It would be sheer high-handedness


WEB DESK: According to a Business Recorder exclusive, the Finance Bill 2016 intends to amend tax laws and disallow input tax adjustments for sales tax paid to provincial governments.

In layman’s terms, this implies that input tax payable to provincial authorities would no longer be adjusted in the sales tax payable to the Federal Board of Revenue (FBR).

The sheer illogic of this proposal challenges the very capacity or indeed intent of the FBR to formulate a tax structure that is fair, non-anomalous and equitable. To clarify, the Finance Bill is expected to disallow the provincial input tax adjustment with the 17 percent across the board general sales tax (GST) in the Value Added Tax (VAT) mode that is credited to the treasury. GST in its VAT mode is passed on in its entirety onto the end consumer/client thereby implying that the actual cost of any output – in manufacturing or services sector – would rise commensurate to the existing adjustment.

Thus unless the federal government reduces the sales tax rate the end consumer/client would pay the higher price attributed entirely to this flawed decision. In addition, the 6 percent projected inflation rate by the Ministry of Finance, a projected statistic shared with the members of the cabinet for 2016-17, would have to be revised upward. It has also been reported in Business Recorder that in spite of a levy of 17 percent sales tax from 2014 onwards the effective rate that ultimately gets credited to the federal exchequer is in a single digit. Last year, the rate of collection fell to around 6 to 7 percent against 17 percent.

According to a Staff Country Report published by the International Monetary Fund “Pakistan’s major source of revenue, GST, has been subject to a variety of reforms in recent years but continues to yield rather low levels of revenues… Pakistan’s GST efficiency is low by international standards…of the 86 countries that currently have a VAT type sales tax system Pakistan’s GST or VAT efficiency ratio is at the bottom 10 percent. Also the ratio is the lowest in South Asia.

Despite the implementation of various measures, including removal of exemptions, enhancing taxpayer facilitation, and widening the tax net there appear to be shortcomings in Pakistan’s GST collections”. All the provinces have expressed serious reservations at the sustained failure of FBR to reconcile sales tax on services, within the purview of provinces under the constitution, with taxes FBR has imposed under the guise of excise duties on those same services. These reservations have also been voiced by Punjab though perhaps not as openly or stridently as those where the PML-N is not in government.

Failure to reconcile these differences is unfortunately the outcome of the Finance Ministry’s over-arching objective for the past three years: to generate higher revenue that trumps a pro-growth policy. It is relevant to note that while disallowing input tax adjustment would enhance revenue yet sales tax is credited under the head of the federal divisible pool that is distributed between the provinces and the federal government.

In other words, the actual share of the federation from any increase in revenue would be minimal and would certainly not outbalance its negative features including a rise in the rate of inflation. True that GST in the VAT mode is a critical component of the policy to enhance documentation of the parallel illegal economy but it stands to reason that by disallowing the input provincial tax adjustment by the FBR the attraction to remain in the undocumented sector may rise further.

As a consequence, the provinces would be compelled to and will surely disallow input adjustment of federal sales tax paid by the services sector. In all this bureaucratic tussle between the FBR and the provincial tax departments, the taxpayer and ultimately the consumer would suffer because of the increased cost.

It would be a classic case of taxpayer harassment and maltreatment instead of facilitation and the onus of this will be on FBR for its high-handedness. -Business Recorder