FED on services must be withdrawn

Pakistan Space and Upper Atmosphere Research Commission (Suparco) fearing that its bank accounts would be frozen for non-payment of accumulated federal excise duty (FED) of 400 million rupees, has informed the Federal Board of Revenue (FBR) that seizure of its accounts would jeopardise the entire project including the loss of the satellite. The critical question is which entity – Suparco or FBR – is in the right in this instance? An informed response must take account of the original argument tabled for the levy of FED on services by the FBR but which is no longer relevant.

The levy of FED by the FBR was appropriate during the time period when the provincial governments did not have the capacity to collect sales tax on services that they were constitutionally empowered to. Post-18th Constitutional Amendment three out of four provinces established their own collection agencies (Sindh Revenue Board, Punjab Revenue Authority and Khyber Pakhtunkhwa Revenue Authority) and began levying and collecting sales tax on services. Unfortunately, the federal government has not ceased collecting FED on some services as the case of Suparco shows, which clearly indicates double taxation on certain services. Several service providers as well as tax bar association members throughout the country have urged the federal government to withdraw the levy of FED on all services as is required under a natural law but to no avail.

In this context, it is relevant to note that as per the SRB website a press release was issued on 1st July, 2011, stating that, “the services rendered by registered persons who were previously subject to Federal Excise Duty (being collected in sales tax mode) have now been subject to sales tax by the provinces through their legislation with effect from 1st July, 2011. The Federal Board of Revenue through a notification has withdrawn Federal Excise Duty on such services (Table-II of First Schedule to the Federal Excise Act, 2005) with effect from the same date ie 1st July, 2011 in order to avoid double taxation.” It is unfortunate that the FBR continues with double taxation on some services sectors in all the provinces even after the passage of four years spanning two elected governments – PPP and PML-N. The Karachi Tax Bar Association has raised an additional concern over the form introduced for filing of sales tax returns and urged the government to remove the ‘business nature’ column from first page of the return as taxpayers with multiple business activities are forced to select the category each time.

What is also noteworthy is that the Sindh Revenue Board (SRB) has not only achieved the highest collections under sales tax on services but is also registering the highest growth rate in sales tax collections on services and this is in spite of the poaching by the FBR in its domain by levying Federal Excise Duty on services, an exclusive domain of the provinces. This encroachment by FBR is continuing to this day. During the current year, the SRB registered an increase of 20 percent in collections and this is in spite of a reduction of 1 percent sales tax on services, allowing an input/output adjustment of 17 percent federal sales tax on goods and higher rate of tax against input of petroleum products.

While granted that the FBR is pressurised each year to generate higher revenues, which is a challenge not only because the tax structure remains the same implying that the tax base remains severely limited (that accounts for a consistently low tax to Gross Domestic Product ratio) yet the continuation of what is clearly double taxation and against the Finance Bill that has already been passed by parliament requires an urgent revisit. One would hope that the Opposition raises this issue in parliament because otherwise there is a growing perception in productive sectors operating in all provinces that the federal government is squeezing out more and more revenue from existing taxpayers, which is not only negatively impacting on output but is also leading to the manufacturers’ decision to relocate to other countries.