The history of sales tax in Pakistan began with the Government of India Act, 1935, wherein same was in the provincial domain. Subsequently, it was transferred to the federal government under the General Sales Tax Act, 1948. The government started implementation of the sales tax under Sales Tax Act, 1951, which provided for a limited base but subsequently the tax base was broadened through a Presidential Order of Taxation of Sales and Purchase in 1960 thus incorporating import, export and manufacturing of commodities besides extending several incentives. The Sales Tax Act 1951 was amended in 1981. In order to introduce the Value Added Tax (VAT), the Act of 1951 was repealed by the Sales Tax Act, 1990.
The sales tax on services was introduced in 2000 in the provinces which led all the provinces to promulgate relevant ordinances, though it was collected by the federal government on account of weak capacity at the provinces. Eventually, the 18th constitutional amendment 2010 transferred the sales tax on services to provinces.
It necessitated provincial legislation for sales tax on services and establishment of tax collecting entities. Taking the lead, Sindh established Sindh Revenue Board in 2011, followed by Punjab Revenue Authority in 2012 and Khyber Pakhtunkhwa Revenue Authority (KPRA) legislated in 2013 through enactment of KP Finance Act, 2013.
KPRA is a corporate entity established under the Khyber Pakhtunkhwa Finance Act, 2013. The authority is mandated to administer and collect sales tax on services across the province. It is governed under the Policy Council chaired by the chief minister and comprising relevant cabinet ministers and administrative secretaries besides private members.
The own source revenue of Khyber Pakhtunkhwa has been in a shambles for the past many years due to numerous reasons, hence dependency on federal transfers under the NFC. Tax to GDP ratio of Khyber Pakhtunkhwa is less than 1 per cent, which speaks volumes of the lacking capacity of provincial taxation and dedicated work required for increasing the provincial own receipts. Increase in own source revenue has been the focus area of the government and the same is reflected in the major reform documents especially the “Public Financial Management Reform Strategy 2017-20” and also taken up with all multilateral partners for technical assistance.
More resources will naturally result in expanding fiscal space that can be utilised to further the provincial development agenda. Without strengthening the taxation framework, all government initiatives are difficult to materialise, hence taxes provide the basis for sustainable peace, good governance and development.
Since inception, KPRA has amplified the provincial own receipts and the receipts of 2016-17 amounts to 10.27 billion PKR. The same is a significant increase and far more vis-a-vis the collection by FBR. KPRA has faced several challenges since beginning being a fledgling authority with no expertise in collection of the sales tax. Nevertheless, it has generated significant revenue through expanding the tax base, pursuing a people-friendly and progressive tax regime, and identifying various key sectors having the potential for consistent growth in revenue. Besides, bottlenecks impeding the institutional growth especially the lack of enforcement through litigation have been attempted to resolve with a focus on legal cases as well the Alternate Dispute Resolution.
Current year has seen significant development in institutional development of KPRA through investing in its staff, revamping and extending the structure through establishment of dedicated directorates and field collectorates. The current budget has been increased manifolds and amount to 400 million PKR. Strategies have been drafted and acted upon for extending the revenue base, withholding tax, internal & external audit, and putting in place an efficient enforcement regime. Besides, the focus has been on providing people friendly tools to the people which has led KPRA to rely more on IT-based modes of tax collection.
On August 6, 2013, KPRA began the journey by enrolling 7 persons and reached to 308 at the end of the same year. During 2016-17, however, record increse occured by enrolling further 840 persons, resulting in total of 1955 tax payers, hence accelarated growth in the tax base. Initially, only 11 service sectors were included in Schedule-II of Khyber Pakhtunkhwa Finance Act 2013, but as of now, they have reached 91.
Total contribution till date is Rs35 billion. Currently, the government of KP set the target of Rs10,000 million for FY 2016-17, which represented an increase of 25 per cent over the previous year’s target of Rs8,000 million. KPRA achieved the target and in fact surpassed the same by collecting Rs10,307 million for 2016-17. KPRA’s performance remained remarkable in revenue collection, broadening of tax net, taxpayer facilitation and system automation. Highest growth rate of more than 40 per cent was achieved in the 2016-17.
