Budget and provinces

The Pakistan Business Council (PBC) has sent post-budget proposals to Federal Finance Minister Ishaq Dar, urging him to make appropriate changes to narrow the disharmony that currently prevails in relations between the centre and the provincial governments that may lead to open defiance by provincial tax authorities.

An obvious example is the budgetary proposal designating provincial tax authorities as withholding agents of the Federal Board of Revenue (FBR) to withhold 3 percent of turnover of those non-filers who are filing sales tax returns with provincial tax authorities but are not filing income tax returns with the FBR.

The federal government should have taken the provincial governments on board prior to designating them as withholding agents, a critical exercise that the provincial governments maintain never took place. One would assume that had such discussions taken place the provincial governments would surely not have agreed to this scheme.

It is feared that the provinces may simply decide not to comply with this particular federal budget proposal, a decision perhaps led by Sindh government given that its budget is scheduled to be presented today, as the FBR would not be in a position to ensure its implementation.

Another budgetary proposal that is likely to fuel provincial federal disharmony was the withdrawal of the right to claim input tax adjustment on provincial sales tax. It is simply inexplicable why the FBR has yet to proactively seek an agreement with provincial taxation authorities that are a source of serious concern to the taxpayers.

The PBC points out that the input tax adjustment would not be available if the supplier has not declared such supply in his returns or has not paid tax due according to his returns. To clarify the amendment implies that an eligible input tax would become inadmissible for the purchaser if the supplier has not declared such supply in his sales tax returns or has not paid due tax on his returns.

Such measures as the PBC pointed out may increase federal tax collections in the short term but warns that “this would imply dual indirect taxation as indirect taxes paid to the provinces shall not reduce the incidence of sales tax paid to the federation”. “The flaw of funding from a narrow tax base must be addressed boldly and urgently,” the PBC argues and maintains that a more development oriented proposal would be to amend the definition of input tax by excluding sales tax paid under respective provincial laws.

The steadily rising reliance on withholding taxes on services/products rather than on income as a revenue source and placing them under direct taxes (budget 2016-17 proposes a rise to 75 percent of all direct tax collections from withholding taxes) is a misrepresentation. Withholding taxes as PBC noted in its letter are eventually passed on by non-filers to consumers and the formal sector this raising the cost of living and cost of doing business.

The PBC has also recommended to the federal government to withdraw group taxation as it is an impediment to the formation of large groups and reconsideration of the super tax system. The government must surely be aware of the steady outflow of investment through relocation of a rising number of industrial units to other countries particularly Bangladesh. To reverse this trend would require less and not more taxes.

The budget for 2016-17 is short sighted in that it not only focuses on raising revenue from a narrow base but, equally disturbingly, may further fuel federal-provincial disharmony. One can only urge the government to take a more realistic view in terms of its implementation capacity with respect to revenue generating measures as well as be aware of their negative impact on development-oriented activities. –Business Recorder