ARTICLE (May 27 2010): Pakistan, a country dipped in all sort of debts (external, internal, aid, swaps, etc), a country facing vicious circle of poverty, inequitable income distribution, a country having risky environment of doing business, a country facing energy shortfall, a country having citizens frustrated over socio-economic problematic issues, and now another challenge is making its way to be fit in this system.
Consumers are to cope with already lingering inflation and are now compelled to welcome another form of inflation attached with new/proposed VAT system. The value-added tax (VAT) is a proportional tax paid on all sales and at each stage of the production process. A sudden rise in prices will be observed due to increased production cost.
What would happen at the end? Of course, the government will earn benefits and revenues at the cost of end-consumers' cut on consumption. It is true, the government has no means to generate revenue but taxes to stabilize the shaken economy. However, one must think, would this system be able to help generate revenue in true sense?
When the miserable people are forced to follow strict policies, it is equally possible that the people would be spying to evade taxation to reduce their burdens as already happens under the GST. Another reality is also obvious that cannot be refused and neglected that our economy is debt-ridden where the IMF and the World Bank are dictating us very sophistically and toning our economy according to their conditionalities.
Implementing authorities claim that the VAT associated inflation will not be more than 1% to 1.5%. To examine this statement, lets analyse the VAT's inflationary impact on those countries where it has been implemented and distressing the consumer.
In the United Kingdom, a developed country, a cut on the VAT from 17.5% to 15% was applied in December 2008 to ease the recessionary impact during financial crunch. Hence, the Consumer Price Index (CPI) was recorded at about 3% in January 2009, which was previously standing at 3.1% in December 2008, but as the government reverses the cut to 17.5% in January 2010, the UK inflation rate jumped to 3.5% in January 2010, to a 14-month high after a rise in the VAT as described by the Office of National Statistics and the Bank of England.
Similarly, one of the Southern African countries, Botswana, which is also renowned as a regional leader in economic freedom in Africa, has also experienced the same impact. The Central Statistics Office (CSO) reported that the annual CPI jumped to 7.1% in April 2010 from 6% due to the increase in the VAT rate from 10% to 12%.
As Federal Board of Revenue (FBR) has claimed that about Rs 150 billion would be collected in addition to sales tax collection. How this would happen? Let's analyse it, the GST applies on goods and some of service sector whereas the VAT will be applied on all goods and services (except some minor exemptions) throughout the production process - at each stage of production.
So what will happen? Production cost will be raised, and it might create an output gap, and upward pressure would be on tradable goods' prices. Overall consumption would decline, as the consumer's spendings are compelled to be discouraged. In addition to this, the VAT on all services sector, and usual price hike in oil and electricity would further increase the burden of end consumer.
The inflation rate as in April 2010 was risen by 13.26%, which could be risen further by the end of this fiscal year. After implementing the VAT, an addition of 1% to 1.5% to already existing inflation will be excessively high, because it would not be an addition rather a multiplicative impact. Now the FBR would be in ease to collect the additional amount of Rs 150 billion after levying tax on the pockets of already poor people of Pakistan, who have been facing the inequitable income distribution as well. Does the government think about those poverty-ridden people?
A long debate has already been held on the VAT. Assuming that everyone would have a plenty of knowledge in relation to its all dimensions - Its mechanism, implementation, calculation and compliances, now discussion should be extended. Addressing a legislative forum on the Federal Value Added Tax Bill 2010 on March 13, 2010, former FBR Chairman Abdullah Yousuf and Muslim League (N) leader Ishaq Dar have expressed serious concern over the VAT implementation.
The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has already been protesting over the VAT implementation. Experienced governmental and non-governmental professionals are demanding to the government to defer its implementation at least for one year. Response of public is also flamboyant that is not appreciating and positive.
One wonders, after all by whom it has been stressing to be implemented on urgent grounds. Even if the government has decided to implement the VAT from the start of coming fiscal year 2010-11 then it should have done groundwork through media and create awareness among the trading community about the VAT.
