Back to the old tax code

The Federal Board of Revenue cannot seem to make up its mind. When it was first introduced in the mid-1990s, the value added tax (VAT) was supposed to be a way for the government to reduce the overall tax burden on the consumer while at the same time offering FBR officials a way to crack down on tax evasion. Now, it seems the government wants to reintroduce the old style of the General Sales Tax, with significantly reduced rates, for the very same reasons that it was abolished in the first place.



Most people are unaware of the fact that the tax we know as the General Sales Tax today is in reality the dreaded VAT. When the government first floated the idea of a VAT — and cited its reasons — most retail and wholesale trading lobbies were up in arms against the proposal. But since the government was being pressured by the International Monetary Fund to implement VAT, it did so, but kept the old name of GST, hoping people would not notice. Indeed, the very law that was passed was called the 1995 General Sales Tax Act. In some ways, the trick worked: the uproar went away. But in other ways, it did not: tax evaders discovered new and hitherto unknown ways to not only evade their existing tax liabilities, but also get the government to pay them refunds on the taxes they never paid.

Now it seems, after nearly two decades, the government is admitting defeat on the VAT experiment. While the headline sales tax rate is 17 per cent, the effective sales tax rate paid by a typical business has come down to an average of 3.6 per cent of total sales. This is why the government can reduce the absolute rate of the sales tax to between 5 per cent and 9 per cent (as is being proposed) and still make extra revenue.

We do not mind the idea of a failed idea being abandoned, but we must beg the question: what reason do we have to believe that the old sales tax will solve the problem? Do we truly suffer from such a poverty of creativity that we are now recycling all the worst policy ideas from the past? Surely we can do better than this.

Published in The Express Tribune, April 22^nd, 2014.

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