The trend in collection is positive as during the year 2013-14, 92 per cent of the recovery was realised from the telecom sector alone followed by 71 per cent in the year 2014-15. During successive years 2015-16 and 2016-17, the contribution of telecom was dropped to 59 per cent which shows that the density of tax collection is shifting from telecom to variegated sectors of economy.
Pre-2013, FBR collected taxes on services and distributed among the provinces. Post-2013, the tax collection on services has experienced a steady growth. KPRA collected a significant amount of tax that surpassed the overall tax collection made by FBR during the preceding years since 2001. At inception in 2013-14, the authority generated Rs5,668 million as compared to Rs4,741 million collected by FBR in the year2012-13 — 20 per cent of increase.
The increase in revenue collection validates the decision of shifting the sales tax on services to the provinces. It further lays ground for pursuing the goal of uniform taxation through devolving the sales tax on goods too to the provinces. The same has also been recommended by the working group on revenue mobilisation constituted under the National Finance Commsisison.
Sales tax on services in fact provided the much needed push to the provinces in enhancing their “own source revenue”, as only this contributes more to the provincial exchequer compared to other sources collectively. It has emerged as the largest tax collection authority by contributing 31.63 per cent to the total provincial owned receipts and 56.42 per cent to the total provincial tax receipts for the instant year. KPRA has collected revenue of Rs10,270 million in the FY 2016-17 vis-a-vis Rs2,733 million by the Board of Revenue and Rs2,381 million by Excise & Taxation Department.
Telecommunications, oil & gas, withholding, banks, construction, security services, hotels and restaurants, manpower and insurance contributed more than 97 per cent of the total revenue generated by KPRA during the FY 2016-17. However, tax audit of other sectors can identify more potential which will lead to diversification of the tax base.
The sales tax on services is faced with numerous challenges. Lack of documented economy, lack of awareness, unwillingness to pay taxes due to lack of trust on state institutions, weak tax culture, perceptions of corruptions and misuse of public resources, tax illiteracy among small business owners, lack of will and capacity of the withholding agents, intra-province jurisdiction issues e.g. settled areas and PATA and dependency on the federal government in several areas of tax management are major among them.
Khyber Pakhtunkhwa is doing better in sales tax compared to other sources of provincial taxation, but it’s still far behind Punjab and Sindh in terms of revenue collection and strong institutions. Punjab revenue collection on the same account has been Rs82.5 billion and Sindh Revenue Board collected Rs78 billion as compared to Rs10. 27 billion of the KP. Balochistan has been last in both the establishment of a dedicated institution and collection of revenue i.e Rs4.6 billion. Besides degree of capacity of the respective institutions, other indicators like economic activity and population too have a role to play though.
The provincial governments have realised the need for generating their own revenue but much is needed to be done towards tapping the actual potential. Provision of smart and convenient processes will work to an extent. Apart from all the legalities and technicalities of the system, fostering a culture of taxation should be the overarching objective of the tax authorities.
People simply don’t like being taxed. They feel of being robbed by the state while paying taxes. They should have felt as if they are making an investment unto their own self in a collective way, which in fact is the rationale behind taxation. This inherent malady is to be addressed as perceptions build over generations are hard to change but we have to begin at some point. Curbing corruption and being courteous to taxpayers will contribute, but not much. Tax education at massive scale is the solution.
To begin with, demystify this mechanism of taxation. Include the purpose and ways of taxation in the syllabus for even our educated are uneducated about taxation. A practical way would be to annually show the taxpayers their total collected amount and the way it is being spent. Take their input and subject yourself to public audit. Well, this all is happening somehow in way or the other, although having no impact. It’s about time to concentrate on the provincial taxation framework, and go for a uniform taxation whereby people would know how much and to whom are they paying so as to build trust and let them make the government accountable.