Source: Business Recorder

EDITORIAL (May 12 2010): The dispute between the federal government and the Sindh government with respect to the imposition and collection of value added tax has not yet been resolved. In this particular instance, the rationale provided by the Sindh government to allow the provinces to collect sales tax on services, if they indicate a desire to do so, has merit as not only does the constitution explicitly state that tax on services is a provincial subject, but also the landmark National Finance Commission (NFC) award granted the provinces that very right.

The major bone of contention is the collection of the VAT on telecommunication, expected to yield sizeable revenue of between 50 to 55 billion rupees per annum. The fact that the other three provinces have agreed to allow the Federal Board of Revenue (FBR) to collect VAT on services on their behalf, upon payment of a one percentage fee, does not, in any way, weaken the stance of the Sindh government.

No one can deny the validity of the provincial trust deficit with respect to the FBR, which, according to the former Finance Minister Shaukat Tarin, is one of the most corrupt institutions of the country.

At the same time, there may be some concern in the provincial capitals that a cash-strapped central government may be tempted to divert some of the revenue collected under the integrated VAT, in an attempt to meet the budget deficit target as identified under the rigid International Monetary Fund (IMF) programme.

Whatever the reason, the Sindh government has proved adamant in not giving into the Centre’s demand to allow it to impose and collect VAT on services, a demand that is sourced to the Letter of Intent (LoI) submitted by the government to the IMF Board in order to show compliance with the pre-tranche release conditions.

Analysts note that the imposition of an integrated VAT is unlikely to increase federal revenue collection significantly, as it essentially is an input/output adjustment. In this context, they propose that the government renegotiates with the IMF and instead of supporting the levy of an integrated VAT, a less controversial and more effective revenue-generating mechanism be developed that seeks to end exemptions currently enjoyed by powerful pressure groups and includes other commitments made by the government to the IMF in the LoIs that are focused on increasing revenue, namely harmonising sales, and income tax administration and carrying out random audits.

It has been revealed that President Asif Ali Zardari, with his Pakistan People’s Party in power both in the Centre and Sindh, has barred the two protagonists from talking to the media unless the issue is resolved. There is, therefore, optimism that this issue would be amicably resolved. Be that as it may, what is ironical about the entire debate is the fact that the business community and other stakeholders have expressed their opposition to this tax as and when it is to be imposed.

The government failed to take the stakeholders on board as it had committed itself to in the LoI, and did not hold public debate on the issue, as has occurred in all other countries of the world, prior to the introduction of the VAT. In short, the government failed to do proper homework and may well have a tough time in implementing this tax.

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