Mohsin Siddiqui (Chief Reporter)
A deepening rift between federal and provincial tax authorities is threatening to undermine efforts to harmonize the sales tax and federal excise duty (FED) collection, leaving taxpayers caught in the crossfire of jurisdictional disputes. The Federal Board of Revenue (FBR) and Provincial Revenue Authorities (PRAs) are at loggerheads over the harmonization of sales tax and FED collection, rendering decisions by the National Tax Council (NTC) largely ineffective.
The Sindh Revenue Board (SRB) has taken the initiative to call for an NTC meeting, citing the FBR’s adamant approach as the primary obstacle to progress. At the core of the dispute lies the contentious issue of defining “goods” and “services” for tax purposes. Despite a series of meetings and agreements dating back to 2020, including efforts by the Executive Committee of the National Tax Council (ECNTC), a consensus has remained elusive.
The SRB, in its working paper, alleged that the FBR has undermined collaborative efforts by proposing unilateral amendments to the Sales Tax Act of 1990, a move described as “in negation of the spirit of harmonization.” A decision made by the NTC in June 2022 to include provincial representation on the board of the Pakistan Revenue Automation Limited (PRAL) remains unimplemented nearly two years later. This delay has raised concerns among PRAs, particularly the SRB, about the federal government’s commitment to agreed-upon reforms.
Further exacerbating tensions, the FBR issued a directive on April 3, 2024, instructing its Chief Commissioners of Inland Revenue to intervene in ongoing court cases challenging provincial sales taxes on various services. The SRB interpreted this directive as an encroachment on provincial tax jurisdiction, even in areas where previous agreements had ostensibly settled such disputes.
The SRB has called for the NTC to take “stern notice” of the FBR’s recent actions, particularly the April 3 letter, and to direct its immediate withdrawal. The SRB argued that any disputes should be resolved through the NTC framework rather than through litigation between federal and provincial governments. Other unresolved issues include the expansion of the Place of Provision of Services Rules and the need for clarity on tax jurisdiction for activities such as wholesale, distribution, and retail services.
This ongoing conflict highlights the challenges of coordinating tax policies in a federal tax system. It underscores the need for a more robust mechanism to resolve inter-governmental disputes to support the country’s economic growth and development.
When contacted, sources in the FBR confirmed that the letter was issued to the chief commissioners, directing them to make necessary arrangements to take stock of pending petitions in the high courts where taxpayers have challenged the levy of provincial sales tax on various services. The directive also included instructions to appoint suitable counsel to make FBR a party in such cases.
From the federal perspective, the FBR sees its actions as a necessary step to ensure a unified tax collection system that prevents tax evasion and ensures compliance. However, the provincial authorities view these steps as overreach and a breach of previously agreed-upon protocols for tax collection.
For taxpayers, this dispute between federal and provincial tax authorities creates significant uncertainty. Businesses operating across different provinces may face conflicting tax demands and increased compliance costs. The lack of harmonization can lead to double taxation or disputes over which authority has the right to collect taxes, complicating the tax landscape for businesses.
Moreover, the economic implications are far-reaching. The failure to harmonize sales tax and FED collection can hinder efforts to streamline tax administration, improve revenue collection, and foster a business-friendly environment. It can also affect investor confidence, as businesses seek stable and predictable tax regimes when making investment decisions.
