Duty collection: Sindh lock horns with federal govt over FED

Province considers taking up the issue at Council of Common Interests.

ISLAMABAD:

The federal and Sindh governments are flexing their muscles as the federation seems to be backtracking on its pledge to repeal the Federal Excise Duty (FED) Act of 2005, a piece of legislation that Sindh believes is unconstitutional after the 18th Amendment to the constitution.

Tension between the federal and Sindh governments is brewing as the June 2014 deadline for repealing the FED Act approaches, according to sources in the Ministry of Finance and Sindh government.

They said Sindh Chief Minister’s Adviser on Finance Syed Murad Ali Shah had taken up the issue with Federal Finance Minister Ishaq Dar in recent meetings.

Sindh is now considering raising the issue at the Council of Common Interests (CCI) – the highest political forum that deals with issues which have implications for both the federation and the federating units. The CCI is headed by Prime Minister Nawaz Sharif.



The provinces’ right to collect sales tax on services had been established in the seventh National Finance Commission (NFC) Award, which was later given legal cover through the 18th Amendment. The federal government has been collecting sales tax on services in the form of FED. After the 18th Amendment, three provinces except Balochistan have introduced their own provincial laws on sales tax on services.

However, the federal government is not ready to give up tax collection on services that are generating significant revenues like telecom services and air travel, according to the sources. The biggest revenue spinner was the telecom sector and the federal government was not willing to give up, they added.

In 2010, when provinces did not have their own laws, the federal government had generated Rs47 billion from the telecom sector through FED – a figure that nosedived to Rs16 billion in the last fiscal year after the provinces started collecting taxes.

In 2010-11, the federal government had committed in the National Assembly that FED would be withdrawn in a phased manner in three years. Finance minister at the time Dr Hafeez Shaikh also said in the house that the federal government “will move away from multiple tax regimes and retain just three main taxes – income tax, sales tax and customs duties.”

The FED Act was triggering the issue of double taxation as the provincial government had introduced its own sales tax on services law, said Tashfeen Niaz, Chairman of Sindh Revenue Board.

He said the Act was also creating ambiguity about jurisdiction and its continuous implementation was against the spirit of the seventh NFC Award and the 18th Amendment.

Collection of FED on telecom services was under discussion, confirmed Rana Assad Amin, Adviser to the Ministry of Finance and the ministry’s official spokesman.

He said a consultation process was going on and the federal government would take up the matter at the CCI only after completing consultation with all stakeholders.

Instead of repealing the FED Act, the federal government was asking the provinces to scrap their laws on sales tax on services, the sources said.

Other two options that the federation has placed on table are that the provincial governments should authorise the Federal Board of Revenue (FBR) to collect taxes on their behalf or the provinces can collect tax on telecom services but should pay 43% of that to the federation.

As the matter lingers on, the taxpayers are actually suffering as they have been forced by both the federal and provincial governments to pay tax to them, which is tantamount to double taxation. If a company pays tax in a provincial capital, it gets notice from the FBR.

The dispute has increased the cost of doing business, said Ashfaq Tola, a leading tax expert. He said the federal government should honour its commitments and amicably resolve the dispute.

Published in The Express Tribune, February 9^th, 2014.

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