Centre and Sindh reach accord on VAT
By Khaleeq Kiani
ISLAMABAD: In a major development, the federal and Sindh governments have reached a broad agreement on value added tax (VAT) under which the province will get the power to impose tax on all services but will delegate its authority to the federation to make collection on eight categories.
The ‘tentative’ agreement says that the federal VAT law will be amended to clarify that the federation will not impose or collect tax on any service, except on the categories for which the provinces will authorise the federation to make the collection on their behalf.
The delegation of power will be for a specified period after which the provinces will collect the tax.
It was against this background that the authorities started hinting at imposition of VAT in two months after completing a fresh legislation and setting up a collection mechanism required under the new arrangement.
However, an official said that VAT would be announced as part of the federal budget to meet conditions of lending agencies.
Under the agreement, Sindh will collect the tax on all services except those for which it will authorise the federation to make the collection on its behalf. A provincial law will cover the arrangement for a specified period.
The tax on services collected by the federation will not form part of the divisible pool. The amount will be kept in a separate account and distributed in accordance with the revenue collection and generation criteria agreed under the Seventh National Finance Commission Award.
For this purpose, either the federal VAT law will envisage the method of distribution or the federal government will sign separate agreements with the provinces.
Under the NFC accord, Punjab will get 44 per cent, Sindh 50 per cent, Khyber Pakhtunkhwa five per cent and Balochistan one per cent of the amount collected.
All the services on which taxes are being collected by the provinces will be exempt from the federal VAT.
The tax on telecommunication services will be collected by the provinces. It will be imposed in the form of a single-stage tax on the subscriber.
Telecommunication companies will collect the tax on behalf of each province from commercial and non-commercial subscribers. The tax collected from telecommunication services originating from a province will be deposited with the province (or with the federation in case of telecommunication services originating in the Federal Capital Territory).
The telecommunication companies will be responsible for dividing the tax collected in accordance with the ‘origin principle’.
The federation may allow commercial subscribers to claim input adjustments for tax paid on telecommunication services used by them. It can then recover the amount allowed as input adjustments to commercial subscribers from the province in which the subscriber uses the telecommunication services. For this purpose, the provinces and the federation will have to sign a separate agreement.
The provinces will collect the tax on banking and insurance services.
For banking services, the place of origin will be the bank branch, ATM or any such facility where the service is provided.
The agreement says that in the event of other provinces not agreeing to this arrangement, the federal and Sindh tax laws will be harmonised to give effect to the understanding.
The services on which the provinces will impose the tax but will delegate the authority to the federation to collect it are: advertisements, travel facilities, inland carriage of goods, courier agencies, credit rating and market research agencies, stockbrokers, underwriters, indenters and commission agents, franchises and construction.
The agreement mentions 15 categories (comprising nearly 100 services) on which the provinces will collect the tax on their own.
These include hotels, restaurants, marriage halls, lawns, clubs and caterers; service providers; property developers, promoters, contractors, interior decorators, architects and town planners; contractual execution of work or furnishing supplies; beauty parlours or clinics and slimming clinics; laundries and dry cleaners; medical, legal, accounts, audit, management, scientific, engineering and information technology professionals and consultants; pathological laboratories; medical and diagnostic laboratories; security agencies; packers, money exchangers, rent-a-car, prize bond dealers, surveyors, designers, photographers, art painters, cable TV operators, auctioneers, public relations services, management consultants, technical testing and analysis services and registrars to an issue; auto workshops, workshops for industrial, construction, earthmoving and other special purpose machinery, electric or electronic equipments or appliances, computer hardware, car washing and service stations; health centres, gyms, indoor sports and game centres, baby care centres, body massage centres, pedicure centres, etc.; fumigation, maintenance, cleaning, janitorial, dredging or de-silting services; shipping agents, stevedores and ship chandlers and customs agents.
The power to impose the tax on other services that are not part of this list will also remain with the provinces.