Tax & Accounting Blog

When it Comes to Sales Tax, is Pakistan Downgrading?

Blog, Indirect Tax, ONESOURCE, Sales and Use Tax November 12, 2015

Pakistan recently announced that it is considering moving from its current value added tax (VAT) to a single-stage sales tax. This feels like it would be a step backward instead of forward—like someone walking into an Apple store and asking to downgrade his brand new IPhone to an older model. In the world of sales tax, VAT is the newest, flashiest model, so to speak, while single-stage tax is relatively archaic.

The reason for the change in tax styles, according to Pakistan, is that the current VAT system has become ineffective due to sector-specific exemptions. Because of these exemptions, there is no reason to have a tax that attaches at various levels in the chain of supply.

For help Pakistan is turning to an old friend, the International Monetary Fund (IMF). Back in the 1980s and 90s the IMF helped Pakistan modernize its sales tax regime by advising on the best strategy for increasing revenue. The IMF’s advice at that time was to implement VAT. Now, more than twenty years later, Pakistan is looking to the IMF again and asking for essentially the same thing. Pakistan wants to increase revenue, only this time they want the IMF to help them increase revenue by getting rid of VAT.

Many Pakistanis are against the idea of a single-stage tax. They feel a new tax scheme will not get at the root of the government’s revenue problem, which is corruption. It has been alleged that under the current sales tax scheme the government handed out billions of rupees in fraudulent refunds. During that time the government also withheld many legitimate refunds in order to artificially restore revenue numbers. If such corruption took place under Pakistan’s VAT scheme, there is no reason to believe it won’t also take place under a single-stage tax scheme.

At this moment Pakistan has other options for increasing revenue—options that wouldn’t require overhauling the tax scheme. One possibility would be to cut back on sweeping exemptions. Another possibility would be to create a lottery to help enforce collection, something that has been successfully done in countries and regions like Slovakia and Taiwan.

When you consider the situation in its entirety, it feels like Pakistan’s shift to a single-stage sales tax would not only be a downgrade. It would also be an overly elaborate attempt at kicking the can down the road.