Provinces oppose sales tax on services

Reformed general sales tax still on agenda for the next budget: Shaikh.

ISLAMABAD:

The federal government encountered another setback in meeting its fiscal targets after provinces opposed the proposal of levying sales tax on services from July.

The “unwelcome message” was delivered by finance secretaries of the four federating units to the federal government during a recent meeting.

A provincial finance secretary confided to The Express Tribune that the provinces were unwilling to bring services in the tax net.

Despite the passage of a considerable period, he said that the federation and provinces could not resolve the dispute, which has now become one of the major bottlenecks.

After the 18th amendment to the Constitution, tax on services is a provincial subject.

After the provinces’ rejected the proposal, the parties concerned discussed alternative options to imposing the general sales tax (GST) on services, with an aim to increase the dismal tax-to-GDP ratio and mobilise untapped provincial revenues. The total tax collection stands at a mere 9.1 per cent of the total size of the economy.

Since September 2009, the federal government, in agreement with the International Monetary Fund (IMF), has been trying to levy the value-added tax (VAT).

Although Finance Minister Dr Abdul Hafeez Shaikh insists that the reformed general sales tax (RGST) is still on the agenda for the next fiscal budget, disagreement with provinces on the issue has made the job more difficult in the backdrop of the insistence of international lenders.

Sources said provinces also raised concerns over a steep decline in the federal tax collection which is negatively affecting their budgets, as 56 per cent of federal taxes go to provinces under the Seventh National Finance Order. Last month, the federal government levied Rs53 billion in new taxes to help achieve its revenue target of Rs1,604 billion.

Another provincial finance official told this correspondent that the meeting’s participants were in the dark about the actual tax collection.  Over the first nine months of the current fiscal year, the Federal Board of Revenue (FBR) has fallen short of its collection target by Rs60 billion, as it generated slightly over Rs1 trillion in taxes.

The sources said provinces have once again expressed their inability to generate the desired revenue surplus to make up for the federal budget deficit. They have conditioned it with achievement of FBR’s revenue target.

The government had envisaged FBR’s target at Rs 1,667 billion on the eve of budget, but slashed it down to Rs1,604 billion after the devastating floods last year. There are reports again that the target may further be revised downwards, showing inconsistencies in policy making.

In the emerging scenario, the federal government’s desire to raise 0.7 per cent or Rs120 billion in provincial surpluses seems highly unlikely. The provincial finance official said that despite repeated requests of the federal government for giving an indicative budget surplus ceiling, the federating units have not yet provided any such target in the wake of increasing development spending in the last quarter of the fiscal year.

So far, provinces have generated Rs100 billion revenue surpluses in the first nine months by holding back development expenditures, but there would be immense pressure for the release of funds in the last quarter (April-June) of the current fiscal year.

This will push the overall budget deficit to almost six per cent of the total size of national economy, which will be 1.3 per cent more than the official IMF target and 0.7 per cent above the latest understanding between the fund and Pakistan.

Published in The Express Tribune, April 9^th,  2011.