KARACHI: The Honorable High Court of Sindh yesterday granted a stay order against the Federal Government’s move to deny offset of input sales tax on services paid to provinces against output sales tax on products payable to the Federal Government.
The Finance Act 2016, in departure of established principle of value added taxes, had disallowed this offset, which the Finance Minister in his budget speech had acknowledged as a move to pressure provinces to settle amounts due to the federation.
The formal sector of business (i.e. the sector that pays taxes) stood to lose Billions unless it passed on the impact to consumers, in which case the result would be inflation of up to 15 per cent, slow-down of sales off take and even less level playing field vs. the informal sector, which evades taxes.
Pakistan Business Council, composed of the largest manufacturing and services companies, including 22 multi-national companies, whose members contribute 16 per cent of tax revenues, urges the Federal and Provincial governments not to drag this matter in courts, to avoid damaging the climate for investment, including FDI.
Instead it recommends that a leading firm of auditors be engaged urgently to resolve the accounting issue between the governments, pending which an amendment be moved to allow offset of input sales tax incurred in the provinces. This would restore the understanding between the provinces and the Federation at the time of 7th NFC award wherein taxpayers are allowed to cross-adjust sales tax.
The Pakistan Business Council has offered the Prime Minister to facilitate the development of a national economic consensus of which a charter for business would be an essential part. Once agreed between various stakeholders, the policies would be implemented consistently to create an environment that levels the playing field between the formal and the informal sectors, promotes employment, encourages exports and develops the capital market in a sustainable manner.