Analysts on introduction of RGST: government urged to focus on reducing corruption, improving governance

The government should focus on improving governance and reducing corruption to increase revenue collection instead of introducing reformed general sales tax (RGST). This was the crux of the presentation on 'effect of corruption and governance on tax revenues' jointly presented by Tahseen Ajaz and Eatzaz Ahmed at a conference organised by Pakistan Institute of Development Economics (PIDE) here on Tuesday.
About the RGST, it has been informed that the strong point should be improvement in quality of governance and reduction in corruption instead of introducing the RGST. The donor agencies like IMF should also consider this before going for measures like the RGST.
Referring to the RGST, international VAT expert Dr Ehtisham Ahmad said that the objectives of the reforms in the tax administration is to try and create an effective reformed GST environment to facilitate administration, eliminate corruption and improve performance of the tax machinery.
The international VAT expert cautioned that if the macro-economic crisis has not been timely averted through implementation of the RGST, NFC Award and 18th Amendment would become irrelevant. I am worried that the macro-economic crisis would further deepen if the reforms in the sales tax regime are not timely introduced.
The presentation revealed that in case of developing countries corruption is widespread and its consequences for the tax system are destructive. It shrinks the state revenues and thus reduces the ability of state to fulfil its obligations to the society. This is something alarming as many studies regarding tax system in developing countries showed that more than 50 percent of tax revenue goes uncollected because of fiscal corruption and tax evasion. The losses in revenues and subsequently in public spending are high as compared to the proportion of the amounts paid as bribes. Another undesirable consequence of corruption is that it reduces the distributive function of tax collection and hence contributes to increase in income in-equality.
The quality of governance as a whole is also relevant in the context. It is widely agreed that the presence of tax evasion and corruption of public officials is social phenomenon that can significantly reduce tax revenue and seriously hurts economic growth and development. The corruption should not be viewed in isolation, as it is a part of the broader issue of governance and public management. The quality of a country's governance is a critical factor for 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.
It said that the tax structure is highly responsive to governance structure; high-income countries can improve their tax performance through improving their governance structure. It has been pointed out that there are different factors that contribute to corruption in tax system. A complex and fragmented tax system increases the 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 to the official to use their flexible powers and mount corruption in the system. Another factor that fosters corruption is high tax rate, 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, they engage in corrupt activities if they feel that the expected punishment is low. Low wages of tax administrator and tax payers also foster corruption.
The good governance brings good tax system. There are three main elements to build a good tax system, which includes state legitimacy, taxpayers' willingness to pay tax and the effectiveness of tax administration. The fiscal corruption in the 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. Developing countries need actively to strive to reduce the opportunities of corruption in tax administration and change the incentive structure for tax officials, presentation added.