Sales tax on all services from October

Centre, provinces agree to impose sales tax on services paving way for restoration of $11.3b IMF bail-out programme.

ISLAMABAD: In a major breakthrough, the Centre and the provinces have agreed to impose sales tax on all services from October through a provincial legislation, paving the way for restoration of the $11.3 billion International Monetary Fund (IMF) bail-out programme.

The agreement was possible after the Centre agreed to Sindh’s constitutional stance of giving the province the right of tax collection on a  majority of the services. The Centre has expressed its willingness to bear the losses incurred by the provinces.

The decisions were reached in a meeting of the four provincial finance ministers, which was presided over by Finance Minister Dr Abdul Hafeez Shaikh. The parties will meet again today (Tuesday) to decide on the rate of tax and the date of its implementation.

The parties also agreed that there would be a uniform tax rate on services of either 15 per cent or 17 per cent. The Federal Board of Revenue has been pushing to keep the rate at 17 per cent, as its reduction to 15 per cent will cause a loss of approximately Rs72 billion this year.

The implementation of the reformed GST will also help the battling finance ministry. The IMF and other donors had threatened that in case of non-implementation of the reformed GST, they would stop lending to Pakistan.

“It is victory of the constitution and provincial autonomy,” said Dr Kaiser Bengali, the Sindh chief minister’s adviser on planning and development.

Finance Secretary Salman Siddique, while briefing the media on the developments, said that services have been divided into two broader categories: the stand alone services that involve no refunds or negligible refunds such as telecom and the integrated services that involve tax refunds such as financial services, franchises, construction and advertising.

All those services that involve greater refunds will be collected by the Centre on behalf of the provinces and the money will be collected in a separate pool, he added. The secretary said the distribution formula of this pool will be agreed today (Tuesday).

Earlier, Punjab was seeking the distribution of tax on those services collected by the Centre on the basis of population, while Sindh was proposing to give 50 per cent of the collection to Punjab, 44 per cent to Sindh, five per cent to Khyber-Pakhtunkhwa and one per cent to Balochistan. The Centre has assured to bear differences that may range between Rs8 and Rs10 billion.

The Centre briefed the provincial governments about the dwindling state of economic affairs. They were told that during the last two years the average economic growth has been 2.7 per cent and the per capita income has increased marginally at 0.6 per cent. Moreover, investment is diminishing and inflation is on the rise. “All this demands that there is an urgent need to mobilise resources and the reformed general sales tax implementation from October is a must,” Siddique said.

Dr Bengali said the Sindh Assembly will pass the reformed GST bill within this week and the other three assemblies have already authorised the Centre to collect the tax on services by amending the year 2000 Ordinance. He said Sindh will repeal that ordinance.

The parties also agreed that the distribution of the collected amount should be in a way that the resources travel back to the provinces. The secretary said that under the seventh National Finance Commission Award, the GST on services is a provincial matter, except when the provinces desire to authorise the Centre to collect taxes for a specific period.

Published in The Express Tribune, September 28^th, 2010.