Whats the most famous three-letter acronym that has occupied more newspaper space than any other, these days?
You guessed it; its called VAT. From business executives to politicians, nearly everyone - including news reading housewives - is pitching their view on how will the new tax regime impact their lives.
The government has assured Washington, that VAT will be implemented by hook or by crook. However, thats a tall statement to make considering the dispute between Sindh and FBR over the collection of tax on services is yet to be resolved.
Still, its too early to call off the bet as efforts are under way.
Though, President Zardari, widely being tipped as the successful mediator, was unable to bring the two parties on board at a high level meeting last week, PM Gilani has reportedly summoned another meeting this week to bring this scuffle to an amicable resolution.
In the last week, officials from Sindh proposed an option to make the cross government collection mechanism workable. It has indicated its willingness to accept the VAT registration and input tax adjustment framework of the federal government.
Supporters of the provincial right to collect tax on services, cite the example of Canada where VAT has been successful with provincial and federal governments collecting taxes concurrently.
Although, comparison between a mature economy and a developing one like Pakistan may be like comparing oranges to apples, Canada offers a useful clue.
Canadian indirect taxation laws were changed in 1991, to usher in VAT. However, there is a long history of cooperation between provinces and federal government in terms of tax collection prior to this, explains Sam Bucovetsky, a public finance expert at York University, Canada.
Such a system can also work in Pakistan, since the constitutional rights for tax collection are well defined - meaning that there is no overlap in the tax bases of the governments.
Being a mature economy, VAT has been a beneficial regime in Canada. Revenues have increased owing to the comprehensive nature of tax. Even so, the underground economy in Canada grew markedly after the introduction of VAT in 1991.
Another feature of the Canadian VAT experience is the exemption of zero-rated items that include basic groceries, prescription drugs, transportation services and medical devices. Bread, milk and fruit, for example, are not taxed for the Canadian consumer.If anything substantial is to come from replacing GST with VAT, authorities in Islamabad and Karachi must resolve their differences soon.
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