Merger of Sales Tax and Income Tax ... a utopian scheme in the making (The Nation Feb 8, 2009)


Federal Board of Revenue (FBR) has recently announced creation of a new post of Member Internal Revenue Service and abolishment of the post of Member Sales Tax. The new Member IRS shall deal with both Income Tax and Sales Tax and hence Sales Tax and Income Tax have effectively been merged. It has been propagated that the same has been done under the pressure from multi-lateral donor agencies. However this hasty step of the FBR appears to have far reaching consequences in terms of its legal, administrative and financial implications and it seems that the Board has not bothered to consider these ramifications at a time when country is already facing financial crisis.
First of all, the decision appears to be based on an IMF working paper and study conducted in 2004 for middle-eastern and north-African countries. The study itself claims in its preamble not to be representative of IMF views and IMF has recently started advocating ‘Best Fit Model’ rather than ‘International Best Practices’ model realising that each country has its own peculiar circumstances and it is not appropriate to import and copy paste foreign models in host countries. Interestingly the decision makers in the FBR failed or did not bother to look around the local models like India, Bangladesh or Malaysia where indirect taxes are administered by one agency and the direct taxes by the other. Even in the United States the IRS (FBR has been quick to copy the name) does not administers the sales tax that is actually a state subject. United Kingdom has tried to do this experiment but without any success.
So why is merger necessary? The proponents’ claim that merging the domestic taxes facilitates the tax payer as the tax payer has to come to one office for his taxes and functions like audit, registration and enforcement can be unified. It is interesting to note that while sales tax has some 80,000 registered persons, Income Tax has some 2 million registered tax payers so even if we accept the argument of facilitation, it would be to the extent of only the overlapping 80,000 tax payers.