NFC: toying with tax rearrangements

At the first round of NFC negotiations last week, Sindh’s Chief Minister reportedly reiterated Sindh’s earlier position that the provinces be allowed to collect GST on goods for the centre. Sindh’s

argument being that provinces can do a better job at collection compared to the FBR, as has been in the case of GST on services now collected by all provinces, putting FBR’s performance to shame at least in so far as that particular tax is concerned. The question is whether Islamabad would agree.

Unfortunately, it is too difficult to answer that question for anyone at the moment, not even the negotiators of each provinces and the centre. NFC is the kind of stuff political economy is made up of. However, if indeed the parties agree to move in that direction and explore how GST on goods can be collected by the provinces, then it ought to be a well thought out process with mechanisms and instruments simultaneously created for the purpose of future coordination, audit and accountability.

For instance, one area of concern is the data. Already the FBR can do precious little in terms of audit since they do not have the data pertaining to land, shops, office, industry or car. But if the GST on goods is to be collected by provinces then will it not further impair FBR’s records, unless explicit provisions are made for shared record keeping and coordination.

Second, the fact that provinces have a claim on the centre rather than on each other may lead to complications in case there is a revenue shortfall under the head of GST on goods collected by the provinces. It is true that all the four provincial GST on service collecting bodies have performed much better than FBR, and so one can potentially argue that provinces will do a better job at collecting GST on goods as well.

But what if, for example, Punjab and Sindh fall short of the collection targets. This will then lead to less than budgeted spending by other two provinces which may cause inter-provincial disharmony. In the existing model if FBR fails to collect GST on goods as per budgeted targets, then the claims are between the centre and provinces, and not among the provinces. Therefore, without thinking through the possible complications and their solutions, a move towards giving GST on goods is not advised. There is already enough of inter-provincial discord and enough of inter-provincial mis-coordination as far as GST on services is concerned. In the case of latter, just ask businesses.

Third, as previously argued in this space, the FBR needs to have provincial representation on its policy board for the simple reasons that the responsibility of a host of economic sectors rests with the provinces, and that more than of FBR’s taxes are actually for the provinces via the divisible pool. But if the parties agree to allow provinces to collect GST on goods, then provincial representation on FBR’s policy board becomes even more paramount.

Lastly, if provinces are given the right to collect GST on goods while they are already collecting GST on services, then why not undergo a VAT reform. Surely, one of the reasons why Sindh is confident that it can collect better GST on goods (compared to FBR) is because having both goods and services under its umbrella will give her access to the right kind of information (for e.g. of wages & margins) across the value chain.

If provinces really want to collect GST on goods efficiently, they will eventually move towards at least having some kind of quasi VAT mode. This then makes one wonder that why shouldn’t the parties agree to create a National GST Agency instead.

That agency could have equal provincial & federal representation on its policy board, whereas the existing provincial bodies for GST on service can become respective provincial offices of that agency. For GST on services the agency would get political direction from respective provinces, and for GST goods it would get from Islamabad. This arrangement will keep businesses happy for they won’t have to register with five different agencies, and it will also help provinces to reap the fruits of VAT mode taxation because of the kind of information it generates across the value chain. Must Pakistan wait for IMF’s dictation to rollout VAT?