What is the RGST?

The RGST is actually plain old Value Added Tax (VAT) with a new name. Since the
VAT has already had its fill of bad publicity, the government decided it would be a
smart move to rename and repackage the new taxation system.
The RGST is a taxation system that operates by an addition of 15 per cent tax on
each and every value addition on taxable products
Who is involved?
The key players behind the proposed RGST are the International Monetary Fund
(IMF), the World Bank, United States Mission to the European Union (USEU) and other
assorted donors who are tired of paying their taxpayers money to cover up for the
leaks in our taxation system. But this is not to say that we do not need reforms in our
taxation system. The International Monetary Organisations might be the catalysts
towards the reforms just now, but in all reality tax reforms have been long overdue.

Those who will be affected in one way or other are the suppliers, the manufacturers
and the retailers who will all have to maintain and disclose proper sales and
production records and would thus find tax evasion pretty difficult. Of course, the real
victims are the consumers who would bear the burden of higher costs.

Why implement the RGST?

The government is trying its best to impose the RGST mostly because there is no way
out of it this time.
The imposition of more taxes is a condition to which the IMF had agreed to give a
monetary injection to the failing economy of the country. Add flood related damage
to the economy and conditions of the donor countries, and the imposition of the new
tax has become a must.
Although the RGST is being imposed under pressure, economic experts say that
Pakistan was in dire need of it. The new system of taxes will not only raise our
revenue but also help in documenting the economic growth.

When will RGST be implemented?

The originally proposed VAT was supposed to come in effect back in July, but due to
massive public and political backlash, the government was forced to delay the
imposition.
Now, the RGST Bill has been passed by the Senate. Eventually, it will be discussed in
the Parliament and will be passed unless rejected through a vote. The government
needs just a simple majority to pass the Bill. As soon as is passed by the Parliament,
the RGST will be imposed.
How will it impact you?
The new tax does have a wider reach than the old GST. When the RGST is imposed,
everyone from the suppliers to the middleman in small and large businesses will be
brought within the tax net.
Unlike the old GST, the RGST will not be imposed just on the final price of a product;
rather, a certain amount of tax will be added at each stage of production.
For example if a supplier sells raw material worth Rs100 to a manufacturer, he would
charge Rs115 instead of Rs100, and remit the extra Rs15 as tax.
After manufacturing the product, the manufacturer, for example, adds a profit of
Rs2o. The product now costs Rs135, but instead of selling it to the retailer at Rs135,
the manufacturer will add another 15 per cent to the value addition of Rs20 which
will bring up the cost to Rs138. The extra Rs3 will be remitted as tax.
Finally, the retailer will add his profit. Assuming that is another Rs20, the price of the
product is now up to Rs158 again. Instead of selling it at Rs158, the retailer will add
yet another 15 per cent of the value addition and the final cost will be Rs161. The
retailer will then pay the added tax back to the treasury.

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There are exemptions and conditions, but so far the glitches are being worked out.
According to economic experts, this system of taxation will help bring more people
into the tax net. Not just that, tax evasion will become more and more difficult. Since
everyone will be documenting and paying the tax at each level, any attempt at tax
evasion will automatically be highlighted. 1
There are various problems associated with RGST or VAT.
1. First problem is that, this tax is directed towards strong section of traders and
businessmen. This is because previous GST was imposed on the final prdouct, thus
bypassing various stages through which it is now supposed to be implemented. As
has been explained in the Viceroy's post about those stages, now those stages
include the whole production and distribution system of the goods on which this tax
is to imposed. This means that previously those industries which were out of tax
documentation will come under tax net. This is the MAIN problem with RGST.
2. Like all indirect taxes, RGST is also inequitable and regressive in nature.
Inequitable tax means that poor will be hit most with this tax, and regressive means
that poor will have to pay more of their income in form of taxes.
3. IMF and WB, are not necessarily insisting on the RGST. Their main concern is about
reduction of fiscal deficit. Which can be done through increase in direct taxes like
income tax, but problem with direct taxes is that very influential section of society
will come under tax net. Although, certainly more equitable and progressive (poor
friendly), this tax is politically infeasible simply because of corrupt government and
their machinery. I must tell you DIRECT TAXES ARE SURE ANSWER TO PAKISTAN'S
PROBLEMS BUT GOVT DOES NOT WANT TO IMPOSE. In this situation, the only
possibility in front of IMF and WB is to lay stress on imposition of RGST.
4. Another dimension of RGST is the issue of exemptions and different tax rates,
while RGST will remove most of the exemptions and also a flat tax rate will be
applied. But this act will increase prices of some items for example sugar, which is
already expensive.
5. One post claimed that taxes are a means to reduce inflation. This is certainly true
if taxes are direct i.e. imposed on their incomes directly. But I am afraid, this is not
the case with RGST. This is because this tax is imposed on goods and services and
not on income. Since this tax is inherently regressive (meaning poor will have to give
more of his income in taxes as compared to rich one), thus rich will not be much
affected and will continue spending although at less rate than before. But the
increased price level will override this effect, hence resulting in inflation.
If that were direct tax, then it would have reduced the income level of rich while not
affecting prices of goods and prices and thus will reduce the overall consumption by
rich and may not have affected poor. Result will be reduction in inflation. This is
because most of the spending comes from rich and decrease in their incomes may
have reduced the price level.

