VAT bills: Sindh shows its dissent: Sindh finance secretary walks out of RAC meeting

In an extraordinary development here on Friday, the Finance Secretary of Sindh government walked out of the most crucial meeting of the Revenue Advisory Council on value added tax (VAT), sending a loud and clear message of not accepting Federal and Provincial VAT Bills drafted by the Federal Board of Revenue (FBR).
This boycott of Revenue Advisory Council meeting by the Provincial Secretary, Finance of Sindh at the FBR House here on Friday categorically showed rejection of the Federal/Provincial VAT Bills, which now seems an uphill task to be implemented in an integrated broad-based environment from July 1, 2010.
Eminent economist and Advisor to Chief Minister Sindh on Finance and Revenue Dr Kaiser Bengali told Business Recorder on Friday that the Sindh government had in principle, decided not to participate in any meeting of the Ministry of Finance or Revenue Advisory Council relating to VAT. "Sindh government will not to participate in any meeting on proposed VAT until the Presidential order clearly mentions the sales tax on services as provincial right," he added.
"We will not participate in any meeting of the FBR, Finance Ministry, RAC, etc, till the major omissions in the President's Order No 4 of 2010 in comparison with the recommendations of the 7th NFC Award relating to 'Sales Tax on Services' and 'Multiple Criteria' are not removed", he said.
Top economist observed that he had not visit Islamabad to participate in the meeting of the Revenue Advisory Council in protest due to deviation from the basic recommendations of the 7th NFC, which were not incorporated in the President's Order. He said that the provincial finance secretary of Sindh has conveyed to the Revenue Advisory Council that "we will not participate in any meeting pertaining to the VAT till the said amendments be incorporated in the President's Order No 4 of 2010 in view of recommendations of the 7th NFC Award".
As it was necessary to send some senior most representative to the meeting, the provincial finance secretary of Sindh had gone to the FBR House, attended the meeting, and formally got recorded protest of the province in the meeting, and walked out of the meeting as a mark of protest.
He said that provincial finance secretary of Sindh had also conveyed to the Revenue Advisory Council that the Federal and Provincial VAT Bills to implement broad-based integrated VAT "are not acceptable to us". The Federal/Provincial VAT Bills of the FBR have been drafted in violation of the Constitution of Pakistan.
The collection of sales tax on services is a basic right of the provinces and any law which empowers the FBR to collect sales tax on provinces is against the Constitution of Pakistan. Referring to two countries, Kaiser Bengali explained that India and Brazil have separate systems for collection of VAT on goods and services.
In both cases, of India and Brazil, there is no concept of broad-based integrated VAT, but the tax system is smoothly operating in these countries. In India, provinces have the right to collect sales tax on goods, and centre has been empowered to collect sales tax on services. India respects its own Constitution and financial autonomy of the provinces. They have not deviated from the Constitution and had implemented arrangement which is acceptable to the provinces.
He added that the draft Bills 2010 relating to Federal and Provincial VAT, prepared by the FBR, reflected a gross violation of the Constitution of Pakistan, "and these are totally contrary to the recommendations of the 7th NFC Award relating to Sales Tax on Services," he added.
On the issue of sales tax on services, there is a specific recommendation in the 7th NFC award, which reads: 'NFC recognises that sales tax on services is a provincial subject under the Constitution of Pakistan, and may be collected by respective provinces, if they so desire'. The deletion of this recommendation is in major deviation to the entire letter and spirit of the NFC and is contrary to the interests of Sindh.
It is worth mentioning that Finance Department, Government of Sindh has also already officially placed its serious reservations to the FBR on record by submitting that the draft Bills on VAT, both federal and provincial, being contrary to constitution "are not acceptable to Sindh."
According to the Sindh government, these Bills empower FBR to collect VAT on behalf of the Federation and the Provinces without providing any scope for provincial rights on collection of Sales Tax on Services. There are innumerable clauses which, in a way, encroach upon the provincial jurisdiction so much so that the role of the provincial government has been almost limited to promulgation of the Act only, as is the case in the existing Provincial Sales Tax Ordinance 2000.
The draft VAT Bills further involve a very complex system of input and output adjustments in such a way that it becomes impossible to ascertain what are "goods" and what are "services". Simplicity in tax structure is one of the basic principles under the canon of taxation as a complex tax structure will always lead to evasion of tax. 'Tax on goods' and 'tax on services' are two separate domains; thus they should be treated separately.
Any integration of the taxes on sales and purchase of services in the provinces and cross-credit of each tax in case of 'Federal VAT' on integration with federal taxes on sales and purchase of goods and cross-credit of each tax in case a 'Provincial VAT' would lead to complexity in tax structure, Sindh government added.