ARTICLE (March 12 2010): Under the Government of India Act, 1935, the sales tax was a provincial subject. After independence the Government of Pakistan adapted the Government of India Act, 1935 (Sales Tax Act 1990). However, the sales tax, which was a provincial source of revenue, was temporarily handed over to the Centre, subject to the allocation of 50% of proceeds to the provinces in the budgets of the Federal government for 1948-49 and 1949-50 and was continued further through Raisman Award, 1951.
The 1961-62 NFC reduced the share of the provinces to 30%, however, in the same proportion as collection in their respective area that was continued through the 1964 NFC and the Distribution of Revenue Order, 1971. The sales tax was finally included in the Federal Legislative List of Constitution of Islamic Republic of Pakistan, 1973.
The Sales Tax Act promulgated in 1990 introduced general sales tax (GST) in value added tax (VAT) version on imported and manufactured goods. However, in 1996 GST was converted into a full-fledged VAT mode tax with all its basic features. In 1998, it was also extended to wholesalers and retailers.
In VAT, a tax in terms of percentage is applied at each stage of production. It is mostly levied in Europe wherein taxation is centralised and invoice method is used. However, one cannot guarantee the tax evasion completely in invoice method. The administrative complexity is another issue that appears in VAT in case of multiple outputs producing firms, which produce taxable and non-taxable products both.
This article is mainly focused on one of the recommendations of recently concluded 7th National Finance Commission (NFC), which recognised general sales tax (GST) on services as provincial subject and it further acknowledged the provincial rights on collection of this tax.
Presently, the GST on services is being collected by the Federal Board of Revenue (FBR) on behalf of the provincial governments under General Sales Tax Ordinance 2000. This tax was named as GST on Services (Provinces). The services brought under the net of GST on services were on services rendered by hotels, marriage halls, clubs, caterers, custom agents, ship chandlers and stevedores, courier services, beauty parlor, laundries, advertisement on TV and radio. However, in the later stage some of the services were allowed exemption from this tax.
At the time of imposition of this tax, the Federal government had placed the proposal of imposition of GST (services) before the IPCC meeting in May, 1999. Wherein, it was decided that the provinces would impose the GST on services through their individual ordinances and that Federal government would collect the tax on behalf of the provinces.
The governments of Sindh and Punjab both objected to the suggestion of distribution of net proceeds of this tax on population basis being contrary to the Constitution. However, the Federal government representative at that time drew out a long list of issues saying distribution on collection was not possible and that Sindh would be compensated for losses.
It was further promised that it would be an interim arrangement and the issue would be finalised during the next NFC due in next two years. Notwithstanding, the proceeds of GST on services were being transferred on the basis of population. Sindh had never been compensated for its losses as per commitment made by Federal Government. The Distribution Order 2006 was also remained silent on this issue. The government of Sindh had been agitating since long at all forums, however, there had been absolutely no response from the Federal government.
Another problem attached with the GST on services was the GST on Services (Central Excise Mode), which was levied for the first time in 1970 by the Federal government through an amendment in the Central Excise Act 1944. The Federal government had imposed GST on services and was collecting it under Central Excise Mode. The use of two nomenclatures for one single tax did not seem rational and was an indirect approach for the encroachment of a provincial tax.
In this perspective, the government of Pakistan had itself provided a list of services in the Central Excise Act, 2005. Further, the SRO 2000 notifying the levy of Central Excise on some services created confusion in the context of term "GST on Services (CE Mode) being used by the government of Pakistan. The nomenclature "GST on Services (CE Mode)" indicated that Central Excise Mode was being used for the levy of GST on Services.
The literatures on excise duty and its levy by many, the governments reveals that the excise duty was originally invented to protect people from harming their health by abusing substances such as tobacco and alcohol, or harming themselves and others indirectly and morally by engaging in activities such as gambling, money laundering and other illicit activities or from harming those around them and the general environment, including curbing activities contributing to pollution (tax on hydrocarbon oil and of other environmental taxes in the UK).
