Are there op­tions bet­ter than RGST?

The Pak Banker - - Editorial - Khaleeq Kiani

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.

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