“Tis but thy name, that is my enemy,” said Juliet Capulet, upon learning that the love of her life came from mortal enemies of her own clan. Continuing to address the object of her desire, “What’s in a name? That which we call a rose, by any other name would smell as sweet.”
It is not often that a situation in contemporary times resembles this famous scene from the 16th century play as closely as the relationship between the IMF and Pakistan’s economic managers.
Simply replace the “star cross’d” lovers with Pakistan’s soft-spoken, hard-hitting finance minister and the IMF’s head honcho on the stand-by arrangement, and Sheikh appears to be wooing the Fund with a similar reasoning.
After all, an indirect tax collected at every stage based on the differential between input and output values will generate the same amount of revenues for the government, regardless of whether it is called value-added tax, reformed GST or plain-old general sales tax.
The controversy-prone RGST label was never an adequate name for the tax measures to be introduced in the upcoming budget since the object of the exercise is simply to restore the Sales Tax Act of 1990 to its original, unadulterated form.
So what did the name change accomplish? For one, it allowed the government’s boisterous coalition partners to claim victory over the ‘villainous’ RGST in favour of the oppressed and burdened masses.
Secondly, by passing the buck forward through Statutory Regulatory Orders (SRO) instead of a bill tabled in the Parliament, the government quietly stepped back on its promise to lower the sales tax rate from 17 percent to 15 percent.
Various studies on the subject have proven that raising the tax rate is detrimental to any attempts to increase the tax net as prospective tax payers are incentivised to dodge the taxman.
BR research recently highlighted that the country’s tax gap is not only gigantic (79 percent of GDP), but has also mushroomed over the past four years.
However, a senior tax official brushed aside these concerns, calling the rising gap a ‘figment of calculations’. After all, talk of tax efficiency is just not romantic enough to warrant a place in this tale.
When Pakistan’s economic managers approached the IMF’s balcony (or window), looking for a friend with deep pockets, the Fund had two main demands. According to the IMF, this union would only sustain if the government could broaden the tax base and reduce its dependence on the central bank for deficit financing.
And in all honesty, the envisioned tax structure and its implementation can serve the country well as it encourages documentation of the economy. Initial estimates suggest that the tax-to-GDP ratio could improve to 12.5 percent within the next 3 years from the current (and abysmally low) level of 9.5 percent.
But just as Romeo and Juliet suffered a terrible fate because of their ill-tempered relatives, the country’s revenue collections may also be jeopardized by the powerful lobbyists and cronies already queuing up for exemptions and zero-ratings for their sectors.
The present government and its successors must empower revenue collectors and refrain from introducing ill-contrived exemptions, especially since the implementation of the NFC award has shifted the onus from the federal to provincial governments.
Reducing the number of tax slabs to three is a positive step, but economic managers should also consider lowering the basic sales tax rate to 15 percent to encourage non-filers to enter the tax umbrella.
Failing this, the current romance between the government and the IMF may end quite tragically.