IMPACT ON PAKISTAN

Explaining the inflationary impact of RGST on consumers, Chairman FBR said

that major cause of higher inflation in the country dismisses concerns on is
government’s bank borrowing.
He admitted that RGST would result in increase in inflation especially on such
items where the GST exemption would be withdrawn. He also informed the
committee members that FBR has never claimed that RGST would increase
inflation. He explained that prices of a large number of items would decrease
further when different rates of GST would be brought down from a maximum
of 25% to 15% and it would also have a positive impact on inflation. He also
requested the committee to invite experts so as to obtain their views on
inflationary impact of RGST and said that being Chairman FBR, he is not an

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expert on inflation and cannot say more than this on the issue.
Chairman FBR, however, categorically said the country could increase its
revenues through imposition of RGST. It would increase the government’s
revenues and would result in less reliance on government’s bank borrowing.
Reduced bank borrowing by the government would help a lot in bringing
down inflation.
Chairman FBR also categorically said that agriculturists would be required to
pay tax when RGST would be applicable on agriculture inputs like pesticides,
fertiliser, agriculture machinery and implements. The meeting was informed
that RGST would be imposed on sugarcane and Phutti at the stage of sugar
mills and ginning factories. When legislators enquired about the status of the
RGST on sugarcane and Phutti, Abrar Ahmed, Member FBR on Strategic
Planning informed the meeting that RGST would not be imposed on
sugarcane and Phutti when, however, tax on such agriculture products would
be imposed when such would reach at sugar mills and ginning Factories.
Chairman FBR further informed the committee that if the parliament allows
the tax authorities, FBR would be ready to tax such agriculture produce like
sugarcane and Phutti at the stage of farms. Abrara Ahmed informed the
committee that purpose of RGST on agriculture is to impose the tax on
agriculture inputs like fertilisers, pesticides, tractors and agriculture
implements and not at the stage when agriculture produce is in the hands of
farmers.
FIRST things first. The reformed general sales tax (RGST) is bad for consumers. Which
means it’s bad for the poor and the less well-off. The reason is pretty straightforward.
RGST is an indirect tax, i.e. a tax on goods and services. Which means it will get
passed on to the end consumer, which includes the poor and the less well-off.
Yes, the government wants to harp on the positive aspects, for obvious reasons: new
taxes on leather goods and carpets, for example, are unlikely to hurt the poor
because they don’t use carpets or leather goods.
But look at all the stuff that is getting taxed. And for that we need go no further than
the information ministry’s six-page handout on RGST. Surgical items which means
your next trip to a doctor may cost more. ‘Pharmaceuticals (other than life saving)
which means the next time you have a mild illness you’ll pay more to get better.
‘Stationery items, dairy products self-explanatory.
But, and here’s the rub, there is a very different kind of problem which has ravaged
the poor in recent years: inflation. In part, the fiscal deficit the country has been
running has helped keep inflation high. Now, with the floods having added colossal
expenditures to the overall budget, the fiscal deficit, in the absence of revenue-
generating measures, would balloon again further driving up inflation.
So for the poor and the less well off, it may be a case of damned if they do, damned if
they don’t: fight off (theoretically) RGST and inflation would rise; accept RGST and
end up paying more from their pockets.
There is, of course, a better solution: tax something else, or someone else, i.e. the
rich. Which is why the government has cleverly weaved in the ‘flood tax’ on incomes.
People and businesses paying income tax, a tiny percentage, will for six months have
to pay 10 per cent more income tax. It’s really just a ruse, allowing the government
to claim that it is moving towards a fairer tax system.
In truth, at the end of the six months, the country will have an inarguably more
unjust and more inequitable tax system, because by then the RGST regime would
have permanently expanded indirect taxes while direct taxes, i.e. income tax, would
return to the original, low, level.
To understand why this happens, you need to know something about your politicians
and how the state succumbs to special interests. Finance Minister Hafez Sheikh gave

