December issue 2010
A Taxing Issue: Introducing the RGST to Pakistan
While most of the chambers of commerce and trade associations in the country have been opposing the Reformed General Sales Tax (RGST), which is a euphemism for Value Added Tax (VAT), big business at home is supporting it. The two prominent business organisations in favour of the tax are the Pakistan Business Council (PBC) and the Overseas Chambers of Commerce & Industry (OICCI).
Why? That is the question I asked the PBC Chief Executive, Kamran Y. Mirza, who has vast experience of heading an MNC, EPZA and KSE and who is presently also a member of the State Bank’s Board. “We think that a large fiscal deficit is presently one of the major challenges to the country’s economic growth. The country can no longer survive with a meagre 10% tax to GDP ratio; the tax net has to be broadened — which is only possible by imposing the RGST,” he maintained. To emphasise his point, he quoted the examples of India and Bangladesh where the tax to GDP ratios are 17% and 14% respectively. “At present,” he pointed out, “the formal manufacturing sector, which accounts for 16% of the GDP, contributes 63% of the country’s direct taxes. The dice is heavily loaded against the industry and does not provide the formal manufacturing sector a level playing field because the informal sector is evading taxes.”
The formal manufacturing sector has to pay 35% income tax and another 7% in the form of worker’s welfare funds. This brings the total direct tax to 42%, if all of them pay honestly. The PBC, which is a non-profit, big business think tank and an advocacy group formed on the pattern of the Confederation of Indian Industries (CII), was set up in 2005. It has managed to gain respectability in government circles because of its serious research-based work. Though it has 30 members, PBC represents major industrial groups which have many businesses. “This means that a PBC member company actually represents a cone, with the group strength being funnelled through a single company,” Mirza observed.
Mirza thinks that unless the tax is broadened through the RGST and other initiatives, the burden of tax on the organised tax payers cannot be lightened, which, he contended, “makes our industries non-competitive in the domestic and international markets.” According to him, PBC has also proposed to the government that tax “should be levied on currently exempt sectors like agriculture income services and that filing tax returns should be made mandatory for:
a) Any person who has taken a personal loan from the bank;
b) Any person who is a member of a professional body;
c) Any person who takes a foreign trip, with the exception of pilgrimage;
d) Any person who has an 800cc car less than three years old;
e) Any person who has had a Rs 50,000 balance in their personal bank account;
f) Any person who owns a personal urban property, with exemption to flats of 900 square feet and a house on less than 120 square yards.
And for people who fail to file returns, they should automatically have transactions on their credit card blocked, recommends the PBC.
Mirza maintained that those who oppose the widening of the tax base under one pretext or another do not realise that the ever-burgeoning fiscal deficit has to be reduced and can only be done either through the broadening of the tax base and netting of those who evade taxes, or by borrowing from the State Bank and the banking system. “The effect of borrowing from the central bank will result in monetary expansion, which in turn creates inflation. And inflation is the worst tax on the poor in whose name these people resist widening the tax base,” he said, adding that “if the government borrows excessively to bridge the deficit from the banking system, the private sector is elbowed out and interest rates rise, which also adds to inflation.”
But he agreed on one point with the critics of the RGST — that the export-oriented industries would find it difficult under the present refund system if their exemption is taken away. Mirza contended that he believed that the refund system should be made transparent and automatic. When asked whether the government has shared the RGST document and its details with the PBC, which is supporting the new tax regime, Mirza conceded that “they should have, but they have not.” He maintained, “Our information is mainly based on media reports and some discussions in the past. Now that is the problem with this government — it wants to introduce the RGST (VAT) without educating the people and having a proper communications strategy.”
The PBC, according to Mirza, is also concerned about “the deterioration in the stock of human capital available to the industry. Pakistan has a large, young population, which can become a burden if not harnessed properly and if investment is not made in human resource development.” At present, the government is collecting a large amount from the Workers Welfare Fund (WWF) and Workers Profit Participation Fund (WPPF). As there is a ceiling on what can be distributed to the workers, a large saving is transferred to the government’s kitty. PBC has demanded that this undistributed amount should be used for the capacity building of human resources in association with government-approved institutions.
Mirza says, “Pakistan Business Agenda 2010 has for the time being identified four areas to focus on: consolidation of industry in Pakistan; providing a level playing field for the industry; broadening the tax base and the development of human capital of Pakistan.”
Interestingly, while there are still many critics of expanding regional trade, who fear that Indian goods will flood the Pakistani market, the big business advocacy group — PBC — has a positive outlook on this issue. As it also plays the role of a think tank, it does not want to take an unsubstantiated position. According to Mirza, the PBC is in the process of getting an in-depth study done on the pros and cons of regional trade expansion by experts in order to formalise the PBC position on this issue.
All said and done, it seems that the RGST levy proposed will be extremely difficult to implement as the bazaar will browbeat the government and use its power with urban parties like the PML-N and MQM to defeat the bill, all in the name of the “people.” Long live tax evasion!