During the last few weeks, Chairman, FBR has been publicly stating and commenting that VAT on goods and services (GST) will be introduced by July, 2010.  He has also given the understanding that it is part of the overall arrangement with the IMF. The government is, therefore, under an obligation to introduce VAT on goods and services by the said date.

2.         It is, therefore, assumed that the Government of Pakistan (GOP) has finally and firmly agreed with the IMF to introduce VAT on goods and services by the said date. However, it appears that the commitment has been given without appreciating the difficulties involved in the venture. Apparently, the GOP without doing its home work, has agreed for the introduction of GST and the Chairman, FBR is also issuing statements, off the cuff. Perhaps the Chairman, FBR is not aware of the implications involved in the introduction of GST. This is condonable, considering the non-professional background of the Chairman. The act of agreeing with the IMF to introduce VAT on goods and services by the said date by the GOP is also condonable, considering the way the GOP works. Everybody knows that it always acts on whims and under pressure from donor agencies. However, what is not condonable is the attitude of the professionals working in the FBR who should be aware of the complexities involved. The insistence of IMF for introduction of GST by the said date is also not condonable considering that IMF is a highly professional organization.

3.         Introduction of VAT on goods and services in normal circumstances requires at least a period of two to three years. (We are, however, permanently living in abnormal times). The present tax administration of FBR is familiar with the working of VAT on goods and is reasonably aware of the issues involved; irrespective of the fact that the present system is distortionary and inefficient. Pruning of the present system to make it effective and efficient requires mounting of considerable effort which might be possible by July, 2010. But to introduce VAT both on goods and services by the said date is asking too much.  Imposition of VAT on goods is relatively easier. But when it comes to services/intangibles, problems start accumulating. We in Pakistan do not have any experience of collecting sales tax on services either at the federal or the provincial level. Tax administration of Pakistan has some experience in imposition of Federal Excise Duty on few selected services. But VAT is altogether a different ball game and the previous experience of Federal Excise Duty is of no use. The drafting of new law, training of staff and officers, formulation of rules and procedures etc. etc. requires lot of time and effort.  To top it all we need a dedicated team of professionals.  None of these ingredients are available at present.  The IMF is here to force it down our throats without realizing the ground realities and the most important ground reality, not taken into consideration at all, is the expected response of the trade and industry.  Is the trade and industry willing to accept VAT on services? In fact the first question in this regard is: will an unpopular government be willing to take on trade and industry on this issue when it will already be in third year of its tenure and the spectre of mid-term polls already looming large on its head.

4.         At present FBR is at logger heads with itself. The Customs and Excise Group is in litigation with the FBR regarding introduction of Inland Revenue Service (IRS).  Understandably, certain sections in the Income Tax Group are also not comfortable with the IRS.  The litigation is likely to take some time to end.  Even if the litigation comes to an end, one has to understand the limitations of a tax administration extremely dissatisfied with its service structure. Nothing worthwhile can be expected from them and should not be expected. They are on extremely confused, disoriented, disarrayed and highly vulnerable group of people, not ready for the job ahead.

5.         However, another very important issue not addressed so far, is the relationship between the Federal Government and provinces. At present, imposition of sales tax/VAT on services is a provincial subject. Will the provinces be ready and willing to surrender their powers to the Federal Government?  What concessions will they expect at the negotiating table in return for surrendering their powers in favour of the Federal Government?

6.         Introduction of VAT on goods and services by the Federal Government will in all probability, require a constitutional amendment as well. Does the political government has the commitment and where withal to introduce a constitutional amendment to implement a VAT? This should not be one of the priority areas for the government, embroiled in most pressing issues of security, law and order and its own survival. Unless this constitutional question is addressed, no Federal VAT on goods and services can be imposed.

7.         Considerable time has passed since we started toying with the idea of a tax on services.  Since sales tax could not be introduced on services due to constitutional bar, Federal Excise Duty on few selected services was imposed. However, it was resulting in cascading, double taxation and distortions created due to its imperfect working (litigation relating to refund of excise duty to telecom companies is a case in point). To address these issues, certain changes were introduced in the federal excise law to ensure that Federal Excise Duty on services was collected in VAT mode. The effort had met with some partial success. But to introduce a full fledged VAT on services requires another kind of effort. Since the commitment was not there, way ward policies were adopted. One of such policies was introduction of sales tax on few services by the provinces. For this purpose, Provincial Sales Tax Ordinances were introduced during the Musharraf era. This imposition of sales tax by provinces on few services was, from the very beginning, a non-starter. It was not designed to deliver and was of no significance.

8.         If the Federal Government is really serious in introduction of federal VAT on goods and services, immediate steps are required to be taken and a period of at least two to three years should be earmarked for achieving the task. The first step should be to talk to the provinces and to convince them that a federal VAT on goods and services is required to be introduced. They need to be convinced to surrender their powers and authority.  Most of the VAT on services will be collected from Sindh and Punjab but smaller provinces also need to be convinced of the need to have a federal VAT on goods and services. This is an arduous task. Such an arrangement has already been worked out by the Australian Tax Administration.  Their experience can be of great importance and significance for Pakistan. The Australian Government had agreed with the provinces to enter into an Inter-governmental Agreement (IGA) to have a federal tax on goods and services. They took substantial time to work out details of IGA. At the same time, agreement on expenditure/distribution of the tax so collected was also reached with consensus.  Such an exercise needs to be mounted here.

9.         The whole issue needs to be looked into in its perspective. On the one hand, provinces are clamoring for more provincial autonomy. There is a serious demand for abolishing the Concurrent List so that these powers go to the provinces. In this perspective, to convince them to surrender their power and authority in favour of Federal Government for VAT is a difficult task. If the FBR and GOP are willing for the job, they need to realize difficulties involved and they need to address serious reservations of the provinces on the subject. Then, there is the issue of amendment in the Constitution. Two third majority in the parliament is required which the present government does not enjoy.  Will the opposition parties in the bigger provinces as well as parties in the smaller provinces agree to an amendment in the Constitution?  I hope, not.

10.       Even if the Federal Government has a smooth sailing and everybody agrees to whatever the desire of the government, the introduction of VAT on services requires mounting of considerable effort. Taxation of intangibles is always very different. What services to tax and what to exempt?  What about financial services?  How, the rent, sale and purchase of property and hundreds of other services being provided by professionals to be taxed.  Decision on all these aspects requires an in depth knowledge of experience of other developing and developed countries which the present tax administration does not have. Of course the technical assistance will be coming from IMF, but to transpose experience of other developed and developing countries to Pakistan requires in-depth knowledge of local conditions as well. This expertise is missing in case of IMF. Then training of the staff and officers in the law to be introduced. They need to understand the complexities involved. The taxpayers also need to understand the law and their complications, if they are willing to pay or the Government has the will to ensure compliance.

11.       The most important question is how to break the resistance of trade and industry; how to educate them as to their rights and liabilities.  These and host of other issues need to be addressed.

12.       At present nothing appears to be on ground. Every effort is in the air including frequent statements by the Chairman FBR and occasional statements of the Finance Minister. If the GOP is serious in implementing GST in Pakistan, they should be demanding a period of at least two/three years for its introduction. The FBR at present is in a mess which is likely to be further compounded by July, 2010. I do not want to be harsh but left with no option except to say that policy makers in FBR and in GOP are day dreaming for introduction of VAT on Goods and Services by July, 2010.  Come July, 2010, they will be awakened and will start begging IMF for extension in time period benchmark. Why do it then and why not do it now. But before that, one has to be serious about it. There is however a big question mark so far as seriousness and commitment is concerned.