ALTHOUGH the move to extend sales tax from 11 categories of services in July 2013 to 57 did not bring any substantial revenue for want of strict enforcement, the KP government is planning the addition of another 32 categories of service providers to the tax net.

In the year 2011-12, when the Federal Board of Revenue was collecting sales tax on 11 categories of services on behalf of the province, KP received Rs8.9bn, after deduction of the FBR’s service charges. The coverage has now been extended five times, but without any improvement.

In FY2015-16, KP collected a mere Rs7.268bn. The figure is low even if allowance is made for the small size of the provincial economy and its development stage.

A senior official of the Khyber Pakhtunkhwa Revenue Authority (KPRA) said the new services categories will be notified in the coming one or two months. “We will introduce the notification in the provincial assembly for debate and its approval with other budget proposals”, he said.

KP was the third province, after Sindh and Punjab, to set up its own authority for collecting sales tax on services, a responsibility that was devolved to the provinces after the 18th Amendment in April 2010.

Service providers who have an annual turnover of over Rs5m fall in the taxable category.

The data collected from a survey of three cities: Peshawar, Abbottabad and Mardan, shows that the potential revenue from ST on services is almost 10 times the present collection amount gained from already registered service providers of hotels, restaurants, marriage halls, clubs, cafes and beauty parlours.

The new services categories will be notified in the coming one or two months

Effective registration of all taxable persons, particularly 964 new establishments identified in the survey, and the realisation of real revenue potential on the basis of ascertained /agreed parameters can fetch Rs2.26bn more revenue per annum.

Data available for service providers shows that there are 14,000 NTN holders who provide services in the surveyed three districts. The list of service providers will go up if data is also compiled for the 15 other districts.

Currently, service providers registered with KPRA stand at over 1,500 taxpayers while only 580 sales tax returns were filed in 2016. This suggests poor compliance.

The affairs of the KPRA are being run on an ad-hoc basis. This affects the authority’s ability to perform.

Recently, the provincial government has appointed a director-general of the authority but it runs with a skeletal staff with around four officers and lacks the right expertise.

Administratively, the authority falls under the secretary of excise and taxation, which is a major lacuna.

“We have placed several requests with the FBR in the last three years for deputation of tax officers to the authority but so far no response has been received”, an officer said, though it has provided officers to Sindh and Punjab for establishing their provincial revenue boards.

At the same time, the provincial government also seems unmoved to induct fresh officers through competitive exams.

There are also policy issues. The province is losing Rs4bn per year due to lack of legal cover for the input adjustment. Though a MoU was signed with the FBR in July 2016, it is yet to be implemented.

“We will take up this issue with the federal government at a higher level to get claims of past liabilities as well”, the official said. The challenge for the KPRA lies in issues related to its jurisdiction over services and to the apportionment of revenue among the FBR and the revenue agencies of Sindh and Punjab.

The draft KP Sales Tax on Services Rules 2015 has been posted on the authority’s website, with no deadline for comments. The authority has been following the FBR’s rules since mid-August 2013.

KPRA is using the complex PRAL system, to maintain a record of its taxpayers; the province has not developed its own data collecting system or database to enable tax authorities to produce the desired results.

While revenue targets were not met, the increase in collection can be attributed to the expanded tax coverage. Service providers deduct sales tax from consumers but do not deposit the amount with the KPRA, according to an official.

Published in Dawn, Economic & Business, February 27th, 2017