Ruckus over the RGST

It is impossible to raise new taxes without minor inflationary consequences. And it is evident that the government of Pakistan needs to raise new taxes. One would therefore conclude that debate over new taxes would revolve around which taxes would minimise inflationary impact. Instead, the opposition is convinced that while the government must raise taxes, it must do so with no impact on inflation. This is nothing short of highly irresponsible populism which may win them some votes but at the unacceptable price of jeopardising the financial future of the republic.

We understand that the government has been deficient in making the case for the value added tax, including renaming it the reformed general sales tax (RGST), which fails to explain what the tax is: it replaces an older tax and reduces the rate of taxation. It raises more revenue for the government by bringing more people into the tax net and helping to document an otherwise largely undocumented economy.

There will inevitably be a slight increase in the rate of inflation. But the experience of other countries suggests that the inflationary effects of the VAT are lower than those of most other taxes. And the administration seems to be actively designing the tax to minimise its impact on the poorest segments of society. If the opposition disagrees with the specifics, they should outline their arguments. But yelling populist slogans in parliament without presenting an alternative will not do the country any good.

It is also time to debunk the myth that the RGST will be more inflationary than the MQM’s proposed alternative: the agriculture tax. Food constitutes over half of what ordinary Pakistani household spends money on. To assume that it is possible to tax agriculture without an inflationary impact on food prices (which are exempt from the RGST) is folly at best and deliberate dishonesty at worst. The country deserves better from our elected leaders.

Published in The Express Tribune, November 29^th, 2010.