Sales Tax on Services in Pakistan: Flaws in the System

The sales tax on services in Pakistan is collected by each province separately, leading to coordination issues between the federal government and the provinces. This has resulted in a poorly managed system that provides room for the service sector to evade the income tax net.

To address this issue, the Value Added Tax (VAT) was introduced in 1987 to document every economic activity. All businesses are required to be registered under the sales tax regime and deposit sales tax with the government. This sales tax is then used to calculate gross income, which is necessary for calculating the net income tax payable.

Although the sales tax regime system may have numerous flaws, it effectively calculates income tax. However, the sales and services taxes were jointly collected by the Federal Board of Revenue, but now it falls under the provinces’ authority. The lack of transparency in sharing service sector information by the provinces with the federal government results in faulty income tax calculations.

To enhance revenue collection and encourage transparency in the system, some issues need to be addressed by the revenue authorities. Firstly, the sales tax on services is less than that on goods charged by the federal government. Secondly, there is a lack of uniformity between different services rates. Finally, a software can be developed to compare all sales tax collected data from each province and calculate income tax based on that basis. Additionally, all the services that are beyond the scope of the tax net must be unified.

In conclusion, the sales tax on services in Pakistan needs to be reformed to enhance revenue collection and ensure transparency in the system. The revenue authorities need to address the issues mentioned above to streamline the process and make it more efficient. By doing so, the government can increase revenue and improve the overall economic situation of the country.

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