Centre, provinces agree on body for uniform taxation in Pakistan

Move will pave way for two World Bank budgetary support loans worth $750m

ISLAMABAD: The Centre and the provinces on Thursday agreed to set up a National Tax Council to devise uniform taxation policies – a major development that would pave the way for the approval of two budgetary support loans worth $750 million by the World Bank.

The National Finance Commission’s (NFC) Monitoring Committee in its meeting chaired by Adviser to the PM on Finance Dr Hafeez Shaikh gave the nod to the establishment of the council.

The finance ministers of Khyber-Pakhtunkhwa and Balochistan also attended the meeting while Punjab and Sindh were represented by their finance secretaries.

According to a handout issued by the finance ministry, the committee approved the composition of the council and its terms of references.

The formation of the council was a major condition set by the World Bank for the approval of the two loans.

The loans were originally scheduled to be approved on March 19 but the international lender delayed giving the green light to them because of a lack of consensus between the Centre and the provinces over the matter.

The finance ministry said the provinces were represented in the council and “it shall enable them to decide collectively the rate of sales tax for both goods and services”.

The council will meet at least once in every quarter and its recommendations will be expressed in terms of majority and placed before the NFC Monitoring Committee.

All five finance ministers will be members of the council while its executive committee will comprise the federal finance secretary and chairpersons of the Federal Board of Revenue and provincial tax authorities.

According to the terms of references, the council will be responsible for sales tax harmonisation, agree on a uniform GST rate on goods and services, a uniform portal, a uniform tax returns form and also settle the definition of goods and services.

The council has been given the mandate of deciding the principle of division of the GST on services on the basis of destination or the origin of the service. More importantly, the council will also decide sales tax exemption policies and thresholds.

The Centre and the provinces will try to agree on a harmonised GST regime in the country before the next budget to make legal changes in the next finance bill.

The fiscal balance heavily tilted in favour of the provinces after the last NFC Award, as 57.5% of the resources went to the provinces with very little responsibilities.

Due to political reasons, the federal government has also assumed some of the provincial responsibilities that further stretched out the federal resources.

The World Bank is emphasising on the development of a tax policy framework that also supports harmonisation of provincial taxes. The Washington-based lender is seeking a common policy and administration for sales and income tax aimed at ending the overlapping of policies of federal and provincial revenue authorities.

The World Bank estimates Pakistan’s tax gap at 10% of the GDP or Rs3.8 trillion, which is equal to 100% of last year’s revenue collection.

The country’s current tax-to-GDP ratio is around 12% of the GDP, which, according to the World Bank, should be 23% of the GDP.

The NFC Monitoring Committee also approved the terms of references for the Fiscal Coordination Committee, which will be responsible for the fiscal framework. However, the NFC Monitoring Committee will perform its role.

The NFC Monitoring Committee will review and discuss the fiscal policy issues of the federal and provincial governments and suggest solutions. It will monitor current and development expenditures of the federal and provincial governments. The discussion on issues related to FBR receipts will also fall under its ambit.

The tasks of reviewing the debt stock of the federal and provincial governments in the perspective of Fiscal Responsibility and Debt Limitation Act, discussing the position of provinces’ own receipts, suggesting measures for the enhancement of provincial revenues and reviewing the cash balances of the federal and provincial governments have also been assigned to the committee.

The NFC Monitoring Committee also approved the biannual report on the implementation of the NFC Award for the periods of July-December 2018 and January-June 2019.

The biannual reports contain the information on the distribution of revenues and grants in aid to the provinces under the NFC Award announced in 2010 (the 7th NFC Award).

The biannual report for July-December (FY 2018-19) stated that of the FBR’s divisible pool collection of Rs1.95 trillion, Rs1.1 trillion was the provincial share. Punjab received Rs580.1 billion, Sindh Rs275.2 billion, K-P Rs163.9 billion and Balochistan Rs101.9 billion.

In addition to these transfers, K-P received 1% -- Rs19.694 billion -- as war on terror fund. Balochistan was given an additional sum of Rs10.149 billion and Sindh received an Octroi and Zila Tax (OZT) grant of Rs7.399 billion. Straight transfers for the period under the heads of royalty on crude oil, royalty on natural gas, gas development surcharge and excise duty on natural gas stood at Rs.48.225 billion.