KP — old rules live on LACKING enabling capacity, the Khyber Pakhtunkhwa government has not succeeded in increasing the revenue from sales tax on services since July 2013, when it took over this responsibility from the Federal Board of Revenue.
It trails far behind Punjab and Sindh which have distinguished themselves in this domain.
Statistics show that in the just ended fiscal year (2015-16), KP collected a mere Rs7.268bn sales tax on services against Sindh’s Rs61.464bn, followed by Punjab’s Rs58.662bn. The figure is low even if allowance is made for the different sizes of the three provincial economies and their development stages.
In the year 2011-12, when the FBR was collecting sales tax on services on behalf of the province, KP received Rs8.9bn, after the deduction of FBR’s service charges, and with a limited coverage of 10 categories of services. The coverage has now been extended to around 50 categories of services, yet the improvement is not commensurate with this coverage.
KP was the third province, after Sindh and Punjab, to set up its own authority for the collection of sales tax on services, a task that was devolved to the provinces after the 18th Amendment in April 2010. Sindh took the lead on July 1, 2011, followed by Punjab in July 2012.
The province’s poor performance is attributable to three factors.
The affairs of the Khyber Pakhtunkhwa Revenue Authority (KPRA), created in July 2013, are being run on an ad-hoc basis. KPRA works as an affiliate of the provincial excise and taxation department. It has a skeletal staff and lacks the right expertise. Administratively, the authority falls under the secretary of the excise and taxation.
A major challenge for the KPRA lies in issues related to its jurisdiction over services and to the apportionment of revenue with the FBR and the revenue agencies of Sindh and Punjab
So far, no regular director general (DG) of the authority has been appointed. Earlier on, a retired income tax officer was appointed the first DG of the authority; his services were terminated after a few months. Most of the KPRA directors are also retired income tax officers. Currently, one such director has been given the charge of running the affairs of the authority.
An officer of the provincial finance ministry said that the KPRA is placed under the excise department which is a major lacuna. Moreover, he said, the provincial government has so far failed to appoint a DG for the department. “We can’t do anything with its performance”, the officer stated, adding, it would have been much better in case the FBR was asked to continue collecting the sales tax on services as it is currently doing for Balochistan.
Though, KPRA started collecting sales tax on services from mid August 2013 under the KP Sales Tax on Services Act 2013, it has to date, failed to develop sales tax rules despite a lapse of three years, and still follows the FBR’s rules. The draft KP Sales Tax on Services Rules 2015 was posted on the authority’s website, with no deadline for comments. The provincial law division has pointed out loopholes in these rules and suggested reinforcements.
KPRA is still using the PRAL system, which is a complex one, to maintain a record of its taxpayers; the province has not developed its own data collecting system or database to enable tax authorities to produce the desired results.
A major challenge for the KPRA lies in issues related to its jurisdiction over services, to the apportionment of revenue with the FBR and the revenue agencies of Sindh and Punjab on account of inter-provincial trade, and, location of the head offices of most of the multinationals and telecom companies, and banks etc elsewhere.
Another issue is jurisdiction, which has yet to be resolved: whether sales tax be charged on services received or consumed. The Sindh government supported the idea that sales tax should be collected on the basis of origin, while Punjab and KP were sticking with the idea of destination. This tussle also compelled some taxpayers to challenge double taxation in court.
A tax expert said the value-added tax globally functions on the basis of destination. However, some provinces are also losing revenue because of ambiguity in their tax laws and absence of relevant tax experts to handle this issue.
While revenue targets were not met, the increase in collection was seen, not because of improved compliance but owing to the expanded tax coverage.
Around 92pc of the sales tax collection comes from the telecom sector. Other major revenue sources are tour operators, travelling agencies, beauty salons, banquet halls and restaurants.