Govt decides to scrap Value Added Tax

ISLAMABAD: In an apparent retreat, the government has in principle made up its mind to scrap the Value Added Tax (VAT) and reform the existing General Sales Tax (GST) in a way that can satisfy the International Monetary Fund (IMF). However, the move may lead to halting of loan inflows.

Finance Minister Dr Abdul Hafeez Sheikh is said to have instructed his team to reform the existing sales tax system, which according to him, has contributed greatly to corruption. The decision was taken after the Centre failed to convince the provinces to accept a uniform VAT.

Special Secretary Finance Asif Bajwa said the government has decided to reform the GST but he did not confirm whether VAT has been abandoned. With that the story of VAT, which was designed to register the undocumented economy, comes to an end.

The finance minister, in his budget speech, said “we expect the proposed GST reform to be in place by October 1, 2010 in consultation with all the provinces and other stakeholders.” The minister did not even mention VAT a single time.

The government’s decision may not be welcomed by the international donor agencies including the IMF, which has extended an $11.3 billion bailout package. Pakistan under the arrangement has already received $7.7 billion since November 2008.

It may be difficult for the government to get the next tranche of $1.8 billion from the IMF. On top of that, the flow of funds worth over $1 billion from the Asian Development Bank and the World Bank may again come to a halt. This money had started arriving in 2008 after a gap of about two years when Islamabad took refuge under the IMF umbrella.

A senior official of the Federal Board of Revenue (FBR) said in case the government dropped the proposal of VAT the next step would be to amend the existing VAT bill, which has already been tabled in the National Assembly, instead of withdrawing the bill.

A top official of the finance ministry said the government has decided to press ahead with GST reforms, under which tax exemptions will be removed, adding in many countries VAT was called the GST.

“The bottom line is that you are able to secure resources and it does not make a difference whether you mobilise them through VAT or the GST,” he added.

Another senior finance ministry official said the IMF has verbally conveyed to Islamabad that the next round of talks would only be possible when there is tangible progress on VAT. Deliberations between the two sides are scheduled for August but dates may be changed after the latest development.

However, in the words of special secretary finance the IMF cannot refuse to hold negotiations with Pakistan under its prescribed rules and mandate even after the government’s failure to impose VAT from July 1.

As the government has now decided to abandon the VAT plan on the grounds that the provinces and the business community are not on board, the FBR too was against its implementation. Before flying to Doha in mid-May to negotiate the budget with the IMF, FBR Chairman Sohail Ahmad had told the government that it could collect Rs24 billion more in taxes even without VAT.

The IMF in its latest review had disclosed that the FBR was not prepared to implement VAT. “The key steps remaining include procuring information technology and supporting equipment (to manage refunds) and stepping up staff training at the FBR,” it said.

Published in the Express Tribune, June 10^th, 2010.