Amendments in the sales tax act The federal government wishes to settle the issue of input tax adjustment in Sales Tax that was blocked in the Finance Act 2016, two months after it was passed by the National Assembly.
The controversial amendment that impinges on the right of taxpayers is seen as a breach of trust by the provinces, and a setback to the movement towards financial federalism in Pakistan by experts.
Last week senior members of the government economic team met in Islamabad with Finance Minister Ishaq Dar in the chair, according to an official source, and decided in principle to withdraw, if necessary, through an ordinance the said amendment in the Sales Tax Act.
Officials in Islamabad confirmed that a meeting was held on the subject last midweek but contested the claim that the government has already decided to strike down the said amendment unilaterally.
“Yes the subject was discussed and Finance Minister Ishaq Dar wished the issue to be resolved in consultation with the provinces. We have already reached out to the Sindh Revenue Board and the Punjab Revenue Authority, and are coordinating with others to hold a meeting. I am confident the issue will soon be resolved to the satisfaction of all stakeholders”, a member of the FBR said over phone from Islamabad.
The provinces, however, dismissed the claim and maintained they have not yet been approached.
The question begging an answer was: Why did the government introduce changes that would not stand the test of merit? No one in the FBR was able to explain that satisfactorily.
“The government knew it would not be acceptable to the provinces or the corporate sector as both opposed it tooth and nail during the discussion phase after the proposal surfaced in Finance Minister Ishaq Dar’s budget speech.
“The blockage of input tax adjustment change is neither wise nor fair” — Ehsan Malik, CEO The Pakistan Business Council
“The government still did not drop it and used its parliamentary strength to push it through. Yes, the architects of the proposal in the FBR went overboard, but the finance minister or the parliamentarians who owned and passed it can’t be absolved of the responsibility”, a tax expert commented.
Dr Mohammad Iqbal, spokesperson of the Federal Board of Revenue, was unable to defend the amendment, and came up with a lame argument that taxation measures are never popular. Talking to Dawn over phone he said the key objective was to increase revenue and press the provinces to honour their adjustment obligations.
“Instead of looking at it as a sign of the government weakness you should appreciate the flexibility of the policymakers ready to accommodate concerns of the private sector and provinces”, he said, referring to the government’s decision to review its stance.
According to some sources, there was opposition from within the FBR to the said changes on the grounds of a cost benefit analysis. “Beside legal lacunas associated with double taxation for the same good or service in absence of input adjustment at two tiers of the government, I thought the projected yield of two and a half billion rupees was too insignificant to stir an hornets’ nest of sales tax arrangement between provinces and the federation”, confided a member.
Beside business bodies such as Overseas Investors Chamber of Commerce and Industry and the Pakistan Business Council, the provincial financial hierarchy has publicly been campaigning against the withdrawal of the facility of input tax adjustment that further fragments tax structure, increases the incidence of the sales tax that reduces competitiveness of local businesses, and hikes inflation.
The Punjab government responded by introducing a counter amendment in the Punjab Finance Act that legalised the blocking of input adjustment of sales tax paid to the federal government.
When reached over phone, representatives of the Punjab Revenue Authority (PRA) welcomed the current federal government’s move to retract changes as positive. It clarified that Punjab does not owe any money to the FBR on account of input tax settlement and has been working closely in the light of an MOU dated March 13, 2014 to periodically settle the revenue accounts on the basis of respective cross input tax adjustments.
It said the PRA had agitated at the time of the Finance Bill 2016 and the Federal Minister of Punjab wrote a letter in this regard to Federal Minister Ishaq Dar; where a meeting decided that the FBR would not drop the proposal of exclusion of provincial sales tax from the definition of ‘input tax’ as provided under Sales Tax Act 1990.
“As a reciprocal measure, the Punjab government was forced to introduce the following provision in the Punjab Sales Tax on Services Act, 2016: 16B. Tax credit not allowed- (1) Notwithstanding anything contained in this Act or the rules, a registered person shall not be entitled to claim input tax adjustment in respect of: (p) sales tax paid to the federal government for supply of goods or provision of services, if the sales tax law of the Federation or the province concerned does not allow adjustment of tax paid under this Act.
“…PRA hopes that the initiative taken by Finance Minister Ishaq Dar will definitely redraw the terms of understanding between the FBR and the provincial revenue authorities in the broader perspective of the VAT system, keeping in view the taxpayers’ rights.
“Similarly it will create an opportunity to resolve intra-provincial issues under the umbrella of the federal finance ministry on cross-border and multiple taxation issues”, said a written statement mailed to Dawn.
Ehsan Malik, CEO of the Pakistan Business Council mocked the idea of penalising tax compliance corporate entities for conflicts on taxation between the federation and provinces.
“If the denial of input tax adjustment is not reversed it will hurt business sentiments and worsen Pakistan’s ranking on the ease of doing business index. It will lead to a price increase of 6-10pc in products as companies will be inclined to pass on the cost of additional tax burden to end consumers or take the brunt on profit margin.
“The blockage of input tax adjustment change is neither wise nor fair”, he said.