RGST may be deferred to July 1, 2011: exemptions, concessions to be phased out through notifications

The government may put off planned implementation of Reformed General Sales Tax (RGST) till July 1, 2011 and systematically phase out exemptions/concessions through notifications under existing Value Added Tax (VAT) mode in case economic managers fail to successfully persuade the political leadership on reform roadmap, it was learnt.
Sources said that final decision to this effect would be dependent on the outcome of the briefing scheduled to be given to the political leadership by the economic managers. The economic team would try to convince the political leadership that implementation of the RGST is a critical component of ongoing reforms as it would plug the shortfall between revenue and expenditure. Finance Minister Dr Abdul Hafeez Sheikh in consultation with Prime Minister Syed Yousuf Raza Gilani would invite political leadership for a briefing on the need for reforms and consequences of delay.
The political leadership would be informed about the increasing vulnerability of the fiscal framework because of a low tax to GDP ratio and rising expenditure. The briefing would involve the inflexibility of expenditure components - ranging from defence, subsidies, debt servicing, and running of government - and shortfall in revenue. The result is that the government is going for the easy option of borrowing from the central bank instead of taking hard decisions to plug loopholes in the economy, they added.
Sources said that an overview of rising expenditure would be given to the political leadership. Incurring cost on subsidies, defence and debt servicing has been consuming up to 12% of the GDP while total revenue collection is not even 10 percent 9% of the GDP. Hence, the need for political consensus on reforms.
There is also concern that over time the pressure on current account due to shrinking foreign inflows would manifest itself. In addition, the briefing would include public debt and potential to reduce it by adopting higher tax to GDP ratio. The briefing to the political leadership would be an effort to garner their support for the passage of RGST in parliament and to develop a broader political consensus on reform roadmap.
Sources said that failure of the economic team to convince the political leadership would leave no other option but to go for implementation of VAT through notification by withdrawing zero rating and other exemptions currently enjoyed by some sectors.