However, during an informal meeting with the Ministry of Finance, Sindh government remained firm on its stance to collect the VAT on services. The provinces have the right under the Constitution to impose and collect VAT on services. Federal Board of Revenue Chairman Sohail Ahmed attended the meeting for some time and left for attending Economic and Revenue Advisory Councils meetings.
The top priority of the Ministry of Finance in the last few weeks had been to arrange this meeting and Advisor to Prime Minister Dr Abdul Hafeez Sheikh met with Sindh Chief Minister last month in this connection. The Ministry of Finance tried to convince the representatives of Sindh government about the economic fallout of a delay in the IMF tranche release due to failure to comply with this critical condition. However, Sindh government remained adamant about setting up its Revenue Services Department that would independently collect VAT on services.
Sindh Secretary Finance had also walked out of the Revenue Advisory Council meeting once in protest against the implementation of an integrated VAT, an IMF condition that the Pakistan government agreed to in its Letter of Intent. At present, President Zardari is the only person who may be able to convince the Sindh government to back down on this issue but his meeting with Sindh government could not take place on Friday.
The IMF has delayed the Board meetings, without whose approval the subsequent tranche cannot be released, till the certification by Pakistan that VAT would be implemented in a broad-based integrated form as drafted by the FBR. VAT on services is a provincial issue but there was an understanding among all the provinces that the FBR would collect the tax on behalf of the provinces.
They said the reason for this understanding was that only integrated application of VAT could be feasible. Once the provinces develop capacity to collect VAT, the provinces could collect the levy with the help of their own tax machinery. The federal government's sales tax collections (on services and goods) formed part of the divisible pool and were then distributed among the provinces under the National Finance Commission Award formula based on population.