GST to VAT?

The issue of Value Added Tax (VAT) is set to return to national politics after the FBR’s decision to move towards implementing a VAT regime in the country. The last time such a move was announced, in the PPP-led era in 2011, it was shelved after protests from traders and the business community. Changing the existing regime of taxing consumption has been on the IMF’s agenda for Pakistan for almost a decade. However, the question remains as to why we need to replace the existing GST regime with a VAT-based tax regime. Imposing GST across all sectors in the country itself has taken a significant amount of time. One must ask how a VAT regime would be better – for the purposes of the state, producers, sellers and consumers. The difference between the two formulas lies in where tax is charged. GST is paid by end consumers, while VAT is paid by all of those involved in a supply chain. This is what explains the reluctance of the often dozens of actors involved in a supply chain to move to a VAT regime. Such a move is likely to push prices higher for end-consumers, who will pay the surcharge for dozens of taxes collected along the chain, instead of just paying a percent tax on the final retail price.

In a time of demand compression, one must wonder whether the FBR is set to undertake another measure that will slow down demand for goods in the country. Whether there has been some internal politics involved that has sped up this decision is another question we need to ask. With the top echelons of government having indicated that they would like to create a new Pakistan Revenue Authority to replace the FBR, this could be a dove offered by the FBR to implement the government’s wishes. The FBR has indicated that surveys are being conducted of different industries under the proposed VAT plan. The claim that this is a system that allows for ‘real taxes’ to be delivered is suspect.

The point is that the government needs to directly be able to tax real income, rather than imposing multiple taxes along the chain. Already, it seems to have no control over the tax it is tasked to collect. VAT would be a forced reset of the taxation system, which might bring the tax revenue down, instead of up, and repeat a lot of labour that has already been done. For now, the VAT plan seems to be based on a gradualist approach. This might end up working where others have failed. The shift to VAT will be funded by the World Bank. The government can only hope this will not be another dead debt. In itself, the shift from GST to VAT appears to be an unnecessary way of complicating an already complicated tax system. One hopes this decision will be revisited.