Flood tax and the RGST

One can be sympathetic to the government’s need to raise revenues but levying new taxes through a presidential ordinance strikes us as a bad idea. At best, it is a temporary and incomplete fix to one symptom of a chronic problem that needs a much bolder solution than the government seems to be willing to pursue. According to the proposal, the government would impose a flood tax on those who already pay withholding taxes, although it would also eliminate some exemptions to the current sales tax regime. Both of these moves are likely to be extremely unpopular and will yield only Rs38 billion, which is not significant in comparison to the size of the fiscal deficit.

The problem with Pakistan’s taxation system is not that the tax rates are too high or too low. It is that far too many people escape being taxed altogether, either through lobbying for exemptions or by avoiding documentation. Levying a flood tax would simply burden those who are already shouldering the entirety of the civic responsibility of paying taxes. Instead of going through a constitutional backdoor for such a small sum, we would suggest that the government grit its teeth and push for the value added tax, now referred to as the reformed general sales tax (RGST). The tax has several merits, not least of which is the fact that it is not a new tax but rather a reduction in the rate of the current GST. Changes to the tax regime will yield higher revenues by eliminating the many exemptions in the system. It also has the added advantage of levying the tax across the value chain, instead of placing the entire burden on the end user, making it an inherently fairer tax.

Admittedly, the RGST is regressive in nature, since it taxes consumption — poorer segments of society consume more of their income, thus paying a higher rate of taxes. But the current proposal for the RGST has critical exemptions for essential items, thus removing at least some of its regressive nature. Passing the RGST bill may be hard, but, in the long run, it is also the right thing to do.

Published in The Express Tribune, March 3^rd, 2011.