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an insight into this world earlier this week when he candidly admitted that as late as
11.30 the night before this year’s budget speech he was receiving calls pressing him
to exclude a capital-gains tax on the stock market.
The rich not only know how to protect themselves, they are far more organized and
serious about it than the average person. The average schmuck working nine-to-five
for a pittance will bend to the government’s will and pony up the extra 10 per cent
income tax (realistically, he will have no option because it will be deducted at source
by his employer).
But the big boys have a bagful of tricks that the average schmuck can only dream of.
Access is of course one thing. Hafez Sheikh is notoriously inaccessible to the media.
But stock-market kingpins lobbying against a capital-gains tax on their business can
reach him at half eleven the night before the federal budget is unveiled.
Even better than access, however, is being there yourself to look after your interests.
Sorry, we can’t tax agricultural income because it’s a provincial subject. Oh, how did
that happen? Well you know, we transferred it to the provinces in the 18th
Amendment. Oh, you mean the provinces where the big landlords control more
seats? Yeah, but it was all about strengthening the federation. Straight face.
Is there any hope of a better, more just system emerging? At present, no. There is no
will for it nor is there the capacity. The clumsiness with which the government has
handled the RGST issue is indicative of that. A systemic overhaul or deep reform by
these guys, in this incarnation, at the present time, is extremely unlikely.
But consider this: the most politically damaging thing a government could do pare
down subsidies at a time of soaring inflation and low growth this government has
done. Why?
Economics and finance have a logic of their own, logic that every government
eventually has to bow before. In 2008, the option was to either embrace the IMF or
slide towards economic oblivion. Purists may argue about that, but it was effectively
the only choice in the real world where politics and economics intersect.
The same goes for the business of taxation. Eventually, economic logic will kick in.
It’s happened already while setting the rate of RGST: 15 per cent, two per cent lower
than the existing standard rate. In this year’s budget, the government experimented
with a temporary, one per cent increase in the sales-tax rate. The consequences
have been inevitable.
While in the short-term the demand for goods taxed stays more or less constant
(people take time to adjust habits and consumption patterns), it eventually begins to
sag — higher price translates into lower demand, meaning you can’t infinitely raise or
rely on indirect taxes.
So it will be with RGST. It really is a band-aid solution, meant to nominally increase
the tax-to-GDP ratio in the medium term. Eventually, other measures will be required.
At that point the RGST Trojan Horse may be tapped: once you’ve documented the
production and supply chain, as the RGST aims to do, you’ve got proof of how much
business so many more businesses are doing.
At present, only the retail level is captured by sales tax. But under RGST, which is
really the value-added tax by a different name, the tax machinery will learn about
the activities of manufacturers, marketers, distributors and wholesalers
exponentially increasing the potential targets of the taxman for things like income
tax.
The problem? The same as always: special interests. What the taxman can
document, the politician can scuttle. Just like agriculture and textile special interests
have worked to keep those sectors largely out of the tax net, so will other, newly
taxed sectors work to acquire clout in the corridors of power.
But then in the end they will still have to make a choice: do they want Pakistan to
swim or sink economically?
At that point, you better hope you have a lifeboat handy. 2

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The Pakistan Muslim League Nawaz (PML-N) Muttahida Qaumi Movement
(MQM) and Pakistan Muslim League Quaid opposed the RGST Bill in the NA
while MQM Senators and Jamiat-e-Ulema-e-Islam Fazl opposed the Bill in the
Senate.Talking to media on behalf of PML-N, Ayaz Amir said the move to
table RGST shows that the government has run out of options and is not
“clear in its head” on how to mobilise resources. He said that the tax will lead
to a hike in inflation because government is not thinking of alternatives.If we
are in a war situation why don’t we get our loans written off?” he said,
addressing the statement of the finance minister on owing debts to the
United States. “In which world is the finance minister living?” said Amir,
adding that the finance minister had said the loans were not to be written off
since it was a “matter of respect”.Khyber Pakhtunkhwa Minister Bashir Bilour
said the RGST cannot be imposed on his province because it is already
exempted from taxes for two years due to floods.PPP MNA, Sherry Rehman
said the RGST Bill, if passed, will prove very burdensome for the common
man.Prime Minister Yusuf Raza Gilani said the Bill will be debated in the
House and voting will be held to decide its fate.Despite stiff opposition from
the coalition partners, the PPP-led federal government finalised the RGST
Reforms Bill 2010 and presented it in the NA and Senate on Friday.The
lawmakers from coalition parties unanimously opposed the raised the voice
against RGST and criticized the government for making such irreversible
mistakes. Senators also declared the presentation of bill in the House equal
to forcing common people to commit suicide.Legislators termed the RGST
equal to drone attacks which meant for initiating a new wave of price hike,
unemployment and poverty and proposed the government to avoid
committing political blunders on the signals from hidden forces.

