing economy.

Seemingly, government has learnt a lesson from the past as it allocated larger amount for public sector development programs in the current fiscal year-54 percent increase is planned for PSDP. A big question arises however about the ability of the government to achieve fiscal consolidation in the face of drop in tax revenue. Budget support is highly dependent on external resources, which account for 80 percent of total PSDP in FY10. Now, delays of major inflows from FoDP raise doubts about large spending on developments.

Foreign inflows have started to pour in the treasures of the government and so far swelled the foreign reserves to a safe level. Financial assistances pledged by the donors in the Friends of Democratic Pakistan meeting in Tokyo in April 2009 if materialized would be a source of meeting the rising cost of military actions and its implications on the infrastructure and people's livelihood.

Pakistan is going through a testing time to overcome recurring expenditures on war against militancy in its northern parts, gradually spreading its tentacles across the country, and rehabilitation of population affected by disturbed law and order conditions. A biggest lending program of the time in the country, IMF standby arrangement that would increase to over $11 billion or up to 0.8 percent of GDP from its sanctioned $7.6 billion, approved by the lender in October 2008, in case of unrealized FoDP's funds, is focused to plug the gap in balance of payments.

Servicing debts is itself an obstacle to fiscal discipline. The external debts of the country have already pierced on to fifty billion dollars and it has to discharge huge amounts for settling interest payments on loans and repayments of debts, which are obviously more than the principals. In near time, the debts are not likely to come down rather they would run up, according to an independent economist. Salvation lies in mobilization of internal revenues that can only be helpful in achieving sustainability in growth. IMF that has been generous in doling money to Pakistan already warned the government "not to bank on external support for too long". 'Donors and others like the IMF can lend to Pakistan for a couple of years, but beyond that the government's finances need to become self-sustaining and sustainable,' IMF Mission Chief for Pakistan told Reuters in an interview. Tax broadening is also possible through mitigating reasons of tax evasions and exemptions instead of strangulating the already inflation-stifled people and sectors.