Facing the impacts of Covid-19, a major concern now is how to boost the economy. Measures are being suggested and implemented in different sectors to overcome the crisis. The National Board of Revenue (NBR) has a great role to play since it directly works with the economy. In fact, tax measures are a very important tool to maneuver the economy. In my opinion, in the area of Value Added Tax (VAT), NBR can adopt tax measures and managerial measures to revamp the economy.
In the area of tax, the reality is, we can not afford to collect lesser tax since government's expenditure is hugely on the increase and domestic tax collection has seen decreasing during the last couple of months. However, government is borrowing from external sources. It is a good start to offset the domestic revenue loss. Our debt-GDP ratio is still relatively low. So, it would not be unwise to accept more foreign loans at this crucial time. Taking loan from domestic banking system by the government would make obtaining loan by private enterprises challenging that would again jeopardise growth.
In the taxation arena, to boost the economy, avoidance of tax collection from those areas from where tax collection is not so significant can be suggestive. In the area of VAT, there are about 1,59,000 registered entities. But about 80 per cent of the domestic VAT collection comes from about 500 entities only. Only 164 entities registered under the Large Taxpayers Unit-VAT (LTU-VAT) Commissionerate contribute about 55 per cent of the domestic VAT collection. So, do we really need to run after thousands of business entities, whose contribution to the revenue collection is very insignificant, engaging huge government machinery at this crisis period. As mentioned above, we can offset this revenue loss by borrowing from external sources.
The medium and small entities in the country may be given free hand for at least 3 years, i.e., complete exemption from VAT network. This may require legislative intervention. With such incentive, they can produce more, employ more manpower, then consumption will increase. Even in the income tax arena too, if you analyse the trend of revenue collection, you will see that the smallest number of Taxpayer Identification Number (TIN)-holders contribute the highest amount of revenue. So, the same holds true there.
This has long-term positive significance. Suggested measures in the VAT area may continue for 1-3 years commensurating with other measures of the government. One of the basic principle of VAT is, lowest possible single rate and widest possible coverage. So, after say about 3 years, these small and medium entities will hopefully get stronger. Then VAT coverage can be extended widely.
In the area of managerial measures, new VAT registration has to be issued easily, change in the registration has to be done easily, search and seizure should be discouraged unless in exceptional cases, collection of current revenue can be emphasised upon rather than collection of arrears, return submission has to be made easier, payment of tax has to be made easier, tax-payers are to be given advice by field-officials to address their day-to-day challenges by responding to them over e-mail, mobile phone.
With the above measures, on the one hand, domestic VAT collection shall not be noticeably harmed, and on the other, the large number of small and medium enterprises can avoid the challenges of VAT compliance during this crucial time. This will be a great incentive for them. The government has already announced for them financial packages. So, they can produce more, can employ more manpower and consumption will hopefully rise.
Dr. Md. Abdur Rouf currently works at a World Bank-financed VAT-related project as a Specialist. Opinions expressed in this article are his own.
roufvat@gmail.com