Documentation a tough task for govt

http://thenews.com.pk/daily_detail.asp?id=104973

Saturday, April 05, 2008
By Mansoor Ahmad

LAHORE: Te economists wonder how the present regime would deal with the issue of documentation of economy which the major coalition partners unsuccessfully tried to impose during their past tenures and opposed while sitting in opposition.

The economists the world over agree that general sales tax that documents every economic activity is the only way to fully cover the economy. Efforts to document the economy through this tax in Pakistan started in 1986 when the GST was recommended in the 1986-87 federal budget. However, the proposal was shelved after traders called the first countrywide shutter-down strike over the issue. Since then, the traders have successfully been avoiding the tax for the last 22 years. On the other side, India that decided to opt for GST or value added tax at the start of this century has finally been able to slap the levy in its states.

The Benazir-led PPP government in 1989, in its first tenure, proposed complete documentation of the economy through the General Sales Tax. However, the Nawaz-led PML-N opposition strongly opposed the move. On the same lines, the Benazir-led opposition in 1991 opposed GST proposal of the Nawaz government and the same pattern was repeated in the second tenures of both parties in 1993 and 1997.

Imposing GST would be a difficult job even for a strong coalition government in which the opponents of yesteryears have buried the hatchet and vowed to steer the economy through mutual cooperation. The military government too at the peak of its power in 2000 failed to tame the traders and had to compromise on a weak fixed tax regime.

The GST on traders has been replaced with a fixed turnover tax that has created distortions in revenue collection. According to the Federal Board of Revenue, traders’ share in the GDP is 16 per cent while their contribution to total tax revenues is less than four per cent. The traders would show their muscle again if the new government tried to impose the GST. The government would not like to open an avenue of confrontation at this juncture as it is already burdened with numerous other issues like price hike, food security, law and order and war on terror.

The experts point out that even the way of determining annual turnover is non-transparent. It has been left to the traders and the annual turnover declared by them is accepted by the FBR. Accordingly, the traders deposit 0.5 per cent turnover tax.

It is pertinent to mention that the turnover tax is imposed on all the traders running shops that have shutters. According to FBR, there are around 1.8 million such shops in the country. They say it is mandatory for all traders to pay the turnover tax but hardly one-fifth of them deposit the tax, which is nominal.

The experts point out that the GST eliminates all tax evasions if it is properly implemented during the entire cycle of an economic activity. It is basically a consumption tax that is paid by the consumers and all other individuals involved in the process simply collect the tax on behalf of the government.

For instance, they say, if a distributor gets a sales tax paid product worth Rs100 from a manufacturer and adds Rs5 as profit, he is required to add 15 per cent sales tax to Rs5 which would be Rs0.75. He charges Rs105.75, including the tax, from the retailer. Now if the retailer adds Rs5 as profit he would add another Rs5.75 to the price that would come to Rs111.50 that he will charge from the end-consumer.

The input supplier, manufacturer, distributor and retailer are required to deposit the sales tax with the ST department. The sales tax deposited reveals the gross income of each and thus tax evasion is eliminated.