VAT: reform, infrastructure and political will

Developments have picked up pace in the implementation of tax reforms. In the last week alone, discussions on introducing a VAT bill, lower tax rate and meetings between the policymakers have been in the headlines.
Some sections of the press have projected a stern attitude of World Banks delegation as regards the issue of tax reforms. Whether it carries any substance may be assessed by the fact that the IMF has not yet convened the board meeting necessary for the disbursement of the ever elusive fifth tranche.
FBR has most recently announced that a new VAT bill will be drafted in the coming days to entertain the right of the provinces to collect revenue on services. Reportedly, a lower rate of tax, around 5 or 6 percent is also on the cards.
Drafting bills and redrafting them is a good omen. One can only hope that this process will finally lead to a law that is comprehensive, clear and actionable. But while the directives of multilateral organizations are in the best interest of the Pakistani economy, reforms must never be rushed. Otherwise, many important aspects are overlooked which can cause trouble at a later stage.
Pakistans tax revenue dynamic is heavily skewed towards the industrial sector, which accounts for less than a quarter of GDP, but contributes more than half to the tax revenue pie. Unlike the industrialists, those involved in service sector produce about half of total economic output, yet its contribution is not commensurate with its size in the economy.
Direct taxation on agricultural income is bound to add significantly to public revenues. However, with the strong lobbying power, at present its implementation is quite unlikely.
Without infrastructure, finely crafted laws may be black ink on white paper, something which Turkey understood long before. When Turkish authorities started implementing VAT, they installed sealed scanning machines similar to cash registers to monitor sales revenue. Retailers were provided incentives in terms of quick refunds in return for compliance. The system worked wonders.
Innovative solutions that fit the mould, keeping in mind, the formal and undocumented sector will have to accompany the sound laws that will eventually govern the revenue system.
A major problem with implementation of tax reform is the menace of rent seeking. It may be explained as the extraction of uncompensated value from others without making any contribution to productivity; in this case by imposing burdensome regulations that affect consumers and businesses.
Research proves that if buying a favourable regulatory environment is cheaper than building more efficient production, firms will choose the former. This results in suboptimal allocation of resources. Research in Bangladesh confirms that corruption by tax officials leads to lower revenues for the public exchequer.
At present, tax laws give officials in the FBR power to arrest, harass and forcibly recover funds. Language is vague in the law and there is no provision to appeal assessments. Laws must balance the interest of the public and the administration. The absence, at least in tax laws, leads to the situation where Pakistan finds itself in.
The only way forward for Pakistan is to increase its tax-to-GDP ratio. For that to happen, there is a moral responsibility on the people of Pakistan to pay their taxes and then to take corrupt officials to task, if any. Consequently, political will can be demanded of the law makers.