TAX NEWS - June 2010
Pakistan Tax: Tax on services
The amendments recognise the provinces' rights over GST on services, but make it part of the divisible pool, reaffirm recommendations for increasing tax-to-GDP ratio to 15 per cent by 2014-15 and seek steps for imposition of effective taxes on agriculture and real estate by the provinces.
The amendments have been made by the finance ministry following protests lodged by the Sindh government with President Asif Ali Zardari and Finance Minister Dr Abdul Hafeez Shaikh over the past week.
However, the revised memorandum revealed that the dispute between the federal government and Sindh over collection and generation of sales tax on services under a separate formula has yet to be resolved.
The Sindh government has been claiming that a formula for generation and collection of tax on services has already been agreed upon.
Under this formula, Sindh had to be given a share of 50 per cent, Punjab 44, Khyber Pakhtunkhwa five and Balochistan one per cent. After repeated protests, the presidential order on the NFC award was amended to show these provincial shares, but this has again been left out of the amended explanatory memorandum.
Under the amended memorandum, sales tax on services (CE mode) has been added to the list of divisible pool. However, the tax on sales and purchases of goods has been excluded from the list of federal divisible pool taxes.
The revised memorandum has for the first time explained that under section 4 of the presidential ordinance on NFC, the multi-factor criteria would be the basis for distribution of net proceeds of the federal divisible pool among the provinces.
The indicators and their respective weights would now be 82 per cent for population, 10.3 per cent for poverty or backwardness, five per cent for revenue collection or generation and 2.7 per cent for inverse population density.
This clause was not part of the original explanatory memorandum on federal receipts announced in the federal budget.
Another amendment (clause 8) has been inserted into the explanatory memorandum. It reads: "The NFC recognises that sales tax on services is a provincial subject under the Constitution of the Islamic Republic of Pakistan, and may be collected by respective provinces, if they so desire." This clause was also not part of the original federal budget.
Likewise, clause 9 has been added to the revised explanatory memorandum. It says that "NFC also recommended increase in the rate of excise duty on natural gas to Rs10 per MMBTU (instead of Rs5.09 per million British thermal unit). Federal government may initiate necessary legislation accordingly".
This clause too was not part of the original federal budget announced on June 5.
AGRICULTURE, REAL ESTATE: Another amendment makes it mandatory for provincial governments to take steps for introduction of taxes on agriculture and real estate sectors and to increase tax-to-GDP ratio to 15 per cent in five years. It says the "federal and provincial governments should streamline their tax collection system to reduce leakages and increase revenues through efforts to improve taxation in order to achieve a 15 per cent tax-to-GDP ratio by the terminal year, that is 2014-15".
Under section 2 (clause 9) of the revised memorandum, the provinces shall initiate steps to effectively tax the agriculture and real estate sectors. "Federal government and provincial governments may take necessary administrative and legislative steps accordingly."
The revised memorandum also makes it mandatory that federal and provincial governments "would develop and enforce mechanism for maintaining fiscal discipline at the federal and provincial levels through legislative and administrative measures".
It also calls upon the federal government to assist the provinces through specific grants in times of unforeseen calamities and that NFC meetings would be convened regularly on a quarterly basis to monitor implementation of the award in letter and spirit.
The amended memorandum repeals the distribution of revenues and grants-in-aid order of 1997 and distribution of revenues and grants in aid order of 2010.
Moreover, the revised memorandum explains that the indicative share of GST on services (provincial) are strictly provisional at this stage since a decision on levying a reformed GST has been deferred to October 1. These shares would be revised in the light of decision taken after discussion with the provinces.
Thus, the federal government would transfer Rs89.2 billion to the provinces on account of GST during 2010-11. Of this, Punjab would get Rs51.2 billion, Sindh Rs21.2, Khyber Pakhtunkhwa Rs12.3 billion and Balochistan Rs4.6 billion.
Under the revised memorandum, the federal government would transfer a total of Rs866 billion to the provinces on account of share of the federal divisible pool. Punjab would get Rs437 billion, followed by Sindh at Rs207.3 billion, Khyber Pakhtunkhwa Rs138.7 billion and Balochistan Rs83 billion. This includes 1 per cent war on terror transfers to Khyber Pakhtunkhwa.
After including straight transfers to the provinces, the provincial governments would get a total of Rs1033.64 billion from the federal government during 2010-11.
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