The lack of harmony between Pakistan’s provincial and federal tax authorities brought the stakeholders together at a seminar held in Lahore this week. The agenda was to lower the cost and ease of taxation in the country, specifically the GST on services (GST-S). One of many arguments and tax lacunas presented at that moot is the need to broaden the provincial GST-S tax base.
Dr. Hafiz Pasha, one of the speakers at the seminar, pointed out that Pakistan’s collection of GST-S is 0.5 percent of the GDP, whereas that by India is about 1.6 percent of her GDP. His argument being, and valid so, that Pakistan has much potential to increase GST on services.
One of the ways to go about it to have a single provincial tax agency merging the departments of Board of Revenue, Excise & Taxation, and the GST-S authority in each province. This idea has been discussed for at least since 2013 because of the obvious benefits of data analytics that flow from merging these departments. But no practical steps have been taken so far; due to what sources label as ‘fiefdom battles between the departments’.
Another way to broaden the provincial tax net is by doing away with lazy mode of taxation. For instance, under current mechanism, services users are tasked to withhold the taxes of un-registered service providers. Similarly, as Abdul Qadir Memon, President of Pakistan tax Bar Association, pointed out “a registered service recipient has been restricted to claim or deduct input tax paid on the goods purchased or services received in respect of which sales tax has not been deposited in the government treasury by the respective suppliers or service provider”.
Such provisions penalize genuine taxpayers for a fault over which they have no control. In fact, in some cases, the WHT-isation of taxation increases the cost of services because in reality that tax becomes a pass-through element in the price. The tax authority’s responsibility should not end just because it is getting the revenue from un-registered providers. The authority should use the details of the un-registered service providers to be provided by those collecting WHT, and send notices and demands for eventual inclusion in the tax net.
However, to give the credit where it is due, efforts have been made to broaden the tax base over the last few years. For instance, in the case of Sindh, the Sindh Revenue Board’s (SRB) collection falls under four big heads: telecom, banks, insurance, and ports & terminal. The combined contribution of these sectors to SRB’s total collection had eased to 45 percent by FY16 from nearly 80 percent a few years earlier.
Considering that tax rates on ‘other sectors’ have not been jacked up, that trend shows a growth in tax collection from ‘other sectors’ – including the likes of wedding halls. Nevertheless, this kind of analysis and policy action will be confined to one that is based on proxies alone, until the governments do something about it. At the one end, revenue potential of GST-S is unknown; there is a need to conduct detailed studies towards that end, which in turn will require reliable and widely agreed estimations of regional accounts (also known as provincial GDPs). Likewise, there is a need to have periodic census of service sector organisations at provincial level to be able to gauge the full potential of GST-S collection.
At the other end, the provincial tax authorities do not publicly share their annual reports (if they prepare one) highlighting important details such as the contribution of sectors in total GST-S collection, sources of growth in collection (whether due to tax rates or tax base), trends in tax base, quality of collection (whether it is on-demand, or in WHT-mode), and so forth.
While it was a good step on the part of Punjab Revenue Authority to have called in a closed-door meeting of provincial GST-S authorities preceded by a seminar with other stakeholders, the publication of their respective annual reports should also be high on their agenda. Follow this space for more on the cost and ease of taxation, and harmonization!