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.