In the words of Adam Smith, "the motive for the implementation of excise should be nothing more than to curb the pursuit of goods and services harmful to our health and morals." Thus, this tax is also referred to as a "vice tax" or a "sin tax". Thus, the basic objective for imposing "Excise Duty" is to curb the pursuit of goods and services harmful to health and morals. Therefore, the imposition of Excise Duty on Services (listed in SRO 617) by the Federal government did not seem rational.
Fortunately, the 7th NFC provided a great opportunity for Sindh to present its case before this forum. Sindh declared GST on Services as the core issue for NFC and pleaded it with fully prepared homework. For this purpose, the services of Makhdoom Ali Khan, a senior lawyer, were hired, who presented the case of Sindh and explained various legal and constitutional implications in this context in Quetta-NFC deliberation.
Both, the GST on Services (Provincial) and the GST on Services (Central Excise Mode) were defended with the references of constitutional implications. Sindh's arguments were appreciated by the Federal government, thus it led to the admittance in the Quetta session that GST on services rendered in the telecommunication sector would be levied by provincial legislation. Federal government would make necessary amendment in the Federal Excise Act to enable provinces to levy this tax.
Finally, the 7th NFC recognised the GST on services as provincial subject and authorised the provincial governments for its collection. Thus, it provided a great opportunity especially for Sindh, which was the major stakeholder and lost billions of rupees since the imposition of this levy.
Actually, Sindh was contributing more than 60% to the main pool of GST on services and, in return, it had been receiving only 23% of the total kitty of the said pool. The authorisation of collection of GST on services to the provinces thus produced a catalytic effect, especially for Sindh, which decided to opt for the collection of GST on services by itself instead of assigning it again to the FBR again.
Surprisingly, the recommendations of 7th NFC are still under the process of its approval after a lapse of almost three-month since the conclusion of Lahore marathon of NFC. The most interesting thing appeared during these three months was that the Finance Division became more proactive towards tabling its VAT bill 2010 in the Parliament which should otherwise go to the Parliament once recommendations of the NFC were approved.
If the Federal VAT Bill 2010 is approved by the Parliament before the approval of the recommendations of NFC, then it would at least affect its recommendation on GST on services severely. It is so because some reliable sources are indicating major pitfalls in the draft Bills 2010 on Federal and Provincial VAT as it signals encroachment upon provincial domain again.
The role of the Provincial Government will become ceremonial again as it will be confined to the extent of promulgation of the Act only as in the case of Provincial Sales Tax Ordinance 2000. On the other hand, the Bills empower the FBR to collect VAT on behalf of the Federation and the provinces, without providing any scope for provincial rights on collection of GST on services.
The tricky issues in draft Bills are: (1) Federation by giving itself the power to decide whether a specific supply is ancillary or incidental supply to a principal supply and must therefore, be taxed as part of the principal supply; (2) The Federation is empowered to prescribe allowable input deductions and adjustments for the calculation of VAT on services; (3) It empowers the FBR to administer, compute and collect VAT; (4) It provides no mechanism for the distribution of revenues collected through the imposition of VAT on services; and (5) the Federation retains complete discretion in the implementation of the Bills and the integration of the Federal and Provincial VAT.
Notwithstanding, the rational approach demands that the Federal government should first get approval of recommendations of the 7th NFC from the Parliament instead of taking any hasty step in tabling Federal VAT Bills 2010. Further, all stakeholders (Provinces) should be taken into confidence before sending this VAT Bill to the Parliament.
It is no need to mention that the 7th NFC has been concluded successfully and has been appreciated by all fora. It was a historic event in Pakistan as each province had recognised the rights of others, therefore, it is the need of the hour that congenial atmosphere should be kept alive forever. The greater responsibility should be again on the shoulder of the Federation, which could maintain it in letter and spirit as it already showed throughout the deliberation of the 7th NFC.
Source: http://www.brecorder.com/index.php?id=1030196&currPageNo=1&query=&search=&term=&supDate=
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