Talking business
The hearings before the standing committee on finance have turned the serious question of tax reform into a joke.
The hearings before the National Assembly’s standing committee on finance have successfully turned the serious question of tax reform, upon which our long term survival depends, into a joke. The hearings that began in the middle of the week kept getting snagged on personal level unpleasantness between members of the committee, to the bemusement of the attending industry representatives.
Of all the industry reps gathered by the committee, only one spoke in support of the reform bill. That was the Pakistan Business Council, not really a trade association but more of a think-tank. Their president told the committee that the tax is a good idea and that it will help in documentation of the economy.
But industry concerns about the refund mechanism are valid, and as a result maybe the tax can start off at a nominal rate of 2.5 per cent and be gradually raised to 15 per cent over a number of years. I wonder what the government’s technical advisers would say about the complications that would arise from having so many different rates for different sectors.
But almost all other industry groups opposed the measure. And almost all of them opposed it on the same grounds: past experience with the refund mechanism has been far from satisfactory. Many industry reps say they are still waiting on refund claims filed as far back in 2005.
The howls of protest they all brought with them must have egged on those members of the committee who are gleefully opting out of supporting the bill.
But here’s the rub: everybody agrees that we have to raise our tax-to-gross domestic product (GDP) ratio. The value added tax (VAT), or reformed general sales tax (RGST) as they are calling it these days, promises to do this faster and more comprehensively than any other tax.
Yes, a consumption tax has far more revenue potential than a tax on agriculture incomes.
So if we all agree that the ratio should be improved then we must all agree that the consumption tax in value-added mode is required. And if the only fuss is about how to implement this reformed GST, then what is the sound and fury all about?
Some industry reps say the bill empowers the tax collector too much. They cite the draconian penalties for tax evasion contained in the bill, along with quasi-judicial powers given to the collector as examples.
But if the bill relies on self-assessment, then aren’t these draconian penalties required? Perhaps, argue the reps, but only if they can be balanced out with rights given to the taxpayer. For instance, the law says if there is a delay in processing a refund, then the government is liable to pay interest for the period the amount has been delayed. Needless to say, this is never done.
Modalities of this sort are no reason to oppose the tax altogether. The relationship between taxpayer and collector will always be an adversarial one, and the toothless collector the industry reps are pushing for can hardly take us through the transition from a single stage sales tax to a value added tax.
The valid fear on the part of industry concerns the potential for abuse of discretionary powers that the new bill is giving to Federal Board Revenue (FBR) officials. They want to know whether there are equally draconian penalties for errant officials who are caught abusing their discretionary powers for personal ends.
Thus far, the parties supporting the bill have only one answer to this concern: automation. The argument goes that with automation you remove all contact between the payer and the collector, and therefore all possibilities for abuse.
We could go round and round on this forever. Since industry reps repeatedly emphasise that they do not oppose taxes in principle, only the manner in which the RGST is going to be implemented, it’s time for the government to state the obvious: we’re drawing a line now, cutting off debate.
This country will have a tax on consumption. It will be administered in value-added mode. And all problems it gives rise to will be sorted out as we move forward with implementation. Otherwise we will never get around to it.
Published in The Express Tribune, December 6th, 2010.
Of all the industry reps gathered by the committee, only one spoke in support of the reform bill. That was the Pakistan Business Council, not really a trade association but more of a think-tank. Their president told the committee that the tax is a good idea and that it will help in documentation of the economy.
But industry concerns about the refund mechanism are valid, and as a result maybe the tax can start off at a nominal rate of 2.5 per cent and be gradually raised to 15 per cent over a number of years. I wonder what the government’s technical advisers would say about the complications that would arise from having so many different rates for different sectors.
But almost all other industry groups opposed the measure. And almost all of them opposed it on the same grounds: past experience with the refund mechanism has been far from satisfactory. Many industry reps say they are still waiting on refund claims filed as far back in 2005.
The howls of protest they all brought with them must have egged on those members of the committee who are gleefully opting out of supporting the bill.
But here’s the rub: everybody agrees that we have to raise our tax-to-gross domestic product (GDP) ratio. The value added tax (VAT), or reformed general sales tax (RGST) as they are calling it these days, promises to do this faster and more comprehensively than any other tax.
Yes, a consumption tax has far more revenue potential than a tax on agriculture incomes.
So if we all agree that the ratio should be improved then we must all agree that the consumption tax in value-added mode is required. And if the only fuss is about how to implement this reformed GST, then what is the sound and fury all about?
Some industry reps say the bill empowers the tax collector too much. They cite the draconian penalties for tax evasion contained in the bill, along with quasi-judicial powers given to the collector as examples.
But if the bill relies on self-assessment, then aren’t these draconian penalties required? Perhaps, argue the reps, but only if they can be balanced out with rights given to the taxpayer. For instance, the law says if there is a delay in processing a refund, then the government is liable to pay interest for the period the amount has been delayed. Needless to say, this is never done.
Modalities of this sort are no reason to oppose the tax altogether. The relationship between taxpayer and collector will always be an adversarial one, and the toothless collector the industry reps are pushing for can hardly take us through the transition from a single stage sales tax to a value added tax.
The valid fear on the part of industry concerns the potential for abuse of discretionary powers that the new bill is giving to Federal Board Revenue (FBR) officials. They want to know whether there are equally draconian penalties for errant officials who are caught abusing their discretionary powers for personal ends.
Thus far, the parties supporting the bill have only one answer to this concern: automation. The argument goes that with automation you remove all contact between the payer and the collector, and therefore all possibilities for abuse.
We could go round and round on this forever. Since industry reps repeatedly emphasise that they do not oppose taxes in principle, only the manner in which the RGST is going to be implemented, it’s time for the government to state the obvious: we’re drawing a line now, cutting off debate.
This country will have a tax on consumption. It will be administered in value-added mode. And all problems it gives rise to will be sorted out as we move forward with implementation. Otherwise we will never get around to it.
Published in The Express Tribune, December 6th, 2010.