Centre, provinces fail to break deadlock

ISLAMABAD: The federal and provincial governments on Wednesday failed to break a deadlock on the implementation of the proposed Value Added Tax (VAT) from the coming financial year, threatening Pakistan’s bid to comply with a key condition of the International Monetary Fund (IMF) for a $11.3 billion loan.

Officials told The Express Tribune that a meeting between Prime Minister Yousaf Raza Gilani and four provincial chief ministers remained inconclusive. The federal and Sindh governments disagreed on who should collect and utilise Sales Tax on services under the new proposed taxation regime. The Punjab government took a new position to further complicate the issue by demanding a share in Sales Tax on services on the basis of consumption of a particular service.

If a service is utilised in Punjab, the province should be entitled to tax it irrespective of the fact from where it is generated, provincial Finance Minister Tanveer Ashraf Kaira explained to The Express Tribune. But the Sindh government continued to oppose this, arguing that a province’s share must be determined on the basis of service generation. For instance, if a service is generated in Sindh, the province should have the right on the collection and utilisation of the tax irrespective of any consideration. There were also differences on whether VAT should be implemented in an integrated form and a federal agency should undertake the task of collecting Sales Tax on services.

The federal government maintained that Sales Tax on services is collected by the Federal Bureau of Revenue (FBR) and then it should be redistributed among the provinces through the Federal Divisible Pool (FDP). Sindh opposed this argument, saying that in the 7th National Finance Commission (NFC) Award it was decided that the provinces would have the right to collect and use Sales Tax on services. The Balochistan government supported the idea of collecting Sales Tax on services through the FBR for a subsequent redistribution by the federal government, arguing that the provinces still have to set up infrastructure agencies, officials said.

The Khyber-Pakhtunkhwa government said it would go along with whatever position the federal and other provincial authorities agreed upon. According to several officials who attended the meeting, there were little chances of evolving a consensus ahead of the federal budget that is scheduled to be unveiled early next month. And if the government fails to replace the current General Sales Tax (GST) systems with the VAT regime, the IMF might end its stand-by arrangement with the government. In that case, Pakistan would have to return more than $8 billion it has so far received from the IMF under the $11.3 billion loan programme.

Experts say it will be an unbearable shock to the country’s fragile economy. But Kaira dispelled these fears, saying there were still chances of the provinces evolving a consensus. According to a brief handout issued from the PM’s media office, the government will continue deliberations to resolve the issue and another meeting may be held in a couple of days. “The meeting reaffirmed the need for domestic resource mobilisation including issues relating to the implementation of various measures as well as the proposed Value Added Tax replacement of the GST,” the statement added.

Published in the Express Tribune, May 27th, 2010.