EDITORIAL: Inexplicably and disturbingly the Federal Board of Revenue (FBR) has made a preposterous claim that it has conducted a study that shows that if FBR accepts the stance of provincial revenue authorities with regard to the definition of four disputed sectors (restaurants, transportation of petroleum products, construction and toll manufacturing) it would lose approximately one trillion rupees in revenue. The sheer absurdity and inaccuracy of this claim is evident from FBR’s own data published in its year book for FY 2019-20 that shows that FBR collected total sales tax of rupees 1.596 trillion in fiscal 2019-20 of which rupees 0.876 trillion was sales tax collected on imports and rupees 0.720 trillion on domestic transactions within the economy. Given that there is an obvious definitional dispute between FBR and provincial tax authorities on what constitutes the word “services” then one would urge all parties to the dispute to agree to definitions that could mirror those that are identified by the European Union or are universally in vogue. One would have assumed that definitional disputes would have been resolved by now given the more than a decade of tax on services being collected by the provincial authorities.
However, what is perhaps even more disturbing than the failure to resolve all definitional disputes is the fact that provinces where the PTI is in government, notably Punjab and Khyber Pakhtunkhwa, received hefty transfers on account of cross input tax adjustments, which is their right, while Sindh did not receive this treatment. Punjab, for example, received a whopping 16.586 billion rupees from the FBR that prompted its finance minister to hold a press conference claiming that the province had collected 73 billion rupees in July-December 2020 against 52 billion rupees collected in the comparable period of 2019 – the highest amongst the provinces. KPK also showed an improvement in collections despite the 1.4 billion rupee transfer from the FBR. Its total collection net of transfer received from FBR is 10 billion rupees against 8 billion rupees the year before. The rise is to the credit of the revenue authority’s efforts and also growth in economic activity in the province due to the easing of monetary and fiscal policies by the federal government to tackle the effects of the pandemic.
In this context it is relevant to note that the Constitution allows sales tax on goods to be collected by the FBR which sales tax on services is the prerogative of the provinces. Previous to the Zardari-led government (2008-13) the FBR collected sales tax on services on behalf of the federating units at a fee of 2 percent with the total amount collected credited to the divisible pool which was then distributed as per the 2010 National Finance Commission (NFC) award formula for sharing between the provinces and the federal government. However, Sindh took the lead followed by Punjab, Khyber Pakhtunkhwa (KPK) and then Balochistan in establishing a provincial tax authority and began to levy as well as collect sales tax on services that netted a considerably higher amount to provinces; however Balochistan, unlike the other three provinces, continues to rely on FBR to collect its sales tax on services. To argue that sales tax on services ever belonged to the Centre is therefore inaccurate and one would hope that the FBR acknowledges this fact before commenting on loss of revenue that never belonged to it in the first place.
Notwithstanding the unrealistic tax revenue target of 4.9 trillion rupees agreed by Pakistan’s economic team leaders with the International Monetary Fund second year running (premised on yet another unrealistic growth projection of 1.5 to 2.5 percent which independent analysts and multilaterals agree is overstated by one to two percent) the FBR must focus not on raising revenue from sources that do not belong to it but from undertaking the necessary and long overdue tax reforms that have been identified by local (National Tax Reform Commission) as well as international bodies including the IMF. The diagnosis was made a long time ago and the prescription written out clearly and succinctly but no one in FBR or in subsequent governments has deemed it appropriate to get the medication to the patient. That mindset needs to change.
We urge the Prime Minister to take cognizance of the anti-federating unit sentiment that has historically prevailed in the economic ministries of the federal government and which has further exacerbated after the 2010 National Finance Commission Award and the passage of the 18th Constitutional Amendment – and to make it clear to all and sundry within the federal government that in a federation such sentiment is unpatriotic, detrimental to national harmony and shall not be tolerated.
Copyright Business Recorder, 2021
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