Delay in VAT implementation

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 10^th, 2010.