RGST: rea­sons for re­sis­tance

The Pak Banker - - Editorial - Dr Ash­faque H Khan

Pak­istan's fis­cal sit­u­a­tion has de­te­ri­o­rated in the past three years with a bud­get deficit av­er­ag­ing 6.3 per cent of GDP. There are in­di­ca­tors that it is likely to de­te­ri­o­rate fur­ther in the cur­rent fis­cal year with bud­get deficit hov­er­ing be­tween the range of 6.5-7.0 per cent of GDP. Set­back on re­source mo­bil­i­sa­tion on the one hand and con­tin­ued ex­pen­di­ture profli­gacy on the other are the root causes of de­te­ri­o­rat­ing fi­nan­cial con­di­tions. There are in­di­ca­tions that the Re­formed GST (RGST) bill will not be pre­sented to the Na­tional Assem­bly soon. Ap­par­ently the govern­ment has not yet mus­tered enough po­lit­i­cal sup­port to get the Bill passed by the Na­tional Assem­bly.

The pub­lic de­bate on the RGST has cen­tred around three main con­cerns. These in­clude the RGST as likely to be highly in­fla­tion­ary, hurt­ing the poor and the fixed in­come group the most, and de­stroy­ing the in­dus­trial base of the coun­try. No se­ri­ous ef­forts have been made by the govern­ment thus far to re­spond to these fre­quently raised ques­tions. The prime time TV talk shows have been one-sided as the govern­ment has been heav­ily crit­i­cised for im­ple­ment­ing an 'anti peo­ple tax'.

The neg­li­gi­ble par­tic­i­pa­tion in these de­bates is ev­i­dence of weak gov­ern­men­tal re­sponses to the pub­lic crit­i­cism. Those who have ap­peared on talk shows to de­fend the govern­ment's po­si­tion had lit­tle un­der­stand­ing of the RGST and even the fi­nance min­is­ter him­self was un­able to give any statis­tics on the in­fla­tion­ary con­se­quences of the RGST when queried over this is­sue by the an­chor per­son. Given the state of pre­pared­ness and the level of com­mit­ment on the part of the govern­ment the fate of the RGST could not have been dif­fer­ent.

The RGST is a con­sump­tion-based tax which means that the more we con­sume, the more tax we pay. It is levied on any value that is added to a prod­uct. There are 141 coun­tries that have im­ple­mented this tax suc­cess­fully and are reap­ing the ben­e­fits of a higher rev­enue. If it can work well in those coun­tries, why can't it work in Pak­istan? The RGST ap­peared to have been mis­un­der­stood by the gen­eral pub­lic and busi­nesses and as such has faced stiff re­sis­tance.

Why has there been stiff re­sis­tance? Firstly, the po­lit­i­cal lead­er­ship of the coun­try with the ex­cep­tion of a few is not pay­ing their due taxes. When they do not pay taxes, how can they ask the peo­ple of Pak­istan to pay more? Se­condly, the feu­dal class earn­ing bil­lions from agri­cul­ture, have re­mained out­side the di­rect tax net. Fail­ure in tax­ing agri­cul­tural in­come has been the ma­jor cause of re­sis­tance. Thirdly, it is the in­dus­try and ser­vices sec­tors which will mainly come un­der the RGST net, there­fore there is re­sis­tance from the Cham­bers and trade bod­ies. Fourthly, the RGST was to be im­ple­mented in an en­vi­ron­ment of ris­ing in­fla­tion, caused by surg­ing food and fuel prices with max­i­mum dis­com­fort to the poor and fixed in­come groups. The claims of the op­po­nents that this tax will fur­ther fuel in­fla­tion has un­nerved the com­mon man and hence caused stiff re­sis­tance.

Fifthly, the gen­eral per­cep­tion cre­ated by the op­po­nents that the FBR is a highly cor­rupt in­sti­tu­tion and that if this cor­rup­tion were min­imised, the govern­ment would not need the RGST to col­lect more re­sources. No ef­fort was made by the govern­ment to dis­pel such im­pres­sions by tak­ing cred­i­ble ac­tion to min­imise cor­rup­tion in the in­sti­tu­tion. Sixthly, no con­crete ef­fort was made by the govern­ment to tighten its own belt. Ex­pen­di­ture profli­gacy con­tin­ued un­abated. What moral jus­ti­fi­ca­tion does the govern­ment have to in­tro­duce the RGST with al­most a 100 min­is­ters and ad­vis­ers in its fold?

Seventhly, was it eco­nom­i­cally jus­ti­fied to in­crease the salary of govern­ment ser­vants by 50 per cent in the midst of the worst fi­nan­cial cri­sis in the coun­try? Lack of fis­cal dis­ci­pline on the part of the govern­ment was an­other cause of stiff re­sis­tance. Eighthly, no con­crete ef­forts have so far been made to ad­dress the is­sue of the bleed­ing Pub­lic Sec­tor En­ter­prises (PSEs), which con­tinue to get re­sources from the bud­get. Those op­pos­ing the RGST have men­tioned that if the govern­ment gets rid of these PSEs through pri­vati­sa­tion, it could save Rs250 bil­lion from the bud­get and hence have no need for the RGST. Ninthly, the story of ram­pant cor­rup­tion and lack of gov­er­nance ap­pear­ing on a daily ba­sis in the print and elec­tronic me­dia, has also cre­ated re­sent­ment among the masses for the RGST. It is gen­er­ally per­ceived that the taxes so col­lected by the govern­ment will be si­phoned off.

Thus, lack of deft han­dling of pub­lic de­bate on the RGST, not tax­ing the rich and the pow­er­ful, the po­lit­i­cal lead­er­ship it­self not pay­ing its due taxes, ex­pen­di­ture profli­gacy con­tin­u­ing, no vis­i­ble belt-tight­en­ing on the part of the govern­ment and the choice of an in­op­por­tune tim­ing have caused re­sent­ment and stiff re­sis­tance from across the po­lit­i­cal di­vide.

What will be the con­se­quences of not im­ple­ment­ing the RGST? The IMF Pro­gramme has re­mained un­der sus­pen­sion since May 2010 and as such Pak­istan has not re­ceived the re­main­ing tranches. The Pro­gramme is go­ing to end on De­cem­ber 31, 2010 at an in­com­plete sta­tus and a dent on the cred­i­bil­ity of the govern­ment. Pak­istan needs the IMF's sup­port and re­sources badly and will have to seek a new Pro­gramme.

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