THE Khyber Pakhtunkhwa Revenue Authority was created to streamline the collection of sales tax on services in July 2013. But so far, its performance has not been up to the mark and its affairs are being run on an ad-hoc basis.

Instead of undertaking the core function of collecting revenues itself, it has outsourced the job to the Pakistan Revenue Automation Limited, an IT company of the Federal Board of Revenue (FBR). As a result, KP has seen little improvement in its revenue base, whereas Punjab and Sindh have recorded big increases in revenues.

KP was the third province, after Sindh and Punjab, to set up its own authority for the collection of sales tax on services, which was devolved to the provinces after the 18th Amendment in April 2010. Sindh took the lead on July 1, 2011, followed by Punjab in July 2012.

Currently, provincial taxes are collected by the excise department, board of revenue, and the mineral, irrigation and forest departments. All these taxes can be brought under one roof to improve compliance and facilitate taxpayers

Three factors are directly attributable to the authority’s poor performance. On the administrative side, the Khyber Pakhtunkhwa Revenue Authority (KPRA) works as an affiliate of the provincial excise and taxation department. It has a director general and four directors, along with a skeletal staff. It does not have the right expertise.

The excise and taxation secretary — hailing from the Pakistan Administrative Service (formerly the District Management Group) — has no experience in taxation. Earlier on, a retired income tax officer was appointed the first director general of the authority, whose services were terminated. Most of the directors at the KPRA are also retired income tax officers. Currently, one such director has been given the charge of running the affairs of the authority.

Ideally, the authority can only be run by officials with a background in either sales tax or customs — as these are two sides of the same coin — until officers with sufficient sales tax training are appointed.

As a result, the KPRA has failed to develop sales tax rules despite a lapse of two years, and it still follows the FBR’s rules. The draft KP Sales Tax on Services Rules 2015 was posted on the authority’s website, with no deadline. The provincial law division has pointed out loopholes in these rules and suggested reinforcements.

The first appointments made in the authority had raised eyebrows because the advertisements, it was stated, were tailored in a way to accommodate candidates with political affiliations.

On the other hand, the Punjab Revenue Authority is being run efficiently by officials with experience in sales tax taken from the FBR. The only option with KP is to emulate Punjab’s model and appoint FBR officials with sales tax background on deputation.

So far, the KP government has not approached the FBR to train its staff in sales tax collection or provide on-the-job training.

Initially, the provincial government had decided to keep the tax coverage limited to 10 categories of services. The sales tax on these services was earlier collected by the FBR for the government. In 2011-12, KP had received Rs8.9bn after the deduction of FBR’s services charges.

The sales tax collection on services for FY13-14 fell to Rs8bn. But in FY14-15, the scope of the tax was extended to 38 new services, bringing the total to 48. The current year’s revenue target from this area is Rs12bn.

But the increase in collection is expected not because of improved compliance, but owing to the expanded tax coverage. The major revenue spinner will be the telecom sector, which includes calling card and scratch-card firms. Around 92pc of the collected sales tax comes from the telecom sector. Other major revenue sources are tour operators, travelling agencies, beauty salons, banquet halls and restaurants etc.

The standard rate of sales tax is 15pc of the value of the service. However, telecommunication services are liable to pay a tax of 19.5pc.

The major challenge for the KPRA lies in the issues related to its jurisdiction over services and the apportionment of revenue with the FBR and the revenue agencies of Sindh and Punjab on account of inter-provincial trade and the location of the head offices of most of multinational and telecom companies, and banks etc. To protect provincial revenues, the KP government needs to appoint relevant experts.

The KPRA can be transformed into a provincial revenue body on the pattern of the FBR given the political will for it. Currently, provincial taxes are collected by the excise department,

board of revenue, and the mineral, irrigation and forest departments. All these taxes can be brought under one roof to improve compliance and facilitate taxpayers.

Published in Dawn, Economic & Business, April 13th, 2015

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