VAT BILLS VIOLATE NFC RECOMMENDATIONS
Apr 5 - 11, 2010
The recently concluded 7th National Finance Commission Award is undoubtedly an outstanding achievement of the Pakistan Peoples' Party led coalition government. One of the significant recommendations of the 7th NFC relates to sales tax on services. This levy is constitutionally under the domain of the provincial government but unfortunately it was being treated as a federal levy under the previous government. The 7th NFC explicitly recognizes the provincial rights on collection of this tax.
Contrary to this, the draft bills 2010 relating to federal and provincial VAT prepared by the FBR reflect a gross violation of this particular recommendation of the 7th NFC relating to sales tax on services. These bills empower FBR to collect VAT on behalf of the federation and the provinces, without providing any scope for provincial rights on collection of sales tax on services. There are innumerable clauses which in a way encroach upon the provincial jurisdiction so much so that the role of the provincial government has been almost limited to promulgation of the Act only, as is the case in the existing provincial sales tax ordinance 2000.
The draft VAT bills further involve a very complex system of input and output adjustments in such a way that it becomes impossible to ascertain what is "goods" and what are "services". Simplicity in tax structure is one of the basic principles under the cannon of taxation. A complex tax structure will always lead to evasion of tax. Our legal and technical teams have examined the draft federal and provincial VAT bills 2010 and they suggest that "tax on goods" and "tax on services" are two separate domains thus should be treated separately.
Any integration of the taxes on sales and purchases of services in the provinces and cross-credit of each tax in case of "federal VAT" or integration with federal taxes on sales and purchases of goods and cross-credit of each tax in case of "provincial VAT" would lead to complexity in tax structure. This would almost ruin the achievement of the 7th NFC and would create massive criticism against the government for impinging upon provincial autonomy.
In case the bill is tabled without clearing the ambiguities and overlaps on provincial domain it is like to trigger unnecessary criticism against the government both the federal and provincial governments.
Clause (xiii) of sub-section (1) of Section (2) of Draft Federal VAT Bill 2010, which defines "federal list services", may be deleted as sales tax on services is exclusively the Provincial domain therefore the question for a "federal list services" does not arise.
Defining "federal list services" in terms of carriage of goods or passengers by railways, sea, or air seems irrational. Actually, these items pertain to the Entry 53 of the federal legislative list. The Entry 53 of the federal legislative list is a "terminal tax" and not the "sales tax". The Entry 53 reads: Terminal taxes on goods or passengers carried by railways, sea, or air; taxes on their fares and freights. For sales tax a separate Entry 49 does exist in the Federal Legislative list. Entry 49 reads: Taxes on the sales and purchases of goods imported exported, produced, manufactured or consumed.
It indicates that "sales tax" and "terminal tax" are two different kinds of taxes that is why two different entries have been made in the Federal Legislative list for these two taxes. Since, services are the part of "sales tax" therefore it cannot become the part of "terminal tax". It is the reason that "terminal taxes" have not been included in the First Schedule to Customs Act, 1969, Chapter 98 (Services) of Federal Excise Act, 2005.
Levying Terminal Tax on "services" would seem to be similar kind of venture of the federation as had been done earlier by it in case of levying excise duty on services (i.e. GST on services in CE mode).
Sindh government has already defended its case for "GST on services" in 3rd meeting of 7th NFC held in Quetta. The arguments of Sindh were fully endorsed by the federation and other provinces. As a result, the 7th NFC for the first time has recognized that sales tax on services is a provincial subject. The provinces can impose a tax on all services that have been recognized as services by the federation in the First Schedule to Customs Act, 1969, Chapter 98 (Services) of Federal Excise Act, 2005 and on which the federation has been levying excise duty
GST on services is the constitutional domain of the provinces. GST on services rendered in the telecommunication sector would be levied by provincial legislation. Federal government would make necessary amendment in the Federal Excise Act to enable provinces to levy this tax. However, this would be subject to developing a consensus on the formula for distribution of the proceeds of this tax by the provinces.
Levying VAT on the supply of services under Section 9 of the Federal VAT Bill may be unconstitutional.
Section 17 of the Federal VAT Bill and Section 6 of the Provincial VAT Bill, by empowering the Federation to decide what constitutes an ancillary or incidental supply allows the Federation to circumvent the constitutional restriction on the federation from taxing services.
By prescribing allowable input tax deductions and adjustments for the purposes of calculating provincial VAT in the Federal VAT Bill, the Federal VAT Bill encroaches upon the constitutional domain of the provinces by undermining the provincial power to tax the sale and purchase of services.
While the provinces set the rate at which taxes are to be imposed on services, the distribution of revenues collected has been handed over to the federation in the draft bills and no method or mechanism has been provided for how it will distribute such revenue.
In the draft bills, the federation gives itself the power to decide whether a specific supply is ancillary or incidental to a principal supply and must, therefore, be taxed as part of the principal supply; appropriates the power to prescribe allowable input deductions and adjustments for the calculation of VAT on services; empowers the FBR to administer, compute and collect VAT; provides no mechanism for the distribution of revenues collected through the imposition of VAT on services; and retain complete discretion in the implementation of the bills and the integration of the federal and provincial VAT.
(The article was written by Deputy Manager Media Orient Advertising-Karachi)