July is fast approaching and so is a fundamental modification in the way the government collects its revenue. The advent of Value Added Tax is all but certain now.
Just a few days ago, Senator Raza Rabbani stood on the Parliament floor to argue that the country has its share of technocrats, capable of tackling the implementation. Apparently those who matter the most - the World Bank, IMF and the FBR - don share this viewpoint.
A very costly team of the Banks experts is going to manage the transition process, according to media reports. While this may be a blow to how Pakistani taxmens capabilities are viewed by IFIs, in plain terms it means that no more delays in VAT implementation will be allowed.
"IMF is pushing VAT in Pakistan because it is the least bad form of collecting taxes in informal sectors", a Canadian expert on public finance, Sam Bucovetsky told BR Research. It is perhaps in the best interest of Pakistan that donor agencies are taking such a keen interest in the changing tax regime.
Even so, a hurried approach towards stuffing initiatives that normally takes years will likely trigger the kill button on the productive impact of the comprehensive tax.
Internationally, VAT is the most popular tax collection method. It has been most successful in economies that have made a conscious effort to document transactions, which unfortunately is not the case in Pakistan.
Regulated sectors of the economy which follow guidelines of maintaining appropriate track of sales and purchases are likely to fall prey to the flying invoices problem. In an effort to save on tax, businessmen may create fake transaction records reflecting worse than actual revenue.
Even more important for the FBR, is the support of the business community. Day after day, business associations hold press conferences rejecting VAT. Small traders associations in recent weeks have launched protests that threaten to disrupt basic commerce in response to VAT.
Pakistan Computer Association termed VAT impractical in the face of smuggling and the high cost of doing business. Similarly, Pakistan Dairy Association pleaded the government to exempt its produce from tax. It cited a hike in the price of milk and associated products because of the lack of documentation in the sector.
Instead of defending the VAT as a replacement to GST and not an additional tax, FBR needs to embark on an aggressive marketing campaign that educates businessmen and consumers on the benefits of the new regime. Mere statements in media by the Chairman are just not going to cut it.
Until the shopkeepers are sold on the idea of drawing refunds from input taxes, they will never envision the incentives from keeping track of business transactions.
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