'GST on services transfer possible even under current VAT mode'

The transfer of powers from the federal government to provinces for collection of general sales tax (GST) on services is possible even under the existing value-added tax (VAT) mode. This was stated by Iffat Ara, from Social Policy and Development Centre (SPDC), while presenting her paper on 'Decentralisation of GST services and vertical imbalances in Pakistan', in the 26th annual general meeting and conference of Pakistan Institute of Development Economics (PIDE) here on Tuesday.
She said that transferring the GST services to the provinces is possible even under VAT mode. Collections of GST on services does not require much collection capacity at the level of provinces, she added. She said that it is generally believed that the 18th constitutional amendment and 7th NFC award have taken a major step towards fiscal decentralisation.
While these two (steps) delegate more fiscal autonomy and transfers additional resources towards provinces, it seems difficult that tax decentralisation options provided in these two can practically be implemented. Historically, tax decentralisation is considered as a complex issue in Pakistan.
She said that, in Pakistan, confinement of major sources of revenue with the federal government and a sizeable expenditure assignment at provincial level create vertical imbalances. While these vertical imbalances are generally addressed through inter-governmental transfers, there is still a need to devolve taxes at provincial level. The 7th NFC award and 18th amendment ensure that a GST on services is a provincial tax, she added.
Moreover, given the higher share of telecommunication companies in GST services, it requires provincial capacities as there are fewer telecommunication companies, which have computerised database. However, these arguments, in favour of GST services as provincial tax, diluted by the on-going GST reforms in Pakistan under the IMF conditionalities. In this context, this paper analyses the scope of GST services in minimising vertical imbalances in Pakistan, she said.
The analysis indicates that devolution of GST on services would help in doubling the share of provincial tax revenues in total taxes. It also indicates that it will facilitate reducing vertical imbalances in Pakistan, she added.
Nasir Iqbal, from PIDE, in his paper on 'Decentralisation of GST services and vertical imbalances in Pakistan', said that the research on the relationship between macro-economic stability and fiscal decentralisation has been rather inconclusive about the benefits of fiscal decentralisation. The evidence that has been presented shows a significant positive impact of fiscal decentralisation on macro-economic stability of Pakistan, although the results are much weaker for expenditure decentralisation, he added.
Nasir said that effectiveness of expenditure decentralisation in curtailing macro-economic instability depends upon the level of revenue decentralisation. In Pakistan, revenue decentralisation is more effective than expenditure decentralisation. He further said that the process of fiscal decentralisation is beneficial for the economy of Pakistan. Literature on macroeconomic stability and economic growth suggest that macroeconomic stability, measured as price stability, leads to more economic output in Pakistan.
So, to achieve long-run economic development, the process of decentralisation is helpful. The present development undertaken by the government in terms of 7th NFC Award and 18th constitutional amendment would have clear implications for Pakistan's long-term economic prosperity and macroeconomics stability. However, outcome of these reforms crucially depends upon the will of the political government, he added.