The poorly-reformed GST

The manner in which the levy and collection of the GST, VAT and now reformed general sales tax (RGST) has been handled is yet another example of the dichotomy that has existed between the political class and the economic establishment. Endlessly deadlocked technical meetings give the impression that the economic establishment is trying to sort out a mess that has been created by the political class. Each meeting that has been held adds to the confusion. Cannons of taxation from the days of Adam Smith require for a tax to be simple and easy to collect. This should specially be so in situations where the tax is new, the business class and the general public perceive it to be burdensome and the collection machinery is not the best in the world. But if the drafts doing the rounds are any indication, the so-called RGST will be the most complicated tax on the statutes.

What has the political class done?  For all its failings, this class has produced two great consensuses: the 18th Amendment to the Constitution and the Seventh National Finance Commission (NFC) Award. Before the Amendment, the Constitution placed the sales and purchases of goods under federal jurisdiction. By implication, the taxes on sales and purchases of services fell in the provincial domain. However, the previous NFCs referred to taxes on sales and purchases collected by the federal government, to sales tax on services collected by the federal government in the central excise mode, and to GST on services (provincial) which was transferred to the provinces after deducting two per cent collection charges. Article 8 of the Seventh NFC now unequivocally  “recognises that sales tax on services is a Provincial subject under the Constitution of the Islamic Republic of Pakistan, and may be collected by respective Provinces, if they so desire.” Following the changes in the NFC and to put all confusion to rest, the 18th Amendment states that the federal government can levy “taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed, except sales tax on services.”

The committee to amend the Constitution was formed at the same time as the seventh NFC was agreed upon and an accord signed with the IMF. As is often the case, the economic establishment gave the understanding on VAT to the IMF without either seriously consulting the political class or based on its own self-confidence about the “national economic interest.”  It was clear from the day the GST was imposed years ago, that it would eventually have to move towards a full VAT mode. There was adequate time for preparation and awareness. While some half-hearted attempts were made to prepare the Federal Board of Revenue (FBR) itself and the businesspersons, the political class and public at large were completely ignored. Small wonder, the VAT is now history and the economic establishment had to come out with the idea of the RGST. The RGST was again conceived on the complacent notion that the provinces, lacking in the desired capacity, would let the FBR collect the general sales tax on services.

The province of Sindh, however, spoilt the party by exercising its constitutional right to collect GST on services. The more the GST is proposed to be “reformed” to appease Sindh, the more cumbersome it is becoming as a tax. Punjab, with relatively better capacity to collect, seems to have let Sindh take the lead, lest its own initiative is misunderstood as anti-federation. It is only a matter of time before all provinces reclaim the right to collect. The sooner it is understood that the VAT and federations do not cohabit happily, the better. The economic establishment must understand that constitutional rights take precedence over IMF conditionalities.

Published in The Express Tribune, October 30^th, 2010.