IMFs concerns on VAT seem sufficiently plausible

Knowing that Pakistans economic future currently lies in the hands of IMF, it is quite unnerving to find out how the whole VAT issue is being managed, or rather mismanaged, by local bureaucracy.
Its a relief to find out that IMFs regional head for South Asia assured Prime Minister Gilani, currently in Washington, of the funds intention to release its fifth tranche of $1.2 billion on May 3, while adding that its entirely on Pakistans discretion to enter into another programme later this year.
But this statement comes a bit a baffling, as the lenders delegation, which just wrapped up its visit to Islamabad earlier this week, held an entirely different position.
Reportedly, members of the delegation explicitly told President Zardari and company that IMFs board would not consider Pakistans case in its upcoming meeting unless the countrys political leadership takes ownership to impose VAT.
The gravity of the issue can be assessed by the fact that IMFs visiting representative warned Pakistani officials about the termination of programme, adding that the fund may even ask for the return of released amount of $6.5 billion if the VAT isn implemented. That can essentially drag economic sovereignty back on the verge of default.
Even if the fund just delays Pakistans case in its upcoming meeting, and clubs this tranche with its fifth review by June end, it would be detrimental to the liquidity-squeezed economy.
Thankfully, however, there is still hope. Since, a stronger Pakistan is necessary by the time United States begins to pull out from Afghanistan in 2011 there is a clear case of political involvement both in Islamabad and Washington as regards the pending fifth tranche, which otherwise is a decision supposed to be based on economic targets.
But one can be too hopeful just because of political involvement. If the IMF relaxes conditions for Pakistan, it can face pressure from other countries, bearing in mind that the delay in IMF board meeting happened after Ukraine - another country under IMF programme - sought similar relaxations as being granted to Pakistan.
Putting politics aside, its not as if that IMFs reservations on non-compliance are uncalled for. The mistrust caused by the defective notification issued on VAT is a highly unprofessional attitude of the bureaucracy.
Its only after the 7th NFC Award was passed that the aboos in the Finance Ministry felt that the then Finance Minister, Shaukat Tarin, had conceded too much to provinces in his negotiations. This compelled them to craftily claw back the transactional loss, due to replacement of VAT with GST on account of lower rate and parting of tax at source to provinces, through the presidential notification. Makes one wonder, why didn they speak up earlier?
Instead, of playing this blame game, which can seriously dent the countrys image at international forums, the Advisor on Finance should sit down with FBR and draw a roadmap to enhance FBRs capacity to register, monitor and collect VAT with provincial authorities down to the retail level. Clearly, the IMF doesn care whether VAT is integrated or not; it essentially wants effective taxation.
The performance of FBR, which missed its growth target by 7 percent in the first eight months, is said to be far from satisfactory. It has not been able to establish a proper protocol with NADRA to register 770,000 persons who have forex accounts and even travel abroad yet do not have a National Tax Number.
Experts fear that the practice of flying invoices will come back in vogue in the zero-rated export oriented sectors, once they come in the tax ambit after VAT. This might once again result in higher rebates over collection, and hence, the five export sectors - textile, leather, sports goods, surgical and carpets need to be tackled differently.
Its time for political leadership and the tax payers to realize that the implementation of VAT is not a matter of choice. The sooner they do it, the better it is for Pakistan.