Tax trouble: Confusion persists over who taxes financial services

Tug of war between the centre and the provinces continues.

ISLAMABAD:

Contrary to its earlier commitment to the provinces, the federal government on Friday has not withdrawn excise duty on financial services, leaving the banks and insurance companies in the lurch over whom they should deposit taxes to.

A senior official of the Federal Board of Revenue (FBR) said that the tax authorities would not withdraw federal excise duty being charged on financial services until it receives a consent letter from the Sindh government.

Earlier, the FBR had said that it would withdraw the tax. The official said that the Sindh government is likely to dispatch the consent letter by early next week. The letter would give consent to FBR for administration and collection of sales tax on all financial services. In return the FBR would withdraw excise duty.

The Sindh government’s willingness to allow the FBR to collect taxes on financial services runs contrary to the earlier stance of the provincial government. The provincial government had vowed to collect taxes on all services after the establishment of the Sindh Revenue Board (SRB).

The FBR official said the letter would also provide a guarantee that the banks and insurance companies are not subject to double taxation. Currently, there is a dispute between the centre and the provinces over collection of sales tax on services. In addition, the federal government claims the Sindh government too, has asked the banks and insurance companies to deposit sales tax with the provincial government.

During a recent meeting between FBR and SRB, it was agreed in principle that FBR would withdraw the excise duty on certain services. Under the 1973 Constitution, the General Sales Tax (GST) on goods is the jurisdiction of the federal government while GST on services falls under provincial purview.

The FBR claim to collect taxes on behalf of the provinces is based on a written understanding reached between the centre and provinces last year in September.

The Record Note signed by the stakeholders was basically meant to evolve a collection mechanism for the interim period but after the enactment of the provincial collection laws, it had become irrelevant.

The interim Record Note was struck on the insistence of the centre at the time to appease the International Monetary Fund (IMF) as a condition of the IMF loan programme to table legislation in parliament and provincial assemblies on the Reformed General Sales Tax was to bring both goods and services into a unified GST code.

To overcome the crisis, the centre and the provinces had signed a Record Note last year and evolved a formula by dividing services into three groups.

The major dispute is over Group-III services requiring tax refunds. These services constitute a significant proportion of input adjustments. They include financial services such as banking, insurance, stock market operation, advertising, construction and franchising services. However, controversy again emerged where input adjustments were involved, and continued to
be one of the major stumbling blocks in the way of achieving consensus.

Published in The Express Tribune, August 20^th, 2011.