FBR’s reluctance to levy VAT

The Federal Board of Revenue’s (FBR) sudden announcement, weeks before the budget for the fiscal year 2011 is released, that it is opposed to the imposition of the Value Added Tax (VAT) can only be characterised as highly irresponsible.

Discussions about the VAT’s implementation have been ongoing for months between FBR officials and the federal and provincial ministries of finance.

For the FBR to now come out against its imposition, a requirement of the IMF loans, is a highly suspect act. If properly implemented, the imposition of the VAT makes the detection of tax evasion easier for the government. Since tax evasion partly owes to complicity of some officials within the FBR, one wonders if the opposition to the VAT stems from fear of losing this kind of revenue. If that is the case, then the FBR’s objections need to be dismissed as the craven attempts of a few bureaucrats to keep the gravy train running.

The arguments currently being put forward by the FBR suggest that the government will have lower revenue collection. They estimate that the government could lose as much as Rs24 billion in tax collection with the imposition of the VAT. Given the fact that the FBR routinely misses its own revenue projections and targets, this number needs to be taken with a grain of salt. There are, however, other valid reasons to oppose the imposition of the VAT. The first and foremost, of course, is the fact that the government seems grossly unprepared for such a massive re-tooling of revenue collection mechanisms. But that is, at best, an argument for the postponement, not cancellation, of the plan which is what the FBR seems to be arguing. The bottom line, however, is that this debate should have happened much earlier.

The government has known that it would have to do this since November 2008. It is too late for these dalliances. The VAT must be imposed as soon as possible.

Published in the Express Tribune, May 24th, 2010.