Although the Sindh cabinet has been called to meet here on April 13 to discuss the VAT bills, before sending them to the Sindh Assembly for enactment, there is more to it than what meets the eye. The Sindh government's posture of defiance and blistering attack on the new VAT law appears to be an effort only to keep the tempers cool, and stall widespread agitation in the province.
The draft bills 2010 relating to federal and provincial VAT have been prepared by the Federal Board of Revenue (FBR) with connivance of Sindh government, according to inside information, about the 7th NFC, trickling in through well informed sources here. The non-settlement of NFC award, through sought amendments in the presidential order 4 of 2010 by Sindh government, is forcing people to find reasons as to what and where it is wrong that the most important exclusions in the order with reference to NFC benchmark is not being taken care of although a month has passed when formal agitation and representation was made by Chief Minister of Sindh to Prime Minister and President of Pakistan.
What was the walkout from the meeting by finance secretary of Sindh about and what one could draw from the claim by Sindh law minister that they have deposited the bills of VAT 2010, one authored by FBR sent to the province and other made by the province for lawmaking. On a query to Sindh the law minister as to which law will be legislated, quick came the reply: "not the one sent by FBR but the VAT law 2010 made by province to allow it to collect the taxes on services will be enacted".
The law minister of Sindh did not mince the words before talking to electronic media recently and said that a conspiracy was hatched against the province while promulgating the presidential order in contravention and violation of constitution and the agreement of the NFC among all the provinces with consensus.
The Chief Minister of Sindh and Dr Kaiser Bengali have also been reported in the press to have declared that they are following up with the Prime Minister and President the issue of the earliest remedy to wrongdoings in converting the NFC to presidential award by not only deleting the most important issues which were agreed at the last moment at Gwadar in which Punjab showed magnanimity to agree deviation from its inflexible stance of sharing revenues and grants in aid only on population basis. The NFC further reconfirmed the position of provinces to have constitutional rights to collect the tax on services and the NFC language was pressed by Sindh to express so and mention that the tax on services shall be allowed for collection by provinces if they wish to do so.
The NFC award contained the language carefully balanced due to all time participation of experts of law and developmental economics from Sindh. Former attorney general of Pakistan, Makhdoom Ali Khan, played a lead role in advising Sindh for languages to protect the deviation which was agreed by Punjab in the larger interest of the country as well as to promote the harmony amongst the provinces as claimed by Chief Minister of Punjab after the document was signed in Gwadar. Dr Kaiser Bengali remained close aide of Chief Minister of Sindh, who is also finance minister, attending all pre-signature meetings which generated the settlement of the demands of the provinces, including Sindh, to add multiple criteria with the aided situation of gradually becoming resource generating through levy of tax on services.
The tax on services are those services which are already being levied as Federal Excise Duty (FED) and as special excise duty with full list completely expressed as to which services are transferable for collection of taxes by provinces. Moreover, these taxes could also grow if the present few thousand numbers of service providers is increased.
Analysts believe that this is a tax which is a doorstep tax and the provincial government through its property tax department and others like Karachi Building Control Authority (KBCA) and on the basis of other information, is fully aware as to which services the province could tax.
Interestingly, Sindh province also collects professional tax from trade and industry, which provides a database to connect to the services which trade and industry are purchasing. Presently the professional tax itself identifies major trade and industry activities and as such the details from its own departments may suffice for expanding the net of the service providers to levy the tax on services. The province is estimating to generate tens of billions of Rupees from tax on services. Major services are sold and purchased alone in the city Karachi which handles more than 2/3rd of import and export trade of Pakistan. The financial services in Sindh are providing the backup for generating other services which are also concentrated in the metropolis of Karachi.
However, all these dreams of idealists have been shattered as about a month has passed of passing of 2010 order of president but nothing is happening against the agitation in writing sent by Sindh Chief Minister to Prime Minister and President.
MQM, which is an ally, also appears to be not much on the move on this issue. In the past, they have been more active when opposition of Kalabagh Dam continued to persist. Intellectuals, opponents, nationalists and other stalwarts are taking abundant caution in using their power at this time and prefer to wait once federal government shows a red signal of 'no go' to Sindh to collect taxes on services and claim the indemnity for protecting the NFC on multiple criteria and other binding constitutional nomenclatures as agreed to in the NFC.
Insiders say that Prime Minister is convinced that by allowing Sindh to collect the tax on services, FBR will have difficulty in managing the new VAT law, likely to be legislated under the pressure of IMF, with whom Pakistan has structural adjustment program. It has to be more tuned to the arguments and dictates in specific of the need to increase tax base and generate additional revenue. World Bank and IMF are reportedly and repeatedly saying that VAT law will bring forth additional Rs 600 billion which presently are evaded on account of loose stringency in the present GST law.
The GST carries circumvention and distortion of VAT law and has 12 regimes to operate with exemptions and zero ratings. The World Bank wants to see excluding the subsidies and increasing the tax base so that the country could sustain the targeted deficits given by IMF for meeting with the demands of continuing with IMF program by getting tranche releases subject to qualifications quarterly.
Insiders say that Prime Minister is convinced not to press or advise the disturbing of presidential order, in specific, related to allowance given to the provinces to collect tax on services but he may be convinced to release some of the languages deleted from NFC during the translation of the same in the NEC award.
Insiders say that Sindh government is half-hearted in its approach as it is not getting the support of its own party at federal level and no heed has so far been paid to its demands to change the presidential order and synchronise the same with the language of NFC award. The efforts of Sindh government, even in legislating its own deposited VAT bill 2010 to empower collection of taxes on services, is taking long and some inside sources say that the president is also more on the thinking path of prime minister and reportedly convinced on the grounds that IMF program must continue with as advised.
Sources also say that the president is reportedly influenced by bureaucracy in Islamabad which played foul, and fudged the documents, and argued their case to support the federal VAT bill 2010 and provincial VAT bill 2010 which allows the former to collect the sales tax on services and allows the latter to agree with the collection of tax on services by FBR.
The situation appears to be so tight in favour of FBR and the bureaucracy in the Ministry of Finance that even the resistance of businessmen does not appear to be stalling the continued progress on the VAT bill in respect of the modalities and procedures being updated by FBR for giving effect through the tabling of the bill.
Interestingly, the Senate has not disapproved the bill while NA appears to be favouring the bill which shows that the party at federal level has advised the upper and lower houses to take care of the structural program of IMF in the larger interest as the building up of the reserves is considered to be the most important macroeconomic stability, which only is possible with the release of tranches.
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