Taxing rights - lack of judicious distribution: FBR-SRB row

In August 2011, the Implementation Commission on the 18th Constitutional Amendment [the Commission] directed the Federal Board of Revenue (FBR) to review the existing tax laws with reference to Entries 49 and 50, Part I of the Fourth Schedule to the Constitution of Pakistan [the Constitution].
Entry 49 is related to taxes on the sale and purchase of goods imported, exported, produced, manufactured or consumed except sales tax on services and Entry 50 provides for taxes on the capital value of assets, not including taxes on immovable property. In the light of these two entries, the federal government, in terms of Article 142 of the Constitution cannot levy sales tax on services and capital value tax on immovable property.
The Commission in the wake of 18th Constitutional Amendment wanted to ensure that the FBR should not collect taxes that fall outside the ambit of the Federal Legislative List. The Commission, while issuing instructions to the FBR, advised it to review the existing tax laws to ensure that the "domain of the federation is extended only to those taxes which were covered under the Federal Legislative List".
Accordingly, all wings of the FBR were required to submit their views on the existing tax laws, forward the same to the Member Legal Wing for onward submission to the Commission in the form of a consolidated report. Even after a lapse of six months no report has yet been submitted to the Commission. The result is an unending row between the Sindh Revenue Board (SRB) and the FBR over many issues, the latest one being, which authority has the jurisdiction to collect sales tax from restaurants and caterers.
The SRB says that restaurants and caterers provide "services" and therefore are liable to sales tax on services under the Sindh Sales Tax on Services Act, 2011. On the contrary, the FBR contests that restaurants and caterers, being manufacturers of goods (food), fall under the Sales Tax Act, 1990 and they have full authority to collect sales tax from them. Since 2000, the FBR has been collecting sales tax on services on behalf of all the four provinces.
From July 1, 2011, the SBR started collecting sales tax on services, while the three others are still continuing with the existing procedure. It is not clear how the FBR has suddenly discovered that restaurants and caterers are not service providers. In the Sales Tax Ordinances promulgated by all the four provinces in 2000, charge was provided for these two entities but the FBR never contested their right to do so. Even in the wake of the Sindh Sales Tax on Services Act, 2011, the FBR did not raise any such objection.
The provincial laws prevalent in Punjab, Khyber Pakhtunkhwa and Balochistan for sales tax on services provide for 16% charge on hotels, clubs, caterers, advertisements on TV/Radio, customs agents, ship chandlers, stevedores and courier services. A distinction is, however, made between restaurants and hotels providing room services as well, which are further subjected to federal excise duty and provincial bed tax. All taxable service providers are liable for registration and payment of sales tax without any monetary threshold. Time of service is the time when the service is completed or payment is received, whichever is earlier.
This is contrary to the provisions of section 2(44) of the Sales Tax Act 1990. It is strange how the FBR has suddenly started contesting that restaurants and caterers fall under the Sales Tax Act 1990 and not within the provincial law whereas Rule 31, Chapter VI of the Sales Tax Special Procedure Rules, 2007 speaks otherwise. If the contention of the FBR is correct then it should be equally applicable to the other three provinces. Why is the FBR annoyed with the SRB alone?
From July 1, 2011, Sindh has been collecting sales tax on services on its own, whereas the other provinces have assigned the task of collection to the FBR. The SRB, established in 2010, has so far shown resilience by not yielding before the FBR to hand over collection rights to it and on the issue of double jeopardy of the Federal Excise Duty [FED] and sales tax on the same services.
The Federal Government under the 1973 Constitution has no authority to charge sales tax on services. The Commission wants that the FBR abolishes FED on services, but it appears that the tax bureaucrats sitting there are not ready to follow the command of the supreme law of the land.
The FBR has on many occasions violated the Constitutional provisions. One such example is Sales Tax Special Procedure (Withholding) Rules 2007, which is unlawful when read in conjunction with section 3(6) and (7) of the Sales Tax Act 1990 as far as requiring banks to withhold sales tax.
The banks, not liable to sales tax, cannot be asked to act as withholding tax agents for sales tax purposes. This violates the command of the Constitution of Pakistan. Notwithstanding this legal position, even otherwise, banks cannot pass on the sales tax burden to their client and thus the very purpose of collecting FED in VAT-mode in their case is meaningless.
The SRB collected Rs 12.2 billion rupees during the first seven months of the current fiscal year and it is forecasting total collections for the entire year at around Rs 25 billion whereas it was getting a fraction of it under the National Finance Commission Award (NFC) from the federal government. It may be remembered that during the 7th NFC Award parleys, the Sindh government took a strong stand on the issue of GST on goods and services making it clear that as per Constitution it should not be part of the NFC. It was reiterated by the Chief Minister of Sindh that the GST on goods was a district tax and the federal government had no right to collect it.
It is a matter of record that successive governments in Pakistan - civil and military alike - have never bothered to restore judicious distribution of taxation rights between the federation and the federating units. Lack of judicious distribution of taxes and perpetual abuse of constitutional provisions by Islamabad has created disharmony and animosity between the Centre and the provinces.
