Doubts about the federal government’s seriousness with regard to fiscal devolution resurfaced when the Federal Board of Revenue (FBR) recently imposed a 7.5 per cent sales tax on restaurants that many believe fall beyond its domain.

The controversial move, which is not expected to yield much in terms of additional revenues, is hard to justify for the political cost it entails. It is an ill-timed move, to put it mildly, as the government is already mired in multiple seemingly insurmountable challenges in its economic stabilisation phase.

The impact of the additional 7.5pc federal sales tax, which increases the total tax on restaurants including provincial sales tax and the federal excise duty to over 25pc, is not discussed here. Represen­tatives of the All Pakistan Restaurant Association were not readily accessible.

The provinces interpreted the unilateral move as a blow to their fiscal autonomy and read it as a sign of what lies ahead. They shared with Dawn their fears and mentioned what they called a “hidden plan to ultimately roll back the devolution process, returning to the old centralised model of governance”.

All the provinces, including Punjab and Khyber Pakhtunkhwa, openly resented the attempt that they see as an infringement on their rights. They are gearing up to put up a collective resistance to all such attempts.

The federal government dismisses their stance as ‘overreaction’ based on ‘cooked-up assumptions’. “People are addicted to conspiracy theories in this country. The PTI government is trying to mend systems and the beneficiaries of the status quo are resisting it,” an expert committed to the PTI asserted without substantiating his position with evidence on the issue.

The provinces consider the unilateral move by the FBR to impose sales tax on restaurants as a blow to their fiscal independence

FBR Chairman Shabbar Zaidi initially defended the move that he said was irreversible. He said that the implementation of the decision was suspended for now but it would be pushed after convincing the provinces of its merits. “No, we will not reverse the decision. But before going ahead with its implementation, we will take the provinces into confidence,” he told Dawn by phone from Islamabad.

When the UN and EU definitions of restaurant, which treat it as service, were mentioned, he admitted that there was confusion about the categorisation. He then referred to the Indian case where national and sub-national governments share the tax on restaurants.

Aware of the reservations of the provinces, he said that the perception of the encroachment on fiscal rights of the provinces is misplaced. “Food is a good and a restaurant sells food. To me, it makes perfect sense if the federal government taxes restaurants and manages collection,” he argued.

The United Nations classifies ‘restaurant’ as service activity under Section I of the International Standard Industrial Classification.

Currently, sales tax on goods is collected by the federal government. But post-18th Amendment and 7th NFC Award, the right to collect sales tax on services rests with the provinces. The provinces took time to put the legal framework and tax administration in place, although Sindh was ahead of the rest. But now the tax bodies are in place and functional in all the four provinces.

Despite initial administrative hiccups and issues related to the capacity building at sub-national levels, the many-fold rise in the collection of sales tax on services, particularly by Sindh and Punjab, provides sufficient evidence that the current arrangement is better in terms of efficiency and fairness.

“Deeds are more convincing than words. They don’t get tired of talking about devolution. But we see the current move as an attempt by the federal government to overstep its defined boundary. We have recorded our views in subsequent meetings and will fight any such attempt tooth and nail,” Sindh Revenue Board (SRB) Chairman Khalid Mehmood said while sharing the relevant material with Dawn. Mushtaque Kazmi, adviser on taxes, briefed Dawn on the background.

Punjab Revenue Authority (PRA) Director General Zainul Abidin Sahi spoke at length about how the provinces have widened the scope and coverage of the sales tax on service using technological solutions. From Rs22 billion five years ago, the PRA increased the collection to Rs110bn in 2018.

He said the federal government has been informed about the PRA’s reservations with regard to the Sept 27 FBR notification. He appreciated the fact that Sindh has put up a strong case complete with supporting documents against treating restaurants as providers of goods for tax purposes by the FBR.

“The FBR unilaterally proposed amendments to Chapter 98 (services) of the Pakistan Customs Tariff, excluding restaurants from the list of services. They imposed a tax on prepared food, foodstuff and sweetmeats supplied by restaurants, bakeries, caterers and sweetmeat shops without consulting the provinces.”

“The provinces are discussing the issue in the inter-provincial coordination committee. They will devise the future strategy depending on the response of the FBR,” he said.

Balochistan Revenue Authority (BRA) Chairman Misri Ladhani and KP Revenue Authority (KPRA) Director General Muhammad Tahir Orakzai were not able to make time for a candid discussion. But they are on the same page with Punjab and Sindh on this issue and their offices confirmed that their correspondence took place with the FBR in this regard.

“Yes, there are problems in devolution, but the solution lies in expanding, and not limiting, its scope and depth. Anyone thinking otherwise is on the wrong side of both history and logic. Days of unilateral centralised decision-making are over. Any attempt to move the wheel of history backward will backfire. The future lies with an open, collective and collaborative approach,” said a champion of provincial autonomy.

Published in Dawn, The Business and Finance Weekly, October 28th, 2019