As the Senate resumed proceedings after interval for Juma prayers, Leader of
the House Senator Nayyar Hussain Bokhari presented the copy of RGST Bill in
the House for further proposals and recommendations. The Acting Chairman
Jan Jamali referred the bill to the concerned standing committee for further
discussion and inputs from the members. MQM Senator Col (Retd) Syed Tahir
Hussain Mashhadi strongly criticized the government for running the
economic affairs of the country without any proper and effective economic
strategy.He said that RGST was refined shape of value added tax (VAT) and
his party despite being the coalition partner would never extend support to
government in getting it passed in the House.He observed that MQM Chief
Altaf Hussain had delivered telephonic addresses in 35 cities of the country
and opposed the enforcement of RGST declaring it as anti people
legislation,He alleged that Trading Corporation of Pakistan (TCP) was involved
in creating artificial sugar shortage just to benefit blue eyed people by
allowing them to increase prices of the commodity.Declaring RGST equal to
drone attacks another coalition partner, Mulana Abdul Ghafoor Haideri JUI-F
said that his party would not join government’s crime against the masses by
supporting it on RGST in either House of the parliament.He said that the
poorest class of the society was the real target of the possible economic
impacts of RGST as it would usher in a new wave of price hike in the country
whereas people had already been extravagantly burdened with heavy
taxes.MQM lawmaker Dr. Abdul Khaliq Pirzada warned the government
against the possible public demonstrations on the Constitution Avenue in

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case it failed blocking anti people legislation.He questioned commenting that
government should gather all the poor people and kill them by dropping atom
bomb for once rather than compelling them to die daily.ANP spokesman,
Senator Zahid Khan while talking to Pakistan Observer exclusively said that
his party would not extend support to government either inside or outside the
parliament on the issue of RGST.PPP Senator Dr. Safdar Abbasi when asked
whether government would be able to get RGST passed from the parliament,
commented,’ I think- it seems difficult’ as coalition partners are not backing
the government on this issue’.Finance Minister Dr Abdul Hafeez Sheikh
presented the RGST Bill in the NA while the Leader of the House in Senate
Nayyer Bukhari presented the Bill in the Senate. The flood surcharge tax Bill
was also presented in the Assembly.The Bills have been forwarded to the NA
and Senate Standing Committees on Finance. The committees will prepare a
report by November 22 after which the Bill will be approved in both the
houses. 3

CONCLUSION
I think this is not the true interpretation of RGST or VAT. I’m afraid this is
written without any proper homework and study. Just a brief for everyone
understands
VAT or RGST is more broad-based, equitable and efficient and is without
cascading (tax over tax) and hence, is preferable to narrow-based and
cascading-ridden traditional sales tax. RGST is levied on goods and services
while sales tax is imposed generally on goods. Through acceleration of
development process with new RGST receipts, employment opportunities will
increase and the overall income level of the low strata of society will
progress. Besides, with increase in revenue income, state will be in better
position to promote social welfare/wellbeing of the masses. Because of
absence of tax cascading and in-built invoice-based input-credit mechanism,
RGST is almost non-inflationary as compared to traditional sales tax RGST is
neutral to production and consumption choices. It eventually stabilizes prices
in the market. Every tax is prone to fraud. RGST however, has edge over
other consumption taxes as that RGST fraud cannot escape detection sooner
or later. Proper monitoring always reduces opportunities for tax fraud. The
world experience shows that RGST induces a strong tax culture.
In my opinion, this is the only tax which has been discussed and debated for
so long in the country’s history and all stakeholders have been given chance
to present their point of view”. The government is taking all suggestions with
an open mind to improve this bill as much as possible he observed.

References
1 http://blogs.tribune.com.pk/story/31...ow-about-rgst/
2 http://www.cyrilalmeida.com/2010/11/...cyril-almeida/
3 http://pak-news.net/rgst-bill-in-na-senate-despite-mqm-opposition-
protest/
4 www.wikipedia.com

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5 www.slideshade.net