RGST: reasons for resistance - Dr Ashfaque H Khan - Tuesday, December 21, 2010

Source : www.thenews.com.pk

Pakistan’s fiscal situation has deteriorated in the past three years with a budget deficit averaging 6.3 per cent of GDP. There are indicators that it is likely to deteriorate further in the current fiscal year with budget deficit hovering between the range of 6.5-7.0 per cent of GDP. Setback on resource mobilisation on the one hand and continued expenditure profligacy on the other are the root causes of deteriorating financial conditions. There are indications that the Reformed GST (RGST) bill will not be presented to the National Assembly soon. Apparently the government has not yet mustered enough political support to get the Bill passed by the National Assembly.

The public debate on the RGST has centred around three main concerns. These include the RGST as likely to be highly inflationary, hurting the poor and the fixed income group the most, and destroying the industrial base of the country. No serious efforts have been made by the government thus far to respond to these frequently raised questions. The prime time TV talk shows have been one-sided as the government has been heavily criticised for implementing an ‘anti people tax’.

The negligible participation in these debates is evidence of weak governmental responses to the public criticism. Those who have appeared on talk shows to defend the government’s position had little understanding of the RGST and even the finance minister himself was unable to give any statistics on the inflationary consequences of the RGST when queried over this issue by the anchor person. Given the state of preparedness and the level of commitment on the part of the government the fate of the RGST could not have been different.

The RGST is a consumption-based tax which means that the more we consume, the more tax we pay. It is levied on any value that is added to a product. There are 141 countries that have implemented this tax successfully and are reaping the benefits of a higher revenue. If it can work well in those countries, why can’t it work in Pakistan? The RGST appeared to have been misunderstood by the general public and businesses and as such has faced stiff resistance.

Why has there been stiff resistance? Firstly, the political leadership of the country with the exception of a few is not paying their due taxes. When they do not pay taxes, how can they ask the people of Pakistan to pay more? Secondly, the feudal class earning billions from agriculture, have remained outside the direct tax net. Failure in taxing agricultural income has been the major cause of resistance. Thirdly, it is the industry and services sectors which will mainly come under the RGST net, therefore there is resistance from the Chambers and trade bodies. Fourthly, the RGST was to be implemented in an environment of rising inflation, caused by surging food and fuel prices with maximum discomfort to the poor and fixed income groups. The claims of the opponents that this tax will further fuel inflation has unnerved the common man and hence caused stiff resistance.

Fifthly, the general perception created by the opponents that the FBR is a highly corrupt institution and that if this corruption were minimised, the government would not need the RGST to collect more resources. No effort was made by the government to dispel such impressions by taking credible action to minimise corruption in the institution. Sixthly, no concrete effort was made by the government to tighten its own belt. Expenditure profligacy continued unabated. What moral justification does the government have to introduce the RGST with almost a 100 ministers and advisers in its fold?

Seventhly, was it economically justified to increase the salary of government servants by 50 per cent in the midst of the worst financial crisis in the country? Lack of fiscal discipline on the part of the government was another cause of stiff resistance. Eighthly, no concrete efforts have so far been made to address the issue of the bleeding Public Sector Enterprises (PSEs), which continue to get resources from the budget. Those opposing the RGST have mentioned that if the government gets rid of these PSEs through privatisation, it could save Rs250 billion from the budget and hence have no need for the RGST. Ninthly, the story of rampant corruption and lack of governance appearing on a daily basis in the print and electronic media, has also created resentment among the masses for the RGST. It is generally perceived that the taxes so collected by the government will be siphoned off.

Thus, lack of deft handling of public debate on the RGST, not taxing the rich and the powerful, the political leadership itself not paying its due taxes, expenditure profligacy continuing, no visible belt-tightening on the part of the government and the choice of an inopportune timing have caused resentment and stiff resistance from across the political divide.

What will be the consequences of not implementing the RGST? The IMF Programme has remained under suspension since May 2010 and as such Pakistan has not received the remaining tranches. The Programme is going to end on December 31, 2010 at an incomplete status and a dent on the credibility of the government. Pakistan needs the IMF’s support and resources badly and will have to seek a new Programme. Perhaps implementing the RGST would constitute the prior action for the new IMF Programme. In the absence of the IMF Programme, Pakistan may not receive funding from development financial institutions or perhaps from the Kerry-Lugar account. With the revenue-expenditure gap widening further, the financing of this gap will become a major issue of solvency.

Difficult times need difficult decisions. The emerging financial situation of the country is bleak. This is not the time to do politics. This is the time to save Pakistan from bankruptcy. The finance team must shed its laid back and lethargic attitude and lead the economy from the front.

The writer is director general and dean at NUST Business School, Islamabad.

Email: ahkhan@nbs.edu.pk

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