Sindh and Punjab lock horns

ISLAMABAD: Sindh and Punjab are at loggerheads over the distribution formula for General Sales Tax (GST) on services that has been hindering an agreement on the tax reforms package before upcoming talks with the International Monetary Fund (IMF).

Officials told The Express Tribune that some progress has been made on the issue of GST collection on services by the provinces and the Centre, but the two largest provinces have taken extreme positions over the distribution formula for the tax to be collected by the Centre on behalf of provinces.

They added that Sindh has proposed tax distribution on the basis of the formula agreed in the seventh National Finance Commission (NFC) Award. This formula stipulates multiple criteria under which Punjab will get 50 per cent of collected tax, Sindh 44 per cent, Khyber-Pakhtunkhwa 5 per cent and Balochistan one per cent.

Sources said that Punjab is pushing for a single criterion of population and in such a scenario Sindh may get only 25 per cent of the total collection.

The officials added that in case of a disagreement, a third option was also under consideration which contains a separate formula for each service.

Under a condition of the IMF, Pakistan was bound to levy Value Added Tax (VAT) from July but it failed and then announced a reformed GST from October by scrapping tax exemptions on goods and netting services.

Technically, the IMF’s $11.3 billion bailout package for Pakistan has come to an end as the government failed to impose VAT. The reason was Sindh’s stance that GST collection on services was a provincial subject and it will not give up its right. Other three provinces have agreed to hand over their tax collection right to the Centre for a certain period due to administrative constraints.

Nevertheless, the sources said, the Sindh government has shown some flexibility of late. It has offered to the Centre four main areas - financial services, construction, advertisement and franchises - mainly because these fall under the category of inter-provincial services.

However, Sindh is still not ready to surrender telecommunications sector. For that, it has proposed a mechanism that the Federal Board of Revenue should give input tax adjustments on behalf of the province, which would reimburse it to the Board later.

There is still a dispute on the right of tax on cellphone calls, but there is a possibility that the origin of the call may be the criterion. Sources said Punjab may accept this proposal as it is home to a larger section of the population, but the Center may intervene as this would deprive it of a handsome chunk of revenues.

The federal government had called a meeting of the provinces on reformed GST issue on Tuesday but due to bad weather Balochistan’s delegation could not reach Islamabad. The meeting has again been called by early next week.

Prime Minister Yousaf Raza Gilani has given August 11 deadline to the Centre and provinces to reach an agreement on GST. If the parties managed to evolve a consensus at the committee level, Gilani may convene a meeting of the four chief ministers before holding talks with the IMF. This will give a right message to the IMF that the government is serious about enforcing the reformed GST from October 1.

Published in The Express Tribune, August 6^th, 2010.