KARACHI, May 20: Criterion for distribution of 2.5 per cent GST in lieu of octroi and zila tax and for another 2.5 per cent provincial sales tax on services has emerged as the key and decisive factor in the deliberations of the National Finance Commission.

The collection of both these taxes used to be disbursed on the basis of population only. Sindh wants the distribution of both these two different GSTs on the basis of actual collection and not on the basis of population.

Officials say that President General Musharraf's order for the distribution of the 2.5 per cent GST to compensate provinces for loss of octroi and zila tax clearly stipulates collection as the only basis.

This principle of making tax collection as the basis should also be applied in case of disbursement of provincial sales tax on the services also.

The Sindh government wants a firm guarantee from Islamabad on disbursement of 2.5 per cent provincial sales tax being collected on the services on the basis of actual collection and not on the basis of the population before extending the net to other services.

At present, the federal government is collecting sales tax on six services-hotels and restaurants, laundries, clubs, slimming clubs and marriage halls-since 2000.

But for last three years, the Central Board of Revenue (CBR) collects the provincial sales tax, make it a part of the divisible pool and distribute it among the provinces on the basis of population.

For the current fiscal year, the CBR has informed Sindh of remitting Rs697 million on account of GST. Out of this, Sindh is believed to have received Rs580 million. But the CBR has never taken provinces into confidence of how much provincial sales tax is collected-province wise or the total amount on federal level.

Finding services a potential revenue generator, the federal government wants to extend the provincial sales tax network to more than 50 services. But Sindh government has refused to allow this extension until Islamabad concedes to the principle that provincial sales tax should be spent from where it is collected.

For about last six months, the federal government initiated an exercise under the supervision of a Task Force headed by an additional finance secretary to work out a strategy for extending the network of provincial sales tax to many new services.

This exercise to explore new services for generating sales tax revenues for the provinces is going along on the sidelines of the National Finance Commission (NFC). In last four sessions, the Task Force is reported to have identified more than 50 services which can generate considerable revenue.

The services identified for generation of provincial sales tax are stock exchange operations, a host of financial services of banks, modarabas, leasing, trade transactions, medical practitioners, pharmacists, chartered accountants, lawyers, tax practitioners, educational institutions charging more than Rs1,500 per month fees, pathological laboratories, specialised diagnostic centres, interior decorators, real estate property dealers, jewellers.

In fact the list of such services has virtually no end which are potential resource generation for provinces and the local governments.

In the NFC deliberations, the Sindh government has expressed its strong disapproval on the distribution principle of 2.5 per cent GST as compensation for the abolition of octroi and zila tax in 1999.

In 1999, the octroi and zila tax was abolished and federal government increased GST rate from 12.5 per cent to 15 per cent with a firm promise that 2.5 per cent GST would be given to the provinces to compensate for octroi and zila tax on the basis of actual collection.

In practice, the federal government distributes 37.5 per cent of the 2.5 per cent GST collection on the basis of the population among the provinces and the remaining 62.5 per cent on the basis of actual collection.

Out of about Rs34 billion being collected against 2.5 per cent GST collection in the current fiscal year about Rs13 billion is being distributed on the basis of population and remaining Rs21 billion on the basis of actual collection.

Sindh wants disbursement of entire Rs34 billion among the provinces on the basis of tax collection. In fact Sindh has demanded refund of the less share given to it in previous years.