IMF suggests national council to harmonise taxes between centre, provinces

ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to raise provincial taxes, especially on agriculture, sales tax on services and property tax. The IMF also asked for establishing a National Tax Council (NTC) to harmonize the taxes among the Centre and the provinces.

To generate revenue surplus from the provinces, the provincial taxes get immense importance because the collective contribution of all the four provinces stood at just a meager amount of less than 1 percent of Gross Domestic Product (GDP). The IMF has estimated that the revenue potential of the provincial taxes is considerable. However, a lack of uniformity in the policy and administration of the provincial taxes prevent this revenue potential from being fully realised, besides creating all sorts of distortions and inequity.

While the progress of the National Tax Council in achieving the objectives and scope of its term of reference is relatively slow, it has achieved some encouraging results and could serve as a ready-to-use platform for achieving consensus on a broader range of provincial tax issues.

The IMF has recommended to expand the remit or terms of reference of the National Tax Council to include the harmonization of tax rates and bases for agricultural income tax and property tax.

The IMF asked to encourage provincial governments to step up the collection of provincial taxes and enforcement of provincial tax laws. The IMF says that the Agriculture Income Tax (AIT) is taxed by the provincial governments, often preferentially as compared to other types of income.

With regard to Sales Tax on services, the IMF states that with a few exceptions, the basic tax structure of the service tax is broadly similar across the four provinces. The standard tax rate is quite similar (around 15 percent), while the structures of non- standard rates differ across provinces. No input tax adjustment is available on services subject to reduced rates in all provinces. Services included in the taxable base are also broadly similar. None of the provinces have zero-rated items in the base, and there are no exemption thresholds in the provinces, except for Sindh

Taxing rights are allocated between the federal government and the provinces in accordance with the Constitution. Only parliament can legislate on matters enumerated in the Federal Legislative List (FLL) and on matters relating to the ICT. All other matters can only be legislated by Provincial Assembly, i.e., the FLL serves as a negative list on the matters on which Provincial Assemblies are entitled to legislate. However, if there is any conflict between federal law (on a subject matter which falls within the FLL) and provincial law, the federal law will prevail.

It is possible for the matters not enumerated in the FLL to be legislated or enforced by the Parliament of Pakistan through consensus. Parliament can regulate on matters not in the FLL in respect of a province, provided that the relevant provincial assembly expressly passes a resolution for parliament to regulate such matter by law, such resolution being amendable or repealable by the provincial assembly at any time.

Similarly, a provincial government can entrust, either conditionally or unconditionally, any of its executive function to the federal government, but this must be ratified by the provincial assembly within sixty days of such entrustment, the IMF has pointed out. However, failure by a provincial assembly or government to legislate or enforce the laws on an area not being on the FLL does not appear to give parliament or the federal government the right to legislate on or enforce that area.

As highlighted in the 2019 report by the IMF, short of constitutional amendment, the next best option is for the federal government and provinces to come to an agreement where tax bases are mostly unified without segmentation of tax bases, and tax collection and enforcement fall under a sole tax administration. It is noted that the National Tax Council, whose terms of reference relate to the sales tax only, has made significant progress in facilitating agreement on the definitions of goods and of services, place of supply rules in relation to services, as well as a more coherent sales tax administration and compliance framework. “The National Tax Council’s term of reference could be expanded to include other areas of taxation where federal and provincial consensus and cooperation is critical, such as tax on agricultural income and property tax,” the IMF suggested.

To encourage provincial governments to maximize tax collection at provincial level, alignment of interest of provincial government with those of the federal government would be necessary. “Consideration could be given as to whether revenues in the divisional pool could wholly or in part be allocated to provincial governments in proportion to their provincial tax collection,” the IMF concluded in its recommendations.