GST and jurisdictions

In budget for 2016-17, federal government proposed some fiscal measures that touched a raw nerve in the provinces

In preparing the budget for 2016-17, the federal government proposed some fiscal measures that touched a raw nerve in the provinces. The measures added to the complexity of issues arising out of the jurisdictional division of the base of the General Sales Tax (GST). The 18^th Amendment to the Constitution unambiguously places commodities under federal jurisdiction and services under provincial jurisdiction. In terms of operations, all provinces now have their own revenue authorities to directly collect the GST on services. Punjab and Sindh are collecting much more than the FBR collected on their behalf. This is only the beginning.

The services sector is the largest sector of the economy and its untapped potential is huge. The problem is that the GST is a hotchpotch of the value-added and single point modes. In the value-added mode, taxes paid on inputs, be it services or commodities, have to be adjusted. Sindh owes money to the federal government and the federal government owes money to Punjab. Both are not willing to pay up. There is evenhandedness when it comes to holding on to refunds! However, the federal finance minister believes that the “provinces would have to behave themselves”. Input adjustment is not a sore point only between the federal government and the provinces, but between the provinces as well.

Input adjustment is not the only issue. The Federal Excise Duty continues to be levied on many services subject to GST. Again, property is a provincial subject and a great potential source of resource mobilisation. The federal government wanted the FBR to determine the value of immovable property. However, some ground was conceded by assigning this role to valuators approved by the State Bank of Pakistan, an autonomous body. Finally, the federal government’s desire to make provincial sales tax authorities withholding agents for the collection of three per cent advance income tax from the filers of provincial sales tax, would have created a big disincentive to expand the provincial tax base. A partial rectification was made as the federal government decided to collect the tax through the FBR.

Sales tax has had a chequered history. The Government of India Act of 1935 had assigned the sales tax on goods to the provinces. By implication, services remained with the centre. After independence, this was reversed. Basically, it was a turnover tax. It became GST in 1990, but all attempts to introduce a reformed GST failed. The devolution of GST on services has made matters worse for the operation of the value-added mode.

To respect provincial autonomy enshrined in the Constitution without compromising the resource mobilisation effort, one solution is to consider a single stage GST on total value as full and final liability. Back of the envelope calculations show that the yield is likely to increase even at a lower rate. The Tax Reforms Commission had also prescribed a single stage GST at half the current rate. It is understood that the issue came up in the recent Dubai meetings with the IMF staff. The latter did not take kindly to the idea for fear of a revenue loss. A recent staff report said: “While fiscal decentralisation can be designed to improve the delivery of public services, it could hinder revenue mobilisation by complicating tax administration and reducing the efficiency of the tax system.” The World Bank’s thinking is the same, especially vis-a-vis the fragmented base. Another solution may be a unified tax authority under the Council of Common Interests, collecting taxes on behalf of the federal and provincial governments. Whatever the alternative, one thing is clear: the value-added mode is problematic in a federal structure.

Published in The Express Tribune, July 1^st, 2016.

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