Centre offers olive branch to Sindh

ISLAMABAD: In a bid to break the current logjam, the federal government has shown some flexibility, for the first time, over the issue of right of levy and collecting consumption tax on services.

It has offered the Sindh government to retain certain services while surrendering the key ones. The federal government proposed that it can levy Value Added Tax (VAT) on all other services except telecom, banking, insurance and air travel, said an official of the ministry of finance on condition of anonymity. The offer was made during the second round of talks between the federal and provincial governments on the issue of right of levying and collecting Value Added Tax on services.

The Sindh government has taken a constitutional stance that the Centre cannot levy and collect tax on services, as it is a provincial subject. The inflexible stance has endangered the implementation of integrated VAT from July 1. “The federal government is negotiating with the Sindh government on the grounds that right to levy tax on all services cannot be given to the provinces, as it would create a lot of problems in giving input tax adjustments.” said Sohail Ahmad, Chairman of Federal Board of Revenue (FBR).

The Value Added Tax works on a principle where one’s output becomes other’s input. Sohail Ahmad said that for some services two tax collecting bodies simply cannot work. Two different collecting systems would create a lot of problems in giving tax refunds, he argued. He, however, acknowledged that the Sindh government has a constitutional right to levy and collect VAT and the federal government was seeking the right to make the levy work.

The International Monetary Fund and the World Bank are pushing Pakistan to levy the tax at 15 per cent on all sectors by replacing General Sales Tax. According to initial estimates, by levying 15 per cent VAT on goods’ sale the government can get Rs 53.8 billion additional revenue during the first year of enforcement. In addition, the provinces will also get more than Rs 70 billion by levying 15 per cent VAT on services.

The finance ministry official said that Sindh would give its response to the offer during next round of talks. Sindh secretary finance, Fazalullah Pechuho, said that to levy and collect tax on services is a provincial subject and surrendering certain services to the federation is, at this point of time, out of question. Another official of the ministry said that the Sindh government did not want to surrender its constitutional right, fearing that the move would eat into its revenues.

“The key question is if the Sindh government surrendered its right. then what would be the resources distribution formula,” he added. The FBR chief said that in case the provinces surrender their collection right, the FBR would deduct one per cent collection charges and transfer the remaining amount to the finance ministry. The federal government has proposed a formula that half of total taxes being collected on services would go to the Sindh government, 44 per cent to Punjab, 5 per cent to Khyber- Pakthunkhwa and 1 per cent to Balochistan. “The Sindh government has not officially given its reply on the issue” he added.

Published in the Express Tribune, May 09/05/2010