Value-added tax proposal ill-timed’

THE government is all set to impose value-added tax (VAT) and withdraw subsidies on various items including electricity, sugar and fertiliser in the national budget for FY2011.

The country’s economic managers claim the twin measures would help reduce the gap between national income and expenses and improve the tax-to-GDP ratio for managing a sustainable economic growth.

But businessmen and agriculturists say the planned imposition of VAT and withdrawal of subsidies are ill-timed and might hurt the common man. They think that these moves might also dampen the pro-growth sentiments and decelerate the pace of economic recovery.

The problem with introducing VAT is not the concept itself but the fact that the government wants to impose it in a haste. “It was not before March that we heard about the planned imposition of VAT,” says an office-bearer of the Federation of Pakistan Chambers of Commerce and Industry. “And it was not before March 15 that FPCCI had first official contact with the Federal Board of Revenue (FBR) to learn how the VAT regime would work. Can you name any country where VAT was imposed in such a haste?” he questions angrily.

The government is introducing VAT for two basic reasons: first, one of the conditions attached to the IMF’s $10.66 billion loan to Pakistan calls for it and second, the government believes it will help in documenting the economy and growth in tax revenue.

“Our stated stance is that VAT should be deferred for at least two years for its smooth implementation with adequate preparation on the part of businesses and the government alike,” FPCCI President Mr Sultan A. Chawala told Dawn.

When asked how FPCCI would respond if the government moves ahead with its plan to launch VAT from July 1 he said “We would call our managing committee and would follow whatever the meeting decides,” and quickly added: “Businessmen cannot hurl stones or block trains to lodge a protest…but they have their own peaceful ways of protesting.”

In its budget proposals FY11, FPCCI has called for deferring VAT for two years, rejected its imposition under the current proposed format and recommended that the rate of VAT should not exceed one per cent.

But the government has already assured the IMF to ensure completion of all legal processes in time for imposition of VAT from July 1. Revenue officials have recommended VAT collection at 15 per cent though a final decision would be taken by the government. Officials of the FBR have estimated that VAT would yield additional revenue of Rs80 billion or five per cent of the tax collection target or Rs1.7 trillion for the next year but its imposition may push up prices of more than a hundred categories of items including food items, by 15 per cent.

Meanwhile, the federal government has so far not succeeded in convincing Sindh to let the centre collect VAT on services. Sindh wants to collect it for itself. In addition to imposing VAT, the government has also reportedly decided to withdraw subsidies on power tariff, sugar and fertiliser. “Withdrawal of subsidy on fertiliser and electricity tariff would make life miserable for farmers,” says Mr Ibrahim Mughal, Chairman Pakistan Agri Forum.

“We are not against withdrawal of subsidies but we want the government to ensure uninterrupted supply of water, gas and electricity and availability of farm inputs at international prices.” Mr Mughal claims that prices of agricultural inputs are far higher in Pakistan than in other regional countries including India and Bangladesh.

He, like many others, fears that imposition of VAT along with withdrawal of subsidies would create hardships for urban and rural public alike. “The stakes are common. So we are trying to set a national platform with representation from both businessmen and farmers to evolve a strategy,” he said when asked how the farming community would respond if VAT is imposed and subsidies are withdrawn from July 1.

During the last two years, gas and electricity tariff has been enhanced several times and that too amid prolonged and frequent breakdowns in supply. “This is so disturbing. This is just unacceptable,” says Mr Zubair Tufail, a former vice president of FPCCI.

He suggests that instead of imposing VAT ‘in haste’ and withdrawing subsidies at a time when inflation is high, the government should focus on improving governance, making state-run organisations profitable, coming down hard on smuggling and tackling wide-spread corruption which “continue to drain the exchequer.”

In view of fierce and wide-spread opposition to planned imposition of VAT from July 1 and the fact that timely enactment of VAT law looks doubtful, the FBR has reportedly drawn a plan B to generate adequate revenue in case VAT is not be introduced. The plan envisages continuation of 16 per cent general sales tax with some amendments and withdrawal of GST exemption from some sectors, increase in federal excise duty, imposition of special excise duty and an overall expansion in the scope of indirect taxes.

“Whereas the fate of VAT remains uncertain, there are little doubts about withdrawals of subsidies on electricity, sugar, fertiliser and some other items,” a senior FBR official told Dawn. He made no comments on whether subsidy on wheat would also be done away with as being speculated in the market. “VAT or no VAT, taxation measures in the new fiscal year would be tough mainly because the government has approved an increase of Rs105 billion in defence budget and it has to dish out Rs40 billion for a planned upward revision in salaries and pensions of government employees,” he said.

Besides, there would a cost for containing circular debts. And spending on poverty reduction, education and health sectors and investment in energy projects would increase. To top it all, the cost of external debt servicing would be higher-- mainly because of a build-up in external debts stock due to borrowings from the IMF.

“You don’t have a choice.” —Mohiuddin Aazim

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/valueadded-tax-proposal-illtimed-150