Challenges to VAT implementation post 18th amendment

Muhammad Yasir

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Topics:Covered in the presentation

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• Quote Unquote• What is vertical and horizontal imbalance• Arguments Supporting tax autonomy at subnational level• Arguments Contesting tax autonomy at subnational level• Features of tax suitable for subnational taxation• Failure of devolution - symptoms• Main principles for assignment of revenue: to subnational

governments• Post 18th amendment journey of tax autonomy in Pakistan –

performance review and challenges – review of news articles• Capacity Building needs of provincial taxation authorities

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Quote Unquote

• The tax authorities have turned more men into liars than marriage did. Robert Lembke

• Do you Agree ?• Remember, in Pakistan we now have

Federal as well Provincial Revenue Authorities !!!

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• Vertical and Horizontal Imbalances

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Disparities and Imbalances:Vertical and Horizontal

• When central governments can collect most taxes more efficiently than subnational governments, it creates Vertical Imbalance

• Where potential tax basis available to subnational governments vary widely, it creates Horizontal Imbalance

• Reduction in vertical imbalances through inefficient decentralization can worsen horizontal imbalances because those who have more to tax are going to be better off

• What is the solutions then ? or what are principles for assigning revenues to subnational governments?

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• Arguments• Supporting and Countering• Devolution and Subnational

tax autonomy

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Supporting Arguments

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• Economic development• Improved efficiency of tax machinery

• Innovation in public service delivery

• Grassroots participation in governance

• Capacity development at provincial and local government

• Local taxes – more visible to local voters• Local taxes – accountability by local residents• Local taxes – less upward pressure • Local taxes – better fiscal discipline• Evidence based taxation – better rationale

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Contradicting Arguments

• Federal government losses a degree of macroeconomic control.

• More spending on consumption goods and services - by local Governments

• Less Capital spending - by Central Government

• Negative impacts on national growth• In crease in regional inequality – SRB success!

• Higher administrative and compliance costs• Ease in doing business – worsens• Double taxation• Cost of doing business increases

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Contradicting Arguments

• Fear of adverse political consequences may restrict Local or Subnational government to fully use open revenue sources

• Exploitation of grey areas in national / local taxes – e.g. challenge on the jurisdiction (origin vs destination, provincial and vs federal jurisdiction)

• Poor control on borrowed employees• Local residents have little information incentive to evaluate fiscal

decisions of local governments responsibly

• Limited or low margin for trial and error - No Freedom to make calculated “mistakes” on the fear of losing next elections.

• In order to avoid accountability, local or subnational governments may attempt to extract tax from non accountable sources e.g. non-residents.

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• Features of a Good Subnational Tax

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FEATURES OF GOOD SUBNATIONAL TAX:suitable for provincial / local taxation:

• Easy to be administered locally

• Low costs of administration and compliance

• Reasonably fair• Imposed solely or mainly on local residents

• Limited possibilities to export, if any, to pass the tax burden to nonresidents.

• Does not raise problems of harmonization or competition at local, regional, subnational and national level

• Meets local needs and sufficiently over time to cover expected increases in the local expenditures being financed.

• Stable and predictable over time to facilitate development and implementation of sound local fiscal practices.

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• Symptoms of Failure of devolution

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Failure of devolution:Symptoms

• Creates or threatens to create macro-instability• society as a whole does not subscribes to it

• New centers of power created by decentralization are not accepted

• Lack of well trained local public servants – no effective control

• Worsens vertical and horizontal imbalances and disparities

• Un necessary Co-existence of Decentralization and Centralization

• Lack of clarity - functional responsibilities are not assigned exclusively and fully to each level of government.

• Lack of political accountability

• No / Pseudo revenue autonomy• Inefficient donors coordination and cooperation management.

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• Post 18th Amendment Challenges in VAT implementation

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•Locked Horns• Who is winner• Who is loser• Is winner also a loser

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Locked Horns

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Locked Horns

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Locked Horns

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Locked Horns

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Locked Horns

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Locked Horns

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Locked Horns – some news articles• Duty collection Sindh lock horns with federal Govt

over FED - The Express Tribune

• Federal encroachments on provincial taxes Aaj News

• Federal govt asked to stop ‘encroaching’ on provincial tax domain Newspaper DAWN

• PCS and IRS lock horns over sales tax collection Corporate News Highlights

• Power-sector-subsidy-FBR-ministry-lock-horns-over-GST-deduction

• Sales tax collection over cleaning services_ PRA locks horns with LWMC Newspaper DAWN

• PRAL Locks horn with SRB over fee issues

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•Double taxation and Cross border input tax adjustment05/02/202323

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Double taxation and input adjustment• Conflict in provincial sales tax on service laws causing double

tax to taxpayers_ KTBA _ Pakistan Revenue.1

• Sind-Punjab lock horns on sales tax collection Pakistan Today

• FBR urged to resolve double taxation issue - Newspaper – DAWN

• Cross-border Sales Tax adjustment_ meeting between FBR, revenue bodies put off _ Business Recorder

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Performance of provincial taxation authorities – some articles• Make life easier for taxpayers - Newspaper - DAWN

• KPRA - Dysfunctional revenue authority - Newspaper - DAWN

• SRB Revenue Graph

• SRB Stellar Performance

• Conflict in provincial sales tax on service laws causing double tax to taxpayers_ KTBA _ Pakistan Revenue.1

• Strengthening provincial GST authorities _ ePaper _ DAWN

• Taxation - Provinces'' view; Federal government accused of encroaching on tax space.1

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A look at news and reports discussing decentralization in Pakistan

“Decentralization in Pakistan: the lost opportunity of the 18th amendment” by NOREF Expert Analysis by Michael Kugelman:For decades their funding needs have been satisfied by federal government transfers. Consequently, they have had little incentive to increase the tax base and improve their strategies to mobilise tax revenue – and they thus lack the capacity to do so today

Those behind the amendment grossly overestimated the will and capacity of provincial governments to take on added responsibilities and resources

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Capacity development of provincial taxation authorities - PRA and KPRA

• Effective accountability, reward and incentive policy – based on international best practices – Measureable KPIs

• Sect oral analysis for inclusion of new services or expansion of previously taxed services – benchmarks and instruments

• Tax law harmonization between provincial and federal taxation authorities

• Training of (public & private) withholding agents• Some incentives for the withholding agents• Effective and independent internal audit department

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Capacity development of provincial taxation authorities - PRA and KPRA

• Transparent and effective mechanism for setting revenue targets• Information sharing between other departments

• Effective public relation and outreach

• Effective internal and external communication policies and procedures

• Effective and modern customer care practices• Qualified and skilled staff – KPRA is said to have only two officers so

far.

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Thank You

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