Sindh miffed over Centre’s ‘illegal’ tax collection move

Says revenue structures like capital gains and withholding taxes have encroached on provinces’ tax base

ISLAMABAD: Sindh has accused the Centre of unconstitutionally collecting taxes on property and trade business, and encroaching on the base of other provincial taxes, reveals a report of the working group of the 9th National Finance Commission (NFC).

The report of the second NFC working group on devolved versus integrated tax structure states that the federal government has not yet reconciled with the legislative intents of the 18th constitutional amendment and 7th NFC Award. This has created serious tax-related issues between the federal and provincial governments, according to the report prepared by the Sindh authorities.



In its first meeting held in April 2015, the NFC constituted four working groups to discuss various issues in depth before the four federating units and the Centre agreed on the 8th five-year NFC award. Sindh shared its findings during the second NFC meeting, held last week.

In the next meeting, tentatively scheduled for the third week of this month, the Centre and the provinces will share their positions on various demands put forward for the next award.

“The federal government has no right to levy and collect Capital Gains Tax on immovable property as it has been devolved to the provinces after the 18th amendment,” the report states.

In order to raise revenues, the federal government has also imposed various withholding taxes that resulted in substantial encroachment on the tax bases of the provincial governments, according to the second working group report. This limits the scope for additional resource mobilisation by provincial governments, it added.

Withholding taxes on automobiles have negatively affected the tax base of the motor vehicle tax. The withholding tax on telecommunications, including mobile phones, has reduced the tax base of sales tax on services. The enhancement of the tax rate on rental income from property will have adverse implications on the development of the provincial urban immoveable property tax, according to the report.

The findings also showed that the introduction of an excise duty on non-banking financial institutions like modarabas, musharikas, leasing, foreign exchange dealers and asset management companies, are clear encroachments into the tax base of the provincial sales tax on financial services.

Last week, Finance Minister Ishaq Dar, who is also chairman of the NFC, did not answer a question regarding Sindh’s accusations of encroaching provincial domains.

The working group has also highlighted the issue of collecting taxes on subjects which it believes is the domain of the provinces under the Constitution.



“The levy and collection of sales tax at wholesale and retail stages should be devolved to the provinces immediately,” the working group suggested to the NFC. It further recommended that for the purpose of facilitating the transfer of sales tax at wholesale and retail stages, the federal system of excise taxation and sales taxation on the basis of retail prices should be discontinued forthwith. “A constitutional amendment is required, if all the provinces agree” to give effect to this proposal, according to working group.

It said that a sizeable proportion of services is still covered under sales tax on goods. The FBR uses the mechanism of excise duty in collection of sales tax, and collects even wholesale and retail tax at production stage, which is clearly described as sales tax on services rather on goods.

Similarly, there is a component of services involved in import of goods. Imports of services, insurance and freight components of total imports are part of the federal tax collection system. At the rate of 17% sales tax on this service component, the provincial government would get extra Rs135 billion.

This report has also proposed devolution of collection powers of sales tax on goods to provinces.

The working group noted that non-exclusion of services from the FED list; non-exemption of federal sales tax on food served in hotels, restaurants, clubs and catering houses and blocking of input tax credits are some of the examples explaining the attitude of FBR for not reconciling with the legislative intents of the 18th amendment and the 7th NFC Award.

Published in The Express Tribune, December 4^th, 2016.