Micromanagement: Vat vs Gst in Pakistan

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Introduction:.................................................................................................................................................. 1 The economy of Pakistan - Moving towards VAT: ...................................................................................... 2 GST & VAT:................................................................................................................................................. 2 Why GST has not been successful in Pakistan and why will VAT be successful: ................................... 2 Advantages of VAT: ................................................................................................................................. 3 The role of IMF in the economy of Pakistan: ............................................................................................... 4 Equity and Justice or demands of foreign lenders: ....................................................................................... 5 Conclusion: ................................................................................................................................................... 7 References ..................................................................................................................................................... 8 Exhibits ......................................................................................................................................................... 9

Introduction: Pakistan has long been striving hard to achieve macroeconomic stability. However, its low tax-GDP ratio along with high expenditures and subsidies has hindered Pakistan in achieving that. The tax-GDP ratio has long been swinging around 10-11% (Exhibit 1). Moreover, debt servicing and high expenditure to curb terrorism have worsened the situation. Taxes are major instrument of fiscal policy through which country’s output and employment is changed to bring it closer to the potential output. Main aim is to generate revenue to provide public services, meet defense expenses and redistribute income to reduce inequality. As per World Bank our Gini Index is 30.8 as of 2008 (Exhibit 2). This shows that inequality persists in our society and needs to be reduced through proper redistribution of income. At the time of birth of Pakistan, only limited areas of commercial activities were covered through sales tax. After an era of tax doldrums, under IMF program through their technical support, a formal Sales Tax Act was introduced in 1990; with its major focus on GST. Again in 1999 through World Bank support efforts were made to revamp the taxation system, but however with little success and the tax-GDP still remained around 9%. This low tax-GDP ratio along with heavy borrowing in recent years from IMF has lead Pakistan to move closer to VAT. The Federal Board of Revenue (FBR) of Pakistan generates tax revenue both through direct and indirect taxes. Around 70% to 80% revenue is generated through direct and indirect taxes – which has been declining as compared to previous years- and around 20% is generated through non-tax sources such as State Owned Enterprises (Exhibit 3). Direct tax puts the incidence of tax on one and the same person. The burden of tax is borne by the taxpayer himself. It includes for instance taxes on salaries, interest on securities and capital gain. Indirect taxes on other hand are one where tax burden is transferred to the public. There are two types of indirect taxes in Pakistan; General Sales Tax (GST) and Value Added Tax (VAT). GST and VAT are often used interchangeably internationally as GST is considered to be part of VAT. It is widely propagated that these taxes are regressive in nature – inclined towards rich people - leading to opposition of VAT. However, if proper targeted spending is done by the government, this additional revenue generated can benefit poor (health and social benefits) and the government...
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