It appears that the federal government has finally come around to Sindhs stand on the collection of Value Added Tax. The stance of the southern province was based on the constitutional arrangement as well as the agreement signed with much fanfare at Gwadar.
During the course of negotiations, FBR was willing to allow Sindh to collect VAT on 128 categories of services and keep the three major revenue spinners i.e. telecom, banking and insurance, for itself. The bottom line was not the principle of integrated VAT, but the amounts.
After much debate and negotiations, it appears the differences between the Centre and Sindh on the contentious VAT have reached a "tentative" agreement. Reports of the resolution appeared in some sections of the media, though a final agreement hasn yet been announced.
Eleventh hour fixes, that have become customary in Pakistan, are not the ideal solution. But, a resolution is better than none.
First, the federal government will revise the draft VAT law, so that it will not be authorized to collect tax on services, except in categories allowed for by the provinces. This will bring the proposed legislation in accordance with the 7th NFC Award.
Provinces have retained the right, among others, to collect tax on services on telecommunication and financial services, which includes banks and insurance companies. Together, these three sectors form the lions share of revenue collection as far as services are concerned.
When it comes to matters of taxation, the devil is in the details. Sindh was careful to concede its right of tax collection of services to FBR for a limited period of time.
It also made sure that the tax incidence on services is based on the principle of origin. For example, if a mobile SIM is purchased in Karachi, but used in Islamabad, tax on the mobile service will be applied as if it were used in Karachi.
The infrastructure to collect revenue in the provinces is definitely not as developed as that of FBRs. Therefore, drawing synergies by sharing the collection responsibilities is a good omen. Starting with the relatively well documented sectors and slowly rolling out into others will enable provincial revenue departments to strengthen, without undue strain.
Also, tax collection within the provincial governments may lead to improvements in fiscal responsibility with the passage of time. Well functioning sectors, operating in a province will most likely lead to higher tax collection on services. Ideally, this could encourage provincial governments to foster a business friendly environment in their jurisdiction.
On the contrary, now that more hands than one will be involved in the collection of taxes, there is a mighty strong chance that losses due to pilferages will increase, at least in the near term. What is still not clear is the fate of five zero-rated export industries. Will they be depositing half a percent or 2.5 percent or more?
FBR has taken two steps forward and one step back on the issue of PACCS. The Advisor on Taxes, Ehtisham Ahmed need not be carried away by false promises. The tax refund regime at FBR is still full of holes. Documentation of export industry is necessary. However the start-up must be on a nominal rate!