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A must for making GST regime effective and efficient

Share of GST regime in overall federal tax receipts is more than 40 percent. However, this is riddled with many deviations from standard GST/VAT systems that are adversely affecting its effectiveness. Resultantly, revenue efficiency is comparably low. An important deviation in this context is the use of multiple rates of sales tax. Apart from standard sales tax rate of 17 percent, imports and domestic supplies are subject to higher and lower rates. Many costs are associated with multiple GST rates.

Efficiency and Productivity

GST collection efficiency (or C-efficiency) and GST efficiency (or GST productivity) are two important benchmarks to assess the revenue performance of a GST system. C-efficiency ratio shows how much GST is collected as percent of total consumption, while GST efficiency ratio shows GST collection as percent of GDP at given standard GST rate over a certain period of time. Since GST taxes consumption, and not GDP; therefore, C-efficiency ratio is an improved measure of GST performance.

In the case of Pakistan, C-efficiency has declined from about 32 percent in 2003 to 23 percent in 2011. This shows that not only the benchmark itself is low (when compared to other developing countries) but is also declining. For instance, C-efficiency ratio in Bangladesh increased from 22 percent in 2003 to 30 percent in 2011. Similarly, in the case of Nepal, this ratio increased from 23 percent in 2003 to 38 percent in 2011. In Sri Lanka, the C-efficiency ratio was 40 percent in 2010.

GST productivity ratio has also decreased in Pakistan from about 27 percent in 2003 to 21 percent in 2004, whereas this ratio increased from about 17 percent to 26 percent in Bangladesh and from 21.5 to 35 percent in Nepal during the same period. VAT productivity ratio was 33 percent in Sri Lanka in 2010.

Moreover, in developed countries, the C-efficiency ratio was much higher with single VAT rate; for example, C-efficiency for New Zealand (98 percent), Canada (74 percent), Chile (75 percent) and Japan (67 percent).

Read More: Standardizing Sales Tax Regime

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