Need stressed to overcome economic crisis through RGST

Professor Dr Karamat Ali, former Vice Chancellor of Bahauddin Zakariya University and renowned economist has cautioned, here on Thursday, that if the macroeconomic crisis is not overcome in time through implementation of Reformed General Sales Tax (RGST), National Finance Commission (NFC) Award and 18th constitutional amendment would become irrelevant.
In a press release issued here on Saturday, Professor Dr Karamat said government should focus on improving governance and reducing corruption to increase revenue collection of Federal Board of Revenue (FBR). The strong point about RGST should be to improve of governance and reduction in corruption. Also, donor agencies like International Monetary Fund (IMF) should consider this for reduction in corruption before considering measures like the RGST.
He further said the objectives of reforms in the tax administration is to try and create an effective RGST environment to facilitate administration, eliminate corruption and improve the performance of tax machinery. He cautioned that if macroeconomic crisis is not corrected timely through implementation of RGST, NFC Award and 18th Amendment would become irrelevant.
The expert said, "I am worried that the macroeconomic crisis would further deepen if the reforms in the sales tax regime are not timely introduced with correction in basic economic indicators. In the past, when the country faced difficult economic situations, government had an option to approach IMF, however, with no improvement in the economy and non-implementation of performance benchmarks agreed, where would the country go in future for help."
He observed that in the case of developing countries, corruption is widespread and its consequences for the tax system are destructive. It shrinks a state's revenue and thus reduces ability of the state to fulfil its obligations to society. This is something alarming as many studies regarding tax system in developing countries show that more than 50 percent of tax revenue goes uncollected because of fiscal corruption and tax evasion. He added that losses in revenues and thus subsequently in public spending are higher than the proportion of the amounts paid as bribes.
Professor Dr Karamat further said that another undesirable consequence of corruption is that it reduces the distributive function of tax collection and hence contributes to increase income inequality. The quality of governance as a whole is also relevant in this context.
It is widely agreed that the presence of tax evasion and corruption of public officials is a social phenomenon that can significantly reduce tax revenue and seriously hurt economic growth. Corruption should not be viewed in isolation, as it is a part of the broader issue of governance and public management, he maintained.
He stressed that the quality of a country's governance is a critical factor in its development process. It is thus surprising how very little attention is given to one of the most fundamental drivers in the way that public revenues are raised. He said that the tax structure is highly responsive to governance structure; high-income countries can improve their tax performance through improving their governance structure.
The economic expert said it has been pointed out that there are different factors that contribute to corruption in a tax system. A complex and fragmented tax system increases demand for corruption. Tax auditors and taxpayers get advantages through complex rule, unclear laws, regulations and procedures of tax system. The complexity of regulation allows an official to use their flexible powers and mount corruption in the system.
Another factor that fosters corruption, he continued, is high tax rates as it increases the incentive for taxpayer to evade tax. To indulge in corrupt behaviour, individuals compare their benefits with the risk of detection and punishment, and engage in corrupt activities if they feel that the expected punishment is low. Low wages of tax administrator and taxpayers also foster corruption. The good governance brings good tax system, he added.
Professor Dr Karamat said there are three main elements in order to build a good tax system, which includes state legitimacy, taxpayers' willingness to pay tax, and the effectiveness of tax administration. Fiscal corruption in tax administration is reduced by required laws, which are vigorously enforced by independent and efficient judicial system.
Also, when democratic political institutions are in place, taxpayers are allowed to freely express their opinion about the tax system, so tax administrations should become more transparent and publicly accountable, hence fiscal corruption is more easily exposed, he added. Concluding, the economic expert said developing countries need to actively strive to reduce opportunities of corruption in tax administration and change incentive structure for tax officials.