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Looking at Devolution of ‘VAT on Services’ in Fiscal Federalism - A Case of Sindh Revenue Board

This paper is concerned with the split of jurisdiction of VAT on goods and services between a federation and its units. The majority of federations enforce VAT as a central tax whereas a few devolve it to the states or provinces to make federating units autonomous. This paper explores literature on intergovernmental taxation to ascertain the appropriateness of the devolution of VAT, particularly that on services. Later, the performance of the Sindh Revenue Board (SRB) is assessed vis-à-vis its claim to a substantial increase in tax collection after the transfer of jurisdiction of VAT on services to Sindh and other provinces in Pakistan under a major devolution plan. This paper finds that taxes that have mobile bases; and are required for macroeconomic stability and redistribution of income should rest with federations. Further, splitting the VAT base, particularly on the basis of a distinction between goods and services, could add to the complexity. This paper suggests that levying VAT on services in provinces dependent on origin could cause a fiscal war even more bitter than that in Brazil if interprovincial input adjustments are made admissible in Pakistan. This paper also suggests that because Pakistan has less developed coordination mechanisms, it should have centralized tax administration for VAT. Regarding the claim of an outstanding performance by SRB, the paper finds that the claim is not based on a correct interpretation of the facts. In direct contradiction to what has been suggested, subjecting more services to tax has increased complexity.