Are there options better than RGST?
INCREASED documentation of national economy and higher tax-to-GDP ratio are the two major stated objectives of the government for introducing reformed general sales tax. The RGST blueprint, however, is apparently in clear conflict with the stated objectives. To say the least, much easier options for achieving better documentation and higher revenue yields remain off the radar screen of policymakers. Notwithstanding opposition parties' demand for plugging the corruption and inefficiency in the tax administration to generate Rs500-600 billion per annum as an alternate to RGST, as estimated by former finance ministerShaukat Tarin, the turnover threshold for registered RGST payers would only act against the documentation objective.
International experiences suggest that better revenue outcomes are easier to achieve when taxation is seen by the taxpayers as fair and equitable. This is generally done through maximum direct taxation on the basis of incomes earned by citizens across the sectors and segments of the economy, unlike Pakistan, where direct taxation (including withholding tax) accounts for less than 35 per cent of total tax revenue. No surprises that direct taxes account only of 3.5 per cent of GDP, in a tax-to-GDP ratio of nine per cent. The RGST would further reduce the contribution of direct taxes to the GDP and increase the share and burden of indirect taxes. The principle of equitable, just and fair taxation could be achieved only if incomes of more than Rs300,000 per annum earned by people in agriculture, real estate, stock market and other walks of life are taxed like the salaried class.
But extortion has survived - both in civilised and uncivilised societies. The powerful have always used their leverage against weaker sections of society. Whether this instinct of promoting self-interest prevails would be seen in the next few weeks when RGST bill reaches the National Assembly for adoption.
The possibility of the poor getting a raw deal from the rich must have crossed the minds of lawmakers when they adopted the Constitution in 1973 to protect the vulnerable against the strong. In Article 3 of the Constitution they provided that 'the state shall ensure the elimination of all forms of exploitation and the gradual fulfilment of the fundamental principle, ' from each according to his ability, to each according to his work'.
The constitutional provision speaks of reciprocity between the citizens and state that underlines the social contract between the ruler and the people in civilised societies. The FBR has chosen to advocate and the government to accept the RGST as the preferred option to raise the country's tax revenues despite the fact that, contrary to the constitutional provision, indirect taxation through RGST disregards the common citizens' ability to pay the tax.
The incidence of an indirect tax like RGST ultimately falls on the consumers, 70 per cent of whom, mostly being poor, will be deprived of a comparatively much bigger chunk of their disposable incomes unlike the other 30 per cent rich with deep pockets.
Even those opinion makers who have rallied in favour of RGST seem to be supporting its objectives and not the extortion which underlies this mode of taxation.
The objectives of documentation of economy and a raise in the tax-to-GDP ratio have mesmerised those who have not studied deeper to appreciate the heavy cost which the 70 per cent poor consumers will pay. Such supporters of RGST do not seem to have explored the better options which could realise the same objectives in a fairer and judicious manner. The present GST was enforced in 1990. It could not bring documentation of the economy to a desired level. Neither could it raise tax-to-GDP ratio. The GST failed in these objectives not because of the exemptions and distortions which the FBR now intends to remove to transform it into RGST. The GST failed because business units with annual turnover up to Rs50 million were given freedom to remain undocumented and government lacked the necessary political will to roll in the GST net big retail sector even if its turnover exceeded the stipulated threshold.
The raise in exemption threshold from Rs5 million to Rs7.5 million in the RGST Bill will ensure that even bigger part of the economy remains undocumented. This will encourage bigger traders to split their business and evade the tax net. So much incentive to remain smaller and out of documented economy and part of black economy.
Precisely this was the cause that hindered the GST from achieving the desired level of documentation in the economy which has now been incorporated in a worse form in the RGST Bill. Some estimates indicate more than 600,000 existing registered sales taxpayers would get out of the net because of higher threshold. For the documentation and for raising tax-to-GDP ratio, it would have been a better option to lower RGST rate to around five per cent, as in many developed countries, and to eliminate the exemption threshold altogether. It should not be expected of the business units exempted from RGST because of their turnover threshold to sell 15 per cent cheaper. Such units will keep their prices near those charged by RGST registered units (the exemption will not be used to pass on the benefit to the consumer) to inflate their own profit margins.