At the wrong time, under the wrong circumstances?

The government has committed a serious mistake by proposing imposition of the Reformed General Sales Tax (RGST) during a recessionary phase when business volumes are declining in all key sectors of the economy.
Leading chartered accountants from Karachi told Business Recorder here on Monday that the best tax administrations have always avoided imposition of new taxes during a recession, which would cause extra burden on business and trade.
Advanced countries like UK cut VAT from 17.5 to 15 percent in December 1, 2008 on business and trade due to the recession. At that time, British government recognised that the UK economy was being badly damaged by the world-wide financial crisis. Concerned that the economy would be further weakened by a collapse in consumer spending, the government announced a temporary reduction of VAT from 17.5 percent to 15 percent. However, the rate would be restored to 17.5 percent from January 1, 2010.
The government has adopted a unique course of action by proposing new tax measures during recession. Whenever business volumes are shrinking, it is an inappropriate time for enhancing taxation of those already burdened. Any attempt to impose additional taxes in recession would only result in tax evasion or under-reporting of taxes. Sources said that the withdrawal of exemptions on essential goods and items during prevailing business environment would compel registered persons to avoid tax. In contrast exemptions and concessions are retained in lacklustre business environment to avoid extra burden on the stakeholders.
So far, the Federal Board of Revenue (FBR) has failed to enforce filing of returns from non-filers, short-filers and nil filers of sales tax returns despite repeated issuance of enforcement plans to the Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs). Instead of improving compliance of registered non-compliant persons, the measures to increase tax rates and bringing more persons into the tax net seems impractical.
According to sources, the best time for withdrawal of exemptions is when businesses are flourishing and there is an increase in productivity. The increase in power prices due to cut in subsidies along with decrease in production would further increase the cost of doing business. The shortage of natural gas in winter has resulted in closure of many manufacturing units in industrial estates and any withdrawal of exemptions at this stage would only cause panic in the country.
Under the ongoing recession, the imposition of RGST may result in strikes and agitation across the country. The devastating floods have already impacted negatively on the economy with serious implications on revenue collection. Another leading tax expert argued that when there is recession in the economy the productivity is at its lowest level. In Pakistan, price of utilities, raw materials and consumer goods are constantly going up, but the income of the public at large is not increasing proportionately. In such situation taxing the already taxed citizens is not going to get fruitful results, but will lead to tax evasion, under-declaration or non-declaration, he added.