A World Bank report has recommended that Pakistan should consider converting the current sales tax (ST) into a harmonized ST on goods and services that allows for effective revenue raising while not negatively impacting economic activity and investments. The recommendation has been made in a Box item titled ‘The case for a harmonized sales tax in Pakistan’ incorporated in the latest edition of the South Asia Economic Focus (SAEC). Issued on October 13, 2019, the Report is captioned Making (De)centralization Work. It has cited Pakistan’s taxation problems to drive home the point that too much decentralization could impair efficiency.

According to SAEC, the current ST regime fragments Pakistan into five competing tax jurisdictions resulting in potential double taxation and high compliance costs for businesses. Federal and Provincial Governments acknowledge that the current sales tax regime needs improvement. The base is broken up into goods and services with the federal government taxing the former and provincial governments the latter. The base is further broken up spatially, as each province has the power to tax services supplied within its jurisdiction and levy its own tax rates on these services. In this regard, the SAEC stated that this fragmented nature of the base has caused inter-provincial and Federal-Provincial jurisdictional conflicts resulting in potential double taxation, exporting of taxes to other provinces, and consequently high costs of compliance for businesses. Unfortunately, no common legislative or administrative forum exists to address these issues. It highlighted the need to introduce a harmonized sales tax system, along with a national forum that has the power to legislate and address the issues related to taxation.

Three key issues that have emerged due to ST collection by five different revenue agencies are - 1) Fragmented bases: The tax bases are different in each province. Issues thus arise between the Federal and Provincial governments on tax bases. 2) Different taxation principles: Issues between provinces have also arisen concerning principles of taxation unrelated to the tax base, especially on sales tax on services. For example, Sindh province charges ST on many services on the origin principle, while the rest of the provinces charge the tax on the destination principle. 3) High administrative and compliance costs: Businesses working across different geographical areas within Pakistan must file up to 60 different tax returns (one per month for each agency). This increases compliance costs for firms, hampering overall economic activity.