Dec 27, 2010 - Jan 2, 20

Following the breakaway of the JUI (F) from the ruling coalition, no positive response from Nawaz Sharif to the president Zardari's appeal seeking PML (N) support in passage of Reformed General Sales Tax (RGST) by the National Assembly, and growing opposition from all directions, the government has reportedly decided to defer the RGST passage. Instead, the government would seek six to nine months extension in the standby loan agreement program of the International Monetary Fund (IMF), which is expiring on December 31 and its renewal has been linked with the passage of RGST.

According to the sources, the ruling PPP has been making frantic efforts for the past many months to woo support for this controversial piece of legislation from the parliamentarians-both from the coalition partners and the opposition benches.

Despite offering many concessions in return, no breakthrough could be made. According to them the RGST, if levied, would bring yet another wave of inflation, which would be unbearable for the masses whose lives have already been made miserable because of over 100 per cent increase in the cost of living during the last 2 years. If they support RGST they would not be able to face the public. They contended that the government could easily raise Rs70 to 80 billion intended to raise through RGST by checking and controlling the rampant corruption all-around. Surprisingly, however, these coalition partners, except the MQM, did not make any mention or demand that instead of RGST the government should levy tax on income from agriculture. Reason being simple that many amongst them also belong to the same class dominating our national and provincial assemblies.

However, the government has still not lost all hopes and therefore has not yet abandoned the idea of RGST. They are only asking for a few more months from the IMF to meet this condition. It is equally surprising-rather amazing-as to why an international agency like the IMF should insist on RGST to raise the revenues of Pakistan in order to cut its budget deficit? Why they not insist on withdrawing the very unjustified exemption to the income from agriculture? According to the experts, if this exemption is withdrawn, it would add to the revenues of Pakistan by about Rs200 billion annually at the present rate of taxation.

The proposal of RGST is being rightly criticized and resisted by the people of Pakistan. There are many cogent reasons for that besides already crippling inflation. Firstly, thanks to over vigilant media, they now know that the political leadership of the country with the exception of a few is not paying their taxes. When they do not pay taxes, how they can ask the people of Pakistan to pay more? Secondly, the feudal class earning billions from agriculture has remained outside direct tax net. Failure in taxing agriculture has been the major cause of resistance. Thirdly, the RGST was to be implemented in an environment of rising inflation, caused by surging food and fuel prices with maximum discomfort to the poor and the fixed income groups.

Fear of further inflation has unnerved the common person. Thirdly, rampant corruption in the FBR deprives the country of a large chunk of its revenues. No serious effort has been apparently made to curb or minimize corruption in this institution. Fourthly, no serious effort seems to have been made to address the issue of the bleeding public sector enterprises, which continue to get money from the budget to cover their losses and lastly the government is making no effort to control its reckless expenditure and is making no effort to tighten its own belt. What moral justification does the government have to introduce the RGST with almost 100 ministers and advisors in its fold?

There are options better than the RGST to achieve the objectives, which its authors want to achieve. Increased documentation of national economy and tax to GDP ratio are the two major stated objectives of the government for introducing this bill. The RGST blueprint, however, is apparently in clear conflict with the stated objectives. To say the least, much easier options for achieving better documentation and higher revenue yields remain off the radar screen of the policy makers. Notwithstanding opposition parties demand for plugging the corruption and inefficiency in the tax administration to generate Rs500 to 600 billion per annum as an alternate to RGST, as estimated by the former Finance Minister, Shaukat Tarin, the turnover threshold for registered RGST payers would only act against the documentation objective.

International experiences suggest that better revenue outcomes are easier to achieve when the taxpayer sees taxation as fair and equitable. This is generally done through maximum direct taxation on the basis of income earned by citizens across the sectors and segments of the economy, unlike Pakistan where direct taxation (including withholding tax) accounts for less than 35 per cent of the total revenues.

Direct taxes account only of 3.5 per cent of GDP, in a tax to GDP ratio of 9 per cent. The RGST would further reduce the contribution of direct taxes to the GDP and increase the burden and share of indirect taxes. The principle of equitable, just and fair taxation could be achieved only if incomes of more than Rs300,000 per annum earned by people in agriculture, real estate, stock markets and other walks of life are taxed like the salaried class.