Though the federal Board of Revenue (FBR) has been careful not to name the system VAT, the reformed General Sales Tax (RGST) promises to be as painful. Whatever the name, this new taxation initiative has caused the furore as was expected.

An ordinary sales tax is levied only at the point of sale. VAT on the other hand is a multi-stage tax. For example, if a good costing Rs100 is imported and VAT is 15 per cent the importer would pay Rs15 to the tax authority at the clearance stage. When he sells the good to a wholesale dealer he would also collect VAT. Suppose he collects Rs25 as VAT.

The importer would pay the tax authorities the difference of VAT paid and collected i.e Rs10 (25-15). When the wholesale dealer sells the good to a retailer he would also collect VAT, let's say Rs35. When the dealer files his return with the tax authority he would also deposit the differential amount i.e. Rs10 (35-25). Finally the retailer sells the good to a consumer who pays the retailer Rs50 as VAT.

It is now the retailer's turn to deposit the differential amount of Rs15 i.e. 50-35 with the tax authority. The tax authority receives total of Rs50 (15+10+10+15) as consumption tax through a chain of collections starting from import (or manufacture) to the purchase by end consumer. As can be seen the system requires all the players to be registered with the tax authority, keep proper VAT collection record and file regular tax returns.

Those who fail to do so would either be penalised or would lose the opportunity of claiming back the VAT paid on their purchases. Therefore, self policing and documentation of economy are cited as the major benefits of VAT system by its advocates.

Various surveys suggest that it is a major source of revenue in more than 120 countries.

Despite the worldwide adoption, VAT has always been a gatecrasher as its introduction has customarily been greeted with massive protests from the business lobby. This opposition has been more vociferous in the developing countries where rent-seeking lobbies view VAT's record-keeping requirements with great suspicion.

In order to do a dispassionate appraisal of VAT system I would use Adam Smith's famous canons of taxation; efficiency, certainty, convenience, and equity for evaluating VAT mode of system i.e. reformed GST.

Let us begin with efficiency. This criterion means that how much tax is actually collected for every rupee spent. VAT is considered to be very good as vast amounts of tax revenue can be collected after spending very little.

No wonder why world bodies like the IMF and the World Bank prescribe it as a panacea for underperforming tax systems of developing countries. The second measure i.e. certainty means how certain the tax authorities can be about their tax forecasts and how certain the taxpayers can be about their tax liabilities. A good tax system should not have too much of discretion and uncertainties built into it. In its model form VAT has one general tax rate and hence measures well on certainty principle.

The third criterion is the convenience principle. From administration's point of view, VAT is a very convenient system of raising huge amounts of tax revenue. But taxpayers generally do not find the system a convenient one. They have to act as unpaid tax collectors for the tax authority. Especially, smaller businesses find the record-keeping requirement an excessive burden.

The seminal research of Professor Sandford and his colleagues on compliance costs of VAT has established that compliance costs are borne regressively higher by smaller businesses. One way of addressing this problem is to keep the threshold of registration high enough to keep very small business out of the system.

Finally, the fourth criterion is equity. Even a cursory reading of human history should clearly suggest that humans have risen in protest when unjust taxes were imposed upon them. Most of the famous revolutions like American Independence and French revolution were caused by taxation related grievances. Therefore it is important that a good tax system should not negate the principles of equity and fairness.

On this account, VAT does not fair very well as it is regressive in nature. This means that a clerk earning Rs10,000 will pay same amount of tax when he buys a bottle of milk for his infant as would be paid by a tycoon for the same purchase.

From the preceding appraisal, one can see that two concerns are noticeable. One, it increases the compliance costs of smaller businesses and second, it is a regressive tax and erodes principles of equity i.e. ability to pay. The equity related concern can have a greater socio-political consequence as it is now commonly known that from PM to finance minister; hardly anyone from the ruling elite pays income tax.

Does this mean that RGST introduction should, therefore, be opposed? There can be strong arguments on both sides. The strongest argument against VAT's introduction is its perceived inflationary effect. The IMF based researchers conclude that there is little evidence that VAT resulted in inflationary spiral in the countries where it was introduced. They opine however that if other monetary measures are weak, VAT can cause inflationary trends.

Given the recent price-hike in essential commodities and post-flood fragile economic situation, the fears expressed by opponents are thus not entirely misplaced. A second problem with VAT is that it was primarily designed for unitary states like France and Britain. It always generates controversies in countries based on fiscal federalism.

In Pakistan, the problem is confounded by the fact that sales tax on services is a provincial subject. A federal authority can, therefore, only collect sales tax on services if it is authorised by provincial governments. Sindh had been reluctant to join the mutual agreement between the centre and provinces on this point. After many rounds of discussion it seems that finally this hurdle has been removed as the centre has been authorised to tax some major services, particularly the construction and banking sectors, while provinces would collect GST on services which had no input adjustment and included no cross-provincial transaction.

The most important issue of fiscal policy that our public opinion makers do not raise is how the taxpayers' money is actually spent. Our discussions are mostly focused upon revenue side only.

In the public expenditure of the UK government as per its budget 2010-11, social welfare, health and education account for 58 per cent of total public expenditure and when other categories of public services are added this proportion rises to 75 per cent.

Public opinion makers should encourage a strategic discourse along similar lines. The debate should consider the question of redesigning the national expenditure so that public services get the major share. If we impose VAT system which is a regressive form of taxation it becomes all the more important to ask where will the taxpayers' money be going? Similarly, we must shout vigorously if a major chunk of this hard earned taxpayers' money is allocated to non-productive sectors such as defence spending.

The author is the Programme Director of MSc Leadership and Management in Public Services at Hertfordshire University, the UK