Thursday, December 9, 2010

Is RGST the only solution?

Startling disclosures by Wikileaks, though, have put the Reformed General Sales Tax (RGST) on lesser priority of public debates; yet, the issue cannot be overlooked as it carries the potential of having serious impact on political economy of the country.

Rational and spirited arguments are being given in favor and against the RGST. Some say it will add to inflation and others claim that it is necessary to bring people in the wider tax net and RGST is meant to fulfill that objective. If RGST’s purpose is only to document the economy and not the revenue collection per se, then the rate could be suggested @ 10%. Had it been so, the idea of documenting the economy through RGST could be sold to the nation effortlessly and tastefully. But that is not the case in reality. Fact of the matter is that government is cash-starved. IMF’s assistance depends on implementation of RGST with stiff commitment otherwise the Fund may delay the release of assistance and functioning of government machinery may face serious troubles. Against government’s argument for more documented economy, the counter argument is that instead of widening the tax net, it will burden those that are already paying the taxes. Heavy opposition from the political parties, particularly those in the coalition government, coupled with lack of effective collection mechanism, is perhaps a true reflection of public views against RGST.

Government can negotiate this conditionality with IMF provided it brings honesty and financial discipline in its own working. From 1998 to 2001, Musharraf regime was running the affairs of country with only 10 ministers and without any nostalgic feelings. The current government has an army of around 40 ministers and 17 state ministers and their performance on ground is highly questionable. The money spent on the maintenance of ministers and state ministers could be saved to off-set partly the adverse impact of RGST. It was surprising that recently two more ministers have been added despite the fact that larger group miniseries is causing a heavy burden on national exchequer.

The larger cabinet has not been able to function effectively. In fact, it has raised the standards of corruption to new levels. According to Transparency International, the average expenditure on bribery/household is Rs 10,537 per annum. Based on a population of 169.58 million and 8 members/house, the cost of bribery works out to Rs 223 billion; an increase of 11.37 % from 2009 which was Rs. 196 Billion. According to an estimate, the amount of tax evaded is in the range of 50 to 60 billion rupees. If the government can plug the points of corruption and reduce the size of ministries to at least half, majority of the financial woes of the government can be solved without such conditionality.

Mounting budget deficit is also a major cause of concern, although the government is directed by IMF to curtail budget deficit at 4.7%, economist fear that with the going trend, it will be in the range between 6% to 6.5%. It is highly debatable that in this situation, increasing tax revenue will not benefit the public at large, but the fear is that the additional money will be siphoned off due to massive financial indiscipline. Luckily, international oil prices have recently come down from over $80 per barrel to around $78 per barrel. This phenomena, if continues, will be a bit of relieve on the current account, but increase in the inflationary pressure from a manageable 10% over 15% coupled with a decline in the economic growth from expected 4.5% to current 2.5% might push the country in the negative real growth trajectory and coming out of this situation will require massive revenue generation and business friendly reforms, particularly in the area of agriculture tax, privatization and introduction of Code of Corporate Governance in the State Owned Enterprises.

In conclusion government must focus on reviving businesses that are already affected due to energy crisis, reducing the cost of doing business, and combating corruption. Pakistan is certainly market economy, once businesses have confidence in government policies that are providing a level playing field, jobs will be created resulting in revenue for the exchequer.