The Sindh Assembly passed a bill on Monday authorising the provincial government to collect general sales taxes on services, marking what is hoped to be the end of a decades-long battle between the federal and Sindh governments over the right to collect GST on services.
The bill, passed by a wide margin of support from both the treasury and opposition benches, is expected to significantly enhance the ability of the Sindh government to generate much of its own revenue.
Despite being the constitutional right of the provinces to collect, the GST on services had been effectively in the hands of the federal government since the 1950s.
Sindh Finance Minister Syed Muradsaid that the provincial government would levy the sales tax at the same rate as the federal government and would add no new taxes.
While the bill allows the government to tax a wide range of services, perhaps the two most important are telecommunications, which includes mobile phone services, and advertising agencies.
Finance Minister Murad Ali Shah said that the federal government would continue to collect the tax on behalf of the provincial government until a final mechanism was agreed upon between Islamabad and Karachi.
While the federal government continues to collect the tax, it will disburse 50% of the GST on services it collects in Sindh to the provincial government and move the rest to the “federal divisible pool”, a term for revenue which is shared by mutual agreement between the federal and provincial governments.
In addition, the federal government is expected to charge a 1% service fee to Sindh to collect the tax, down from a historical 4% fee.
Nevertheless, the Sindh government expects a substantial rise in its ability to collect revenue. Provincial government officials expect tax revenues to hit at least Rs25 billion during the fiscal year ending June 30, 2012, up from the Rs12 billion collected during the outgoing fiscal year.
The tax will also apply to tour operators, property dealers, architects, town planners, contractors, non-banking financial institutions, professionals and consultants, pathological laboratories, restaurants, marriage halls, clubs, hotels and travel agents.