Its nearly twelve weeks since the federal budget was announced. And what a quarter its been. The finance minister squeezed an extension on the implementation of integrated VAT, which was followed by some complacency, and then came the floods.
To set the record straight, the time bought back in early July was to reach an agreement between the provinces, educate the stakeholders and iron out the few remaining concerns over VAT.
Be it economic, social or now even political considerations and imperatives, the dynamics of the country have changed in the last three weeks.
Currently, the Finance Minister, Hafeez Shaikh, is leading a delegation from Pakistan to hold talks with the IMF to discuss the course of action in the aftermath of the deadly floods. Hafeez would likely argue for further relaxation, but, given Pakistans lacklustre efforts to get VAT implemented, it is unlikely that the donors will let loose the condition that easily.
Multilateral lenders must be baffled by the obstacles to an agreement between Sindh and the federal government, given President Zardaris control over his party, which currently forms the government in the southern province.
Perhaps thats the reason why other provinces (read Punjab), have so far been rather laid back in their reservations about the
ew tax. Lobby groups and the provincial government in Punjab would rather not involve themselves in a battle being fought for it by Sindh.
In recent days, Information Minister, Qamar Zaman Kaira, indicated that the tussle over VAT has finally been resolved, though no formal announcements have been made so far. And given the credibility of the current dispensation, the information could prove false in the coming days.
Reportedly, however, the federal government admits that Sindh must be assured of its constitutional right to collect taxes on services. Earlier on Saturday, this newspaper reported that the new formula to collect GST on services is on the anvil. The formula revolves around the aggregation of services into three broad catchalls.
One, tax collection from standalone businesses, such as hair dressers, corner stores and even restaurants that are largely location-based are to be awarded to the provinces, if they choose to collect it themselves. Though the collection under this category would vary from one province to another, it is likely to be less than one-tenth of the total GST on services, according to tax experts.
Therefore, one wonders if the provinces would really take the hassle to set up their machinery for such a small amount. Ideally, they should. But will they, and whether they intend to develop their tax collection capacity over time, is a crucial question unfortunately left unanswered in the public debate so far.
The second category primarily includes the telecom sector, which reportedly accounts for up to three-fourth of the pie, and will also remain under the domain of the federating units. The streamlined nature of such industries allows for easier calculation.
The third category includes industries that are integrated on a nationwide basis and require input tax adjustments between the provinces. These are to be left with the centre until adequate capabilities are developed within the provinces, if they develop at all.
While agreements in principle may have been reached, they mean little until decisions are made to formalise the modalities. And with the top brass of the finance ministry in Washington in the aftermath of the floods, don count your chickens yet. They might not hatch.
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