Pakistan Needs New GST System

December 31, 2010 Taxation in Pakistan

Rupee ,Currency of Pakistan ( Coins )At a recent conference Pakistan’s potential Reformed Goods and Service Tax was discussed in detail, with experts agreeing that the tax needs to be implemented as soon as possible to ensure the country’s economic health.

On December 30th the Pakistan Institute of Development Economics concluded a three-day conference, concerning the current financial situation and future economic outlook of the country, held in Islamabad. Among the numerous discussions held at the conference was a series of presentations about the potential implementation of a Reformed Goods and Service Tax (RGST) in Pakistan.

Speaking on the second day of the conference Dr Hafiz Pasha, a leading academic economist, claimed that the country’s fiscal future would experience a strong downward spiral unless RGST is implemented soon. He stated that without the extra revenues potentially raised by the RGST, the Government’s budget deficit would rise significantly. Dr Hafiz Pasha went on to explain that if the Government was to increase its annual level of money printing to cover the fiscal gap, the country would soon be caught in the grip of hyper-inflation. He noted that while continued discussions are being held regarding the RGST, political disputes have stalled the implementation of the tax, or even a comprehensive decision on the exact nature and implementation of the system.

The Governor of the State Bank of Pakistan (SBP) Shahid H. Kardar also spoke at the conference, reaffirming Dr Hafiz Pasha’s statements. He explained that the RGST system would greatly raise national tax revenues and improve the country’s economic prosperity. He summarised his opinions on the tax, saying, “…the country desperately needs a tax structure in order to improve its economy. The RGST can be the best option but unfortunately our politicians are not convinced enough to pass it into a law.”

Both speakers conceded that RGST would have some upward inflationary pressure, as claimed by many who oppose the tax. However, Shahid H. Kardar and Dr Hafiz Pasha both pointed to the fact that the eventual inflation levels caused by the Government’s growing budget deficit would greatly exceed any inflation directly caused by the a new RGST.

The potential issue of RGST fraud was also raised at the conference by Dr Ather Maqsood Ahmed, a former member of the Federal Board of Revenue (FBR), when he spoke at the conference. He suspects that an RGST system would result in greater levels of tax fraud and the creation of an underground economy for the sale of fake sales invoices. Although, later in the day Abrar Ahmed Khan, current member of the FBR, stated that national tax collection infrastructures are being perpetually upgraded, and a full electronic checking system would be implemented for any future form of the RGST system. He went on to say that Dr Ather Maqsood Ahmed’s concerns are based on his own experiences with tax collections, which are now outdated by today’s technological standards.

Several speakers at the conference also noted that in lieu of an immediate implementation of the RGST system, tax authorities should concentrate on improving collections from property taxes, which would stem some significant downward economic movements.

Photo by amir taj