Reforming Sales Tax and KPRA in KPK

Provinces should improve their tax base according to the constitution of Pakistan. The sales tax is essential for it.

By Fahad Ikram Qazi

The history of sales tax in Pakistan began with the Government of India Act 1935, wherein same was in the provincial domain. Subsequently, it was transferred to the federal government under the General Sales Tax Act, 1948. The government started implementation of the sales tax under Sales Tax Act, 1951, which provided for a limited base but subsequently the tax base was broadened through a Presidential Order of Taxation of Sales and Purchase in 1960 thus incorporating import, export and manufacturing of commodities besides extending several incentives. The Sales Tax Act 1951 was amended in 1981. In order to introduce the Value Added Tax (VAT), the Act of 1951 was repealed by the Sales Tax Act, 1990.

The sales tax on services was introduced in 2000 in the provinces which led all the provinces to promulgate relevant ordinances, though it was collected by the federal government on account of weak capacity at the provinces. Eventually, the 18th constitutional amendment 2010 transferred the sales tax on services to provinces.https://republicpolicy.com/an-overview-of-the-economy-of-pakistan/

People simply don’t like being taxed. They feel of being robbed by the state while paying taxes. They should have felt as if they are making an investment unto their own self in a collective way, which in fact is the rationale behind taxation.

It necessitated provincial legislation for sales tax on services and the establishment of tax collecting entities. Taking the lead, Sindh established Sindh Revenue Board in 2011, followed by the Punjab Revenue Authority in 2012 and Khyber Pakhtunkhwa Revenue Authority (KPRA) legislated in 2013 through enactment of KP Finance Act, 2013.

KPRA is a corporate entity established under the Khyber Pakhtunkhwa Finance Act, 2013. The authority is mandated to administer and collect sales tax on services across the province. It is governed under the Policy Council chaired by the chief minister and comprising relevant cabinet ministers and administrative secretaries besides private members.

In detail, Khyber Pakhtunkhwa Revenue Authority (KPRA), as corporate entity, was established under the Khyber Pakhtunkhwa Finance Act, 2013, with the mandate to administer and collect Sales Tax on Services & Infrastructure Development Cess. KPRA is governed, with relative autonomy, has been placed under the Finance Department to have an interface with the Government. While, the Council acts as Policy Making body chaired by the Honourable Chief Minister, Khyber Pakhtunkhwa, and comprising of three (03) Cabinet Ministers for Finance, Law and Excise and Taxation, Chief Secretary, Secretaries of the Finance, Law, Excise, Taxation and Narcotics Control departments and four representatives nominated by the Government from the private sector.

The tax system in Khyber Pakhtunkhwa reflects a narrow base and fragmented revenue administration through various departments namely: Revenue & Estate and Excise and Taxation etc. KPRA has emerged as the largest tax collection authority of Khyber Pakhtunkhwa, contributed 33% to the Total Provincial owned receipts and 56.42%, 61% & 51% to the Total Provincial Tax Revenue for the year 2016-17, 2017-18 & 2018-19 respectivly. KPRA was envisioned to enhance fiscal space for social development in the province. The Authority has generated total revenue of Rs. 60 billion since its inception.

KPRA has faced several challenges since its beginning including frequent changes in the top management. Nevertheless, it has generated significant revenue through expanding the tax base for services, informed compliance and introducing automated systems and processes. However, the delayed operationalization negatively impacted the desired goals of tapping of the potential revenue.https://republicpolicy.com/fixing-the-structural-issues-of-the-economy-of-pakistan/

Additionally, KPRA also devised several strategies including elaborate communication strategy for increased emphasis on informed compliance. The transition team of KPRA was also successful in securing the technical assistance of multiple development partners for assistance in governance reforms.

Transparency and organizational integrity is the hallmark of KPRA being nascent financial institution. Besides an efficient financial management system is in place ensuring preparation of financial statements of the accounts, statement of revenue receipts, its reconciliation with the Accountant General, Khyber Pakhtunkhwa; and regular conduct of external and internal audit, managing risks, and continuous monitoring of internal processes in order to build confidence of the taxpayers and achieve the strategic goals of KPRA.

The own source revenue of Khyber Pakhtunkhwa has been in a shambles for the past many years due to numerous reasons, hence dependency on federal transfers under the NFC. Tax to GDP ratio of Khyber Pakhtunkhwa is less than 1 per cent, which speaks volumes of the lacking capacity of provincial taxation and dedicated work required for increasing the provincial own receipts. Increase in own source revenue has been the focus area of the government, and the same is reflected in the major reform documents especially the “Public Financial Management Reform Strategy” and also taken up with all multilateral partners for technical assistance.

More resources will naturally result in expanding fiscal space that can be utilised to further the provincial development agenda. Without strengthening the taxation framework, all government initiatives are difficult to materialise, hence taxes provide the basis for sustainable peace, good governance and development.

Since inception, KPRA has amplified the provincial own receipts contributed significantly in the collection of tax. The same is a significant increase and far more vis-a-vis the collection by other tax collecting agencies. KPRA has faced several challenges since beginning being a fledgling authority with no expertise in collection of the sales tax. Nevertheless, it has generated significant revenue through expanding the tax base, pursuing a people-friendly and progressive tax regime, and identifying various key sectors having the potential for consistent growth in revenue. Besides, bottlenecks impeding the institutional growth especially the lack of enforcement through litigation have been attempted to resolve with a focus on legal cases as well the Alternate Dispute Resolution.

The current year has seen significant development in the institutional development of KPRA through investing in its staff, revamping and extending the structure through the establishment of dedicated directorates and field collectorates. The current budget has been increased manifolds to facilitate the administration of tax collection. Strategies have been drafted and acted upon for extending the revenue base, withholding tax, internal & external audit, and putting in place an efficient enforcement regime. Besides, the focus has been on providing people friendly tools to the people which has led KPRA to rely more on IT-based modes of tax collection. https://republicpolicy.com/the-executive-denial-of-constitutional-fiscal-federalism-in-pakistan/

To be continued.

The writer is a civil servant.

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