Once in October 2009, the FPCCI and other trade bodies revealed concurrence with the FBR-VAT team to levy the VAT at the retail stage, when it was decided to send teams of the FBR officers and other stakeholders to Thailand, India and South Africa for study of their VAT system and to share their experiences to make the development and implementation of the VAT possible enforcing from next fiscal year.
There are more than 150 traders' associations and chambers, and they are the main stakeholders whose concurrence is essential in implementing any business law, but the policy-making authorities, without taking them into confidence, have expressed their motive to implement the VAT.
To know the positives and negatives of the VAT and its impact on production and consumption, a thorough study should have been required with the consultation of all trade bodies, but a fear of losing sympathies of the IMF and its next tranche of $1.2 billion is making its implementation easier more than ever by our regulatory authorities.
No doubt we need sympathies of our donors and so the government should not be alleged in levying the VAT at this stage because the aid package offered by the IMF includes such type of structural adjustments through which they can assure the revenue generation properly. If the consultation process had have been started almost a year ago, the rigging which is observed now could be equivocated.
Concerned people have been sentient of the position that the VAT implementation can hamper the production, reduce the consumption, give sever inflationary impact and overall it undermines the growth. The protrusion of this issue would further widen the gap, therefore, to escape the situation; efforts should be made to bridge the distances between objections and implementation.
The VAT is not as much different from already existing taxation system of GST, which was converted into VAT mode in 1995-96 having characteristics of self-assessment, input tax credit facility, functional distribution and audit-based procedures, but its scope was limited to goods only. Gradually to increase the tax base, a minor share from service sector was included after the year 2000.
The FBR is highly ambitious to collect revenues up to Rs 1.63 trillion to Rs 1.65 trillion for 2010-11, which is currently standing at the target of Rs 1.38 trillion for 2009-10. Although it's a huge sum to collect yet it is not difficult with existing system if properly managed.
Keeping in view the flaws of existing system of collection like evasion from registration, documentation, and audit penalties, taxpayers' would take time to conform themselves with new system. Complications in achieving the huge target would definitely be faced. Would it not be better to continue with the existing system for the next year unless the people are made aware of new system?
It has been claimed that the VAT model from developing countries has been followed for Pakistan, but the picture presented in the VAT Act 2010 is even not similar to that of developed countries' model. A good-looking VAT Act, 2010 available on the FBR's website with cosmetic proposals need some revisions. There is only one VAT rate ie 15% and the schedules given for exempted and zero-rated supplies are not apprehended truly.
A consolidated list of zero-rated and exempted goods and services would help reducing the obstructions on the way of its implementation. Application of 15% VAT as standard rate will be a burden on taxpayers as 21% along with the inflationary impact on consumer side. The provision of 12.5% VAT rate as already proposed must be assured to win the confidence of public and trading bodies.
In United Kingdom, the VAT mechanism has been running smoothly with a standard rate of 17.5% and a reduced rate of 5%. These rates are not rigid but are subject to fluctuation in view of constrained economic conditions. The package of zero-rated goods include, food, stationary, children's clothing, drugs and medicines on prescription, domestic passenger transport, water and sewerage services, and some others whereas, domestic fuel and power, smoking cessation products, women's sanitary products, and energy saving products come under the cover of reduced rate.
However, private education, health services, postal services, finance and insurance, rent on domestic dwelling and commercial property are exempted from the VAT cover. But Pakistan's VAT Act is hanging between the models of developing and developed countries, by over toning of developed counties' features and least matching with developing countries' model.
The VAT is considered to be regressive tax where poor pay more as percentage of their income than that of rich. Countries already implementing Vat have reduced income tax on lower income class to compensate the burden of VAT on poor. Would it be possible for our government to give compensation packages to ease them? The issue is nothing but time, awareness can come through the passage of time and all apprehensions would be settled down with time. If implementing authorities are determined with this VAT ACT 2010, they must take into account the upcoming tribulations which could damage the foundation of our economy which has already been traumatising.
(The writer worked at Isaacs Accountants (a UK-based firm) as an Accountant, VAT calculation was one of my job duties. Now working in Planning Commission as Research Associate)
Source: http://www.brecorder.com/index.php?id=1061682&currPageNo=1&query=&search=&term=&supDate=
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