Pakistan

Imposition of VAT

Editorial May 06, 2010

Imposition of VAT

The federal government seems to have realised that implementing the value added tax (VAT) will take more than simply declaring it the law of the land. The five-member committee constituted this week has to create an effective mechanism for the collection of the VAT, focusing on the retail sector. But why did the government take so long to realise that it needs to re-tool its revenuecollecting institutions, in order to implement perhaps one of the most fundamental re-designs of the taxation system in the country? Surely, this should have been detected at a much earlier stage.

The imposition of the VAT has sparked protest from the usual tax-avoiding crowd, though some of it is legitimate. The tax is regressive, with the effective rate being highest for the poorest segments of society. Yet it is the least distortionary amongst the revenue generating tools at the disposal of the government as it is the least likely to create perverse incentives in the economy. It is also, however, difficult to enforce in our relatively undocumented economy.

The government hopes that the imposition of this tax, which measures the amount of value added at each stage of production before levying a tax on it, will help in documenting the economy and assist the FBR with the collection of other forms of taxation. But a clear strategy needs to be put in place. It is disturbing to note that the government has not yet done so. Given the radical nature of the change being brought about, an initially turbulent period of transition was expected, but the complete lack of preparation is unacceptable. If the government is to achieve its target of higher revenue collections, then it must get its act together and do so fast.

COMMENTS (2)

muhammed ashraf gandhi | 14 years ago | Reply imposition of vat would ruin the economy which is already athe lowest ebb.in a country where there is undocumented economy to the tune of 62% vat would further promote undocumented economy and also undue refunds on account of fudge and paper exports. the previous govt. has suffered because of it. we must first move towords removing the trust deficit before implementing the same. vat if atall has to be enforced should be levied on all irrespective of the volume of trade. however in the present shape it would be suicidal

Nadir El Edroos | 14 years ago | Reply VAT's have always been very controversial. Indeed some have proposed it as a magic pill for America's massive public debt. Either way the infrastructure required to implement it, to document the economy, make estimates on value addition is a mammoth task. It may be implemented on the 1st of July but it will be a few years before the desired revenue targets are achieved. I remember reading somewhere something like Rs. 800 billion generated. The government which has dilly dallied on this issue should not present this as some magical economic perscription, and neither should it count on it to make massive improvements in revenue generation. On the 5th of June if the budget document points to VAT as a major source of revenue, most economists are going to view such predications sceptically. It will be a repeat of last years massive PSDP allocation that never saw the light of day. The figures were printed on paper, but the money never appeared.

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