Wednesday, January 5, 2011

RGST In The Balance Amid Pakistan Crisis

RGST In The Balance Amid Pakistan Crisis
The implementation of a Reformed Goods and Service Tax (RGST) in Pakistan was unsurprisingly the main topic under discussion at a recent conference of the Pakistan Institute of Development Economics (PIDE), but with recent events sending the government into chaos, the chances of the tax being introduced any time soon appear remote.

Experts at the conference agreed that implementation of the RGST needs to be carried out as soon as possible to ensure the country’s economic health. Dr Hafeez Pasha, a leading economist told the conference that the country’s fiscal future would experience a strong downward spiral unless RGST was set in place soon. He warned that, without the revenues generated by the RGST, the central government's budget deficit would widen, potentially plunging the country into a fiscal crisis whereby the government would have few options but to increase money supply, risking inflation in the process.

Other speakers voiced concern over the ability of Pakistan's administrative system to cope with such a reform, while others questioned the potential revenue yield from the tax. Asad Omer, President, Engro Corporation, also expressed fears that the complex nature of the tax may create loopholes and opportunities for corruption.

The government's determination to force through the RGST seems to have taken a hammer blow, however, after a coalition partner of President Asif Ali Zardari's government in the National Assembly defected to the opposition recently, leaving the ruling party as a minority government. Political tension was also ratcheted up another few notches on January 4 when the governor of Punjab, a key ally of President Zadarni, was assassinated by a member of his own security. With the current administration potentially losing its ability to govern, fears are growing that the country could enter a prolonged economic and political turmoil.

The RGST, approved by the government in November, extends the scope of the existing general sales tax (GST) by abolishing certain of its exemptions, while replacing the current multiple rates of between 17% and 25% with a new flat rate of 15%.

Pakistan has operated under a commitment to the IMF to broaden the country’s tax base, which was, originally, to have been fulfilled by the introduction of a value added tax (VAT), by the beginning of the 2010-11 financial year in July. Following the government’s failure to implement a VAT, it was proposed instead to expand the base of the existing GST.

However, until now, deadlines in reforming the GST have been missed, largely because of vociferous opposition from provincial governments over the services sector, and consequent delays to implementing legislation.

Confirming the seriousness of the situation in Pakistan the International Monetary Fund has recently issued a stern warning to Pakistan to take steps to cut its spiraling budget deficit, said a senior Pakistani government official. In an official letter to the government, the IMF warned that the state of the nation's economy is far worse than previously realized and urged immediate fiscal belt-tightening measures, according to the official, who had seen the correspondence.

The IMF withheld USD3.5bn in 2010 from its total USD11.3bn loan package for Pakistan in a bid to pressure the country to take action

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