No consensus on collection mode By Afshan Suboh

The introduction of the value added tax proposed from the next fiscal may be delayed because of the confusion over conceptual and procedural issues at different tiers of the government.

For example, the stand taken by Sindh over its right to collect VAT on services may be legally justified, but VAT experts say it tends to ignore the ground realities in view of the complexities in the value-added tax and the provincial administration’s doubtful capacity to deliver.

Sindh considers the draft bill on VAT prepared by the government a gross violation of 1973 Constitution as it entrusts the federal government to collect VAT on services, denying the federating units their right to tax services.

“There is some misunderstanding here. No one is suggesting that provinces should relinquish their claim over revenue generated by taxing services. However for technical reasons and till such time, the provinces equip themselves by building up their capacity, the federal taxation machinery may be used to collect VAT by paying a fee of one per cent of the collection. Through a transparent accounting, after making necessary adjustments, the amount raised on account of services from each province will be reimbursed to it”, a member of the VAT experts drafting team told Dawn.

“Besides we are not imposing our will on anyone. Punjab, NWFP and Balochistan have agreed to let the federal government collect VAT on services and reimburse to them. If Sindh is not comfortable, so be it. However, the nature of VAT is such, that in my view, the stand taken by Sindh would complicate the situation and the whole exercise might finally prove futile”, he added.

“Why be selective and refer only to experience of VAT in the US, Canada and Australia? The Brazilian model is also there, where the heads of goods and services are dealt separately. In my considered opinion, Sindh can collect tax that falls in its domain. It is doable. If the federation accepts Sindh’s demand, we can go ahead with VAT from next fiscal”, Dr Kaisar Bengali, Adviser to the Sindh Chief Minister commented.

While the provincial government does not have the capacity to actually do the job and the quality of governance in the province leaves much to be desired, the Sindh’s economic team expresses confidence that it can develop the human resource and systems by engaging skilled people from outside the government.

“Currently we in Sindh get five billion rupees under the head of service tax from the federal government. I can double the amount over the next fiscal if the federal government concedes to our demand”, Dr Fazalullah Pechuhu, secretary finance Sindh told Dawn over telephone.

“We are bringing in Sales Tax on Services bill over the next week in Sindh Assembly. Taxing the financial sector and telecommunication will not really be difficult as both are documented. For retail and other services, we will gather record. I am confident that the province can manage the tax for it needs resources for development of this province”, he maintained.

“Keeping in mind the ground realities, we need to revisit the draft bill and find a middle path acceptable to all. The current draft law will not deliver in the current circumstances. We cannot wish away the mistrust and will have to evolve a formula, may be, by bifurcating tax on goods and services”, said Syed Shabbar Zaidi, partner A F Ferguson and Company and former president of the Institute of Chartered Accountants of Pakistan, engaged by the government in the drafting process of new tax laws.

“For long I have been the biggest advocate of VAT but an insight into the working of the government and complicated political situation has baffled me. I do not think that the government will be able to iron out differences anytime soon. The process is long drawn with a need to table VAT bills in provincial assemblies to get their approval for amendments. To me there is no way for VAT to take effect from July 1, 2010”, he added.

Syed Qaim Ali Shah, Chief Minister Sindh is reported to have moved a reference to PM Gilani in this regard.

“The proposed law will relegate the role of the provincial government to the promulgation of the Act as in the case of Provincial Sales Tax Ordinance 2000. It would further complicate the already complicated tax structure and enhance the scope of tax evasion”, said an independent expert.

“The implementation of the proposed law in the current form would be tantamount to losing out what smaller provinces gained through the seventh NFC Award after a long struggle”, said another advocate of provincial autonomy.

“For Pakistan to implement and harvest benefits of policies adopted in the developed world it has first to be lifted to their level. Expecting the dissected society of this country with deep rooted mistrust and weak documentation to improve domestic resource mobilisation significantly by introducing a modern tax is outright naïve”, commented a political analyst.

If the government wishes to improve domestic revenue generation it probably needs first to address another set of twin deficits: (a) the people’s trust deficit in the government perceived to be inefficient and financially irresponsible; (b) the mistrust of smaller provinces in the centre perceived to be hobbling major chunk of resources generated by them. Next, it needs to generate the right economic environment for growth.

It is hard to imagine how a struggling divided society could spare more resources for a dysfunctional government. All the noise made so far by the government to improve on tax to GDP ratio does not offer much hope at the moment.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/no-consensus-on-collection-mode-230