The issue is not that of vertical or horizontal distribution of taxes and resources but giving the provinces full autonomy that includes exclusive right of levying taxes on goods and services emanating in their respective areas and having full control over resources. In the existing scenario of Balochistan, the Centre should keep only four subjects, namely, Defence, Currency, Foreign affairs and Communications, with it and the rest shall be given to the provinces - this alone can ensure the survival of Pakistan in the long run.
The Centre, at present, is transgressing on the constitutional rights of the provinces and then out of so-called divisible pool - comprising of unlawfully collected taxes belonging to the provinces - gives them peanuts. This is a lamentable act that should be stopped immediately. The ownership of natural resources of provinces and its exploitation for the benefit of their own people is the real issue that needs to be addressed.
While Sindh has taken a revolutionary step towards fiscal autonomy, Punjab is still captive in the hands of the FBR as it has not only failed to take any measures for collecting sales tax on services on its own but has also failed to take any step towards building its own capacity to collect sales tax on services as done by Sindh through the SRB.
This failure of Punjab exposes the tall claims of good governance by the PML (N). It was Punjab's duty to lead all other provinces towards meaningful fiscal autonomy. On the contrary, it is borrowing more and more funds and not collecting taxes where due - for example its criminal laxity in collecting agricultural income tax from the rich and mighty.
In the given circumstances of Pakistan, the Centre must behave, respect and restore the rights of the provinces, lest it is too late. The FBR should withdraw all taxes that constitutionally belong to the provinces - many indirect taxes imposed on services under the garb of the presumptive tax regime through the Income Tax Ordinance, 2001.
It is high time that recommendations made at consultative workshop on the "Upcoming NFC Award" organised by "We Journalists," in the Karachi Press Club on September 6, 2009 should be considered. The recommendations amongst others included requiring the federal government to just keep 20% of the collected taxes and the remaining 80% must go to the respective federating units on the basis of collection from each province.
By treating provincial government departments as withholding agents, the FBR collects billions of rupees at source without paying any service charges as envisaged in Article 149 of the Constitution. On the contrary, it charges collection fees to provinces for collections under the provincial sales tax laws on their behalf - Sindh has liberated itself from this captivity from July 1, 2011.
This dichotomy has never been noticed or agitated by any provincial government; nobody has ever mentioned it in any meeting of the NFC and the same was ignored in the unanimous resolution passed by the Sindh Assembly on February 3, 2009, asking the FBR to stop collecting sales tax on services and refund over 200 billion rupees withheld from the service sectors unlawfully in the past.
Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to reduce the burgeoning fiscal gap. One of the reasons to reduce ever-increasing fiscal deficit is non-empowerment of the provinces to generate their own resources.
After denying them their constitutional right, the FBR has the audacity to claim that provinces lack infrastructure for efficient collection of taxes. Who has given the authority to the FBR to issue such statements violating constitutional provisions? Are people sitting in FBR, above the Constitution who can openly defy resolutions passed by the sovereign parliaments?
It is shameful that the provinces have been denied autonomy of levying indirect taxes on goods and services transacted within their territorial limits. Denial of taxation rights to the provinces has made them totally dependent on the federal government - this is a well-calculated policy of control and maintaining hegemony over federating units.
What makes the situation more painful is the fact that even under the existing Constitutional framework - giving full fiscal autonomy to federating units needs to be reconsidered - provinces are not getting their due shares even under the so-called 7th NFC Award or through direct federal grants. There is something fundamentally wrong with Pakistan's constitutional structure of distribution of taxation powers between the federation and the federating units.
In all major federations of the world, federating units have the exclusive right to levy taxes on transactions of goods and services within their geographical boundaries - this was also the case under British India. In Pakistan, the Constituent Assembly took away the right of levying sales tax on goods from the provinces in 1948 and unfortunately till today none of the provinces ever raised a voice for its reversal.
On the contrary, all four provinces conceded this right to the Centre during parleys on the 7th NFC Award to impose VAT on goods. The Parliament must reconsider the entire matter once gain - if they can pass 20th Constitutional Amendment in record time, the right to levy sales tax on goods to provinces can also be restored in the forthcoming budget in exchange for taking the right to levy income tax on agricultural income by the FBR. It will end many dichotomies. The provinces have the right to levy indirect taxes on goods and services according to their needs and the Centre to levy income tax on all kinds of incomes to achieve uniformity on the national level.
Lack of judicious distribution of taxes and perpetual abuse of constitutional provisions by Islamabad is destroying the federation at a pace which is simply unbelievable. Federal injustice in tax matters has denied the provinces their constitutional rights besides crippling them financially. Provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries - sales tax should not be a federal subject at all. Right to levy any tax on goods should be restored to the provinces as was the case in 1947.
The federal government's claim that provinces lack infrastructure to efficiently collect taxes is reflective of the colonial mindset. This issue should be left to the decision of sovereign parliaments of the provinces. If they will not collect taxes from the affluent, let them face the wrath of their voters rather than blaming the Centre for everything.
Provincial autonomy without taxation rights and equitable distribution of income and wealth is meaningless. We cannot come out of our perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenues and exclusive right to utilise them for the welfare of their citizens.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences)