KARACHI, Feb 7: All the four provinces have sought from the federal government a precise definition of sales tax on services. They also want to know a clear demarcation between the services that falls within the federal domain and those which are in the provincial jurisdiction.

At present the federal government is collecting sales tax and excise on telephone calls, gas distribution, electricity, air travels and on railways. It also collects sales tax on behalf of the provinces on restaurants, hotels, clubs, slimming clubs and radio and television advertisements.

Under the constitutional provisions, the federal sales tax is leviable on imports, exports, domestic production and consumption of any goods or class of goods or any taxable supplies made in the country. Since services are excluded from the constitutional provisions that authorize the federal government to levy sales tax, it is presumed that all these come under provincial and local jurisdictions.

Now that the government is taking steps to extend the scope of GST on services within the provincial jurisdictions, a task force has been constituted headed by the additional finance secretary. The task force includes excise and taxation officials and the finance secretaries of all the four provinces. This task force is exploring new avenues of sales tax and excise within the provincial domain.

Extension of GST on services within provincial and district governments' jurisdictions is being considered as a final and decisive step to convert the existing general sales tax (GST) into a full fledged value added tax (VAT).

One of the implications of the integrated federal-provincial strategy is that the overall revenue from provincial sales tax on services and from GST has ceased to be distributed purely on population basis and has begun to reflect actual collection. Another possible implication would be that the federal government would have to concede its authority to impose sales tax on any service as all services come within the domain of provinces.

Second in the series, the meeting in Karachi on Friday asked the CBR to inform the task force of the revenue generation from sales tax and federal excise on gas, telephones, railways and electricity. Since 1999 the federal government is collecting provincial sales tax on restaurants, hotels, beauty parlours, clubs, slimming clubs and advertisement on radio and television.

According to the CBR, the excise and tax collected by the Railways was deposited at Lahore, that by the Pakistan Telecommunications at Islamabad and on air travel at Karachi. In the meting held on Friday at Karachi, the CBR was unable to provide a province-wise revenue generation figures.

According to well-placed sources, the CBR had promised to come up with full facts and figures on collection of existing sales tax on selected services in the next meeting being proposed to be held at Islamabad on February 21.

Extension of GST on services to the provincial jurisdictions is part of an agenda that was set in by the International Monetary Fund in the Extended Structural Adjustment Facility (ESAF) signed in the early nineties. The IMF took up all this agenda with greater vigour with the military government after 1999 when it signed a short-term agreement.

Way back in 1995, Dr Abdul Hafeez Pasha, now Vice-President of the United National Development Programme (UNDP), in his paper on "Sales Taxation on Services by the Provincial Governments" which he presented before a national conference on resource mobilization and expenditure planning held at Lahore has indicated generation of Rs2.80 billion additional resources by the year 2002-03.

Dr Pasha had identified eight specific areas for additional revenue generation, that were sales tax on gas distribution, sales tax on professional services, licence fees on particular service, electricity duty, sales tax on TV advertisements, sales tax on cheques and presumptive sales tax on selected trades. Since then all these areas have been brought under the sales tax net and yield much greater revenue than anticipated in 1995.

With privatization expected to gain momentum in the coming months and the financial sector has expanded considerably, financial analysts expect substantial revenue generation from provincial sales tax enforcement on share trading, brokerage houses, stock brokers, doctors, lawyers, accountants and many other areas.

For the first time in 1999, the provinces started getting their shares in sales tax on the basis of collection and not on the basis of population in their respective jurisdictions when the Nawaz Sharif government abolished octroi and zila tax. In the budget 1999-2000, the Nawaz government had decided to raise the sales tax rate from 12.5 per cent to 15 per cent. The revenue loss suffered by the provinces on account of abolition of octroi and zila tax was to be met from 2.5 per cent increase in GST.

In the 1999 budget the total collection from 2.5 per cent was Rs14.34 billion, which in 2003-04 has swelled to Rs34.82 billion. Initially Punjab's share was 52 per cent while that of Sindh it was 42 per cent.

After three years when audited accounts from Punjab were received it was found that Punjab's collection ratio is only 42 per cent and the Sindh share was raised to 46 per cent. Shares of NWFP and Balochistan have also increased.

Sindh is now demanding a compensation of Rs3 billion for the losses suffered on account of suppressed ratios for three years.