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March 9, 2015

Tax Reforms Commission: rhetoric and reality


March 9, 2015

In 2008, an international conference on value-added tax (VAT) was held in Lahore and Islamabad. Ihtisham Ahmad and Micheal Kean, then affiliated with IMF, declared the existing tax model in Pakistan ‘moth-eaten’ and needs to be fixed. One such area, they pointed out, was to align general sales tax (GST) with international model. Once this is fixed, income tax will automatically be stream-lined.
Now Prime Minister Nawaz Sharif has set up a Tax Reform Commission (TRC). In a meeting of with stake-holders, Ashfaq Tola, a leading member of TRC caught by surprise to the participants. Deliberations apart, he said, the decision has already been made by the competent authority to implement single stage sales tax (SSST) in order to simplify it. Different areas were enlisted in a power point presentation that warranted the rolling back of GST in VAT mode.
Included among them are also the proposals of multiple rates of taxes, local zero rating, higher threshold level for registration, distortion in law, and different special procedures in law, etc. Abolishing the existing system with no input tax adjustment has also been suggested. This reminds me of a collector who had suggested to Riaz Malik, the then Chairman of CBR, that VAT can work efficiently if we stop giving Input tax credit. The chairman thought it was a joke but found the collector was serious. The dilemma is that people who have been assigned to reform GST have no clue about how does it operate in VAT mode. Simply put, it means to tax only the value addition that takes place at each stage of transactions. In this way everybody’s income doing business is recorded and subsequently their actual income can be taxed.
There doesn’t exist any gospel of VAT. The closest standards of VAT are mentioned in fourth and fifth directives of European Union which enable every country to make certain changes in accordance with their trade practices. If we look into the concerns pronounced in the presentation made

by Ashfaq Tola, these “grey areas” have paradoxically been retained in his thesis on SSST. It allows, for instance, multiple rates at different commodities but has also permitted exempting certain sectors/services.
When confronted about the contradictions in the data being used to multiple increase in revenue from SSST, Tola was left with no option but to confess that the data he banked on was faulty. These “experts “should have done their spadework to check the veracity of data before making a case to roll back the GST in VAT mode. This data promised generation of 14.3 % revenue from electricity instead of existing 2.5% conveniently ignoring that government can’t afford such an unpopular decision as it will result in an unprecedented power-tariff hike.
As for as lowering the threshold for sales tax registration is concerned, the study has again not looked into the best international practices which auger for higher threshold. In this context it is pointed out that even the threshold of 2.5 Million simply failed to make any compliance. The threshold generally is linked with purchasing power and growth in economy. Higher/stronger these indicators, the higher are generally the threshold. Funny thing about power point presentation is that one can present data that suits his case. This is evident from the fact that expert have shown in their thesis that SSST is in vogue in India. However, as a matter of fact, VAT has only recently been adopted in India. It was restricted to a few states earlier.
With regards to the proposal of SSST, it is relevant to point out that FBR had undertaken very ambitious reform program under TARP, a $100 million project of the World Bank. This phenomenal amount was spent, as usual, on creating more posts, unprecedented promotions and renovations. Nothing was done to reform the business processes. It had been more appropriate for TRC to study the existing processes in light of Shahid Hussain Task Force Reports and made suggestion to facilitate the tax payers.
If TRC’s recommendations for SSST are implemented in present shape, they are bound to create mess for the business community. This is because SSST calls for taxing each stage of transaction or different yet distinct manufacturing process without allowing input tax credit. However, the fact remains that that there are quite a few finished goods that become raw material for other goods. For instance, tyres though finished product, they are in-put goods for automobile sector. Consequently cost of finished goods will increase many folds.
The existing system of sales tax in VAT mode has been in place since 1996 and gradually was in synch with IT technology. However when IR was created in 2009 and sales tax replaced with other domestic taxes, the workforce handling it for the last two decades was delinked from GST. New workforce was not trained enough to handle it professionally at transitional stage. It is not the fault of GST in VAT mode if it did not behave well due to shifting of sales tax to income tax department without looking into pros and cons. TRC should have examined the existing tax-model in order to fix its nuts and bolt instead of reinventing wheel of change
The writer is retired Director General of Automation FBR. He can be reached at [email protected] He tweets @Chafqat

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