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Old Wednesday, March 18, 2015
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OUR Constitution empowers the federal government to levy sales tax (GST in our case) on goods, and the provinces to collect such a tax on services. This constitutional division of taxation powers between the federal and provincial governments has, perforce, required the establishment of two tax-levying and collection agencies for GST. This has resulted in a multiplicity of revenue-collecting authorities, especially because provinces have more than one revenue-levying and collecting agency (one for collecting GST on services, one for collecting property tax and motor vehicle tax, one for registering property transfers and collecting stamp duty, etc.).

Resultantly, taxpayers have to contend with different authorities for different taxes. This multiplicity of revenue-collecting agencies for different taxes adversely affects administrative and economic efficiency, leading to the fragmentation of tax-collecting and management systems, unnecessary duplication of functions and data bases and inconsistent legal and other treatments of similar types of taxes. Such a complex arrangement raises the cost of compliance for taxpayers by creating difficulties for them, causing them increased aggravation.

To illustrate the dilemma posed by inconsistent legal treatment, take the case of the difficulty in identifying goods and services separately for imposing GST on services (a provincial tax) and the GST on goods (a federal tax). When can the federal government levy GST on goods and when can a province collect the GST on a service? For instance, GST collected from restaurants is being treated as GST on goods and levied and collected by the federal government, whereas logically, as would be the case in other tax jurisdictions worldwide, it is treated as a tax on services.

Taxpayers have to contend with different authorities for different taxes.
What makes this example particularly debilitating for hapless taxpayers is that the provinces do not allow the deduction of GST paid on inputs (eg GST in the electricity bill), ie they are levying GST as a point of sales tax, simply shrugging their shoulders when taxpayers remind them that the country is supposedly administering a system of GST in VAT mode!

Similarly, GST levied on consumption of electricity, gas and telephones or on products sold in wholesale or retail should, arguably, be treated as a tax on services but not when you are dealing with Islamabad. Islamabad operates in a world of its own making in which actions and decisions are not driven by, or argued on the basis of, logic.

In our case, it is invariably procedural obstacles and blockages at the administrative level that dominate the tax regime that taxpayers have to deal with. Organisational convenience and issues like institutional and personal fears of loss of an empire, authority, power and privileges have driven tax practices more than logic, influencing the structure of taxation and associated procedures, processes and institutional arrangements to manage the system.

What is, however, more worrying is that instead of correcting the above-referred anomalies in the tax structures and making the related legislation, processes and institutional mechanisms less harassing for existing taxpayers, if not taxpayer friendly, Islamabad and all donors (particularly the IMF) are intent on consolidating existing systems to generate, by hook or by crook, more revenues at both levels of government. This is meant for the purposes of reaching some magical number of the budget deficit, after which, we are assured, we Pakistanis will live happily thereafter. So much for their refrain that the government is undertaking tax reforms which are being studiously implemented.

Moreover, in their zeal to achieve this budget deficit target they also fail to see the obvious fallacy, if not stupidity, of demanding provinces to raise more revenues but (and don’t laugh) not spend them, retaining large sums of money (referred to in their jargon as ‘provincial surpluses’) so that Islamabad can spend these savings. Does it make sense that the provinces should be falling over each other to invite the ire of their residents through more taxation so that a remote entity, Islamabad, will have more to throw around on less priority projects like metro buses? This should serve as a good story line for an episode of Yes Minister.

Worldwide the architecture of a national GST administered by a single centralised agency is becoming the norm. Therefore, ideally we should have one GST for the country as a whole to be collected by one authority instead of several GSTs being implemented under different modes (in sales tax mode in the provinces and VAT mode at the federal level) so that the objective of a common market for Pakistan is attained, with a judicious, fair system for sharing of the revenues so collected.

However, given the extent of mistrust one cannot see the provinces, especially the smaller ones, agreeing in the foreseeable future to a single collecting agency. It will not be politically possible to sell this idea. Therefore, although there are obvious advantages and gains to be realised from establishing a single agency in a country administering a dual GST, we will have to learn to live with the present administrative structure of two separate agencies levying the GSTs that the Constitution empowers them to collect.

In this writer’s view, the best that we can hope to achieve is complementarity in the collection of a dual GST through two separate revenue authorities. This will entail adoption of uniform procedures and processes, with common IT platforms, databases (containing all relevant information), taxpayer registration, tax return filing, payments and appellate systems, without the poor taxpayer being subjected to a simultaneous audit by both agencies.

In other words, what is needed is harmonisation of administrative structures and systems. All this, however, will require a level of inter-agency coordination hitherto never seen or experienced in this country. Two separate agencies cooperating with each other while simultaneously administering the same tax base will be a huge challenge if we are to achieve the envisaged operational results efficiently and effectively.

Published in Dawn March 17th , 2015
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