Delay in VAT implementation


Editorial June 09, 2010

Without the slightest bit of schadenfreude we would like to say to the financial policy makers of the country: “We told you so.” The announcement by the federal Finance Minister Abdul Hafeez Shaikh on the imposition of the Value Added Tax (VAT) being postponed till October 1 is the by-product of bad planning and an inability to anticipate how long it would take to prepare for the implementation of such a drastic overhaul of the revenue collection system.

The delay will cause the government billions of rupees in the interim period, unlikely to be made up for in its entirety by the one percent increase in the general sales tax that was announced as a stop-gap measure. In fact, “plan B” has the unfortunate appearance of making the VAT look like a tax increase, when it could more accurately be described as an even redistribution of the indirect tax burden. That both the structure and the collection mechanism of the taxation system in Pakistan are in desperate need of reform has been repeated ad nauseum. But perhaps what is most disturbing is that the inability of the government to implement the tax puts in jeopardy the latest tranche of IMF loans, which the international lender had made clear it would not release until the VAT is implemented. For a government that has prioritised securing international funding to shore up its fiscal deficit, this is incredibly shoddy workmanship.

The federal government must now prioritise the implementation of the VAT. Any bureaucrats in the Federal Board of Revenue who exhibit misgivings about the tax must be asked in no uncertain terms to put them aside and work to ensure that the October 1 deadline is met. It is bad enough that the tax was delayed once. It would be unforgivably tardy to miss it a second time.

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

COMMENTS (2)

Meekal Ahmed | 11 years ago | Reply I must say I am very impressed with this Editorial. It is bold and hard-hitting. It pulls no punches and it is very well-written. While not making light of it, I think we tend to over-estimate the difficulties of transition. A lot of it is posturing and the unremitting efforts of our selfish and self-centered elite who fear they may get trapped this time and have to pay some taxes. They will make every effort to delay it and even if passed make every effort to ensure it fails. The present GST has operated in VAT mode for a long time. Of course, as is our proclivity, it has been completely corrupted with "fake and flying invoices" as the FBR calls them. Moving to the full VAT with electronic re-funds and other uses of cutting-edge technology which we do have, strengthens the hope that we can stop, or at least arrest some of the worst abuses in the present tax system. On the point about the IMF, as of July 1, the program will, technically speaking, be over. To restart it, Pakistan will need to seek a waiver. The right to seek a waiver for non-compliance has been much abused in IMF programs and we are one of the leading lights in that department. A waiver should have a convincing rationale. I don't see a very convincing rationale here. The IMF's Executive Board will not buy excuses like Sind does not like the VAT or that neither does Punjab because it hits the PML's vote-bank. Of course matters will not get that far. Staff and management have to be reasonably sure beforehand that what goes to the Executive Board has a reasonable chance of being approved. Although only a simple majority is needed to approve the program, in this case, that cannot be assured.
CanuckinKL | 11 years ago | Reply Fine for the bureaucrats - but what about PAK businesses? How to ensure they will be ready for all the changes a VAT brings? Changes to systems, to documentation, to prices, managing the changes with their customers, their suppliers, their own staff??? For businesses to be VAT ready they should have started all this planning months, if not years ago.
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