GST harmonisation

Pakistan needs one seamless consumption-tax system without sacrificing provincial ownership The World Bank’s ‘2026 report, Strengthening Fiscal Federalism in Pakistan’ places fragmentation of general sales tax (GST) among the country’s first-priority fiscal reforms. It describes five competing jurisdictions with different rates, bases, definitions, withholding rules, input-adjustment mechanisms and refund systems. The World Bank had already sought tangible progress in 2024, including a common portal and consolidation of collection. The diagnosis is sound. Pakistan should act, however, not because a lender has attached urgency to the issue, but because the present arrangement penalises documented businesses, obstructs the national market and weakens every government’s revenue. The constitutional position must be stated correctly. Entry 49, Part I of the Federal Legislative List assigns sales tax on goods to the Federation while expressly excluding sales tax on services, which belongs to the provinces. That distribution of taxing power does not require five incompatible systems. Harmonisation is not centralisation. Legislative ownership and revenue can remain with the constitutionally entitled government while definitions, procedures, technology and collection are coordinated. A federation ceases to be meaningful when autonomy is erased; a common market ceases to function when autonomy is converted into fiscal barriers. The need becomes clear from the elementary working of VAT-type GST. A registered seller charges output tax on sales, deducts the tax paid on business inputs and deposits only the balance. Full input credit ensures that tax falls on final consumption rather than on each firm in the production chain. This neutrality is a basic principle of the ‘OECD’s International VAT/GST Guidelines’. Once a legitimate credit is denied, capped or trapped in another jurisdiction, GST ceases to be a tax on value added and starts behaving like a cascading turnover tax. Take the case of a simple manufacturer. Assume, only to show the mechanism, a harmonised rate of 15 percent. It buys raw material worth Rs 10 million and pays Rs 1. 5 million GST. It also buys transport, software and professional services worth Rs 2 million and pays Rs 300, 000 GST. It sells finished goods for Rs 15 million and charges Rs 2. 25 million as output tax. With seamless adjustment, it deducts Rs 1. 8 million and deposits Rs 450, 000—exactly 15 percent of the Rs 3 million value it added. If Rs 300, 000 tax on services is rejected because it was paid to another authority or under a non-matching rule, the deposit becomes Rs 750, 000. That Rs 300, 000 turns into business cost and is taxed again in the price of the finished product. A second example concerns place of supply. A technology firm in Karachi provides a Rs 10 million service to a business in Lahore. One law may assert jurisdiction because the provider is in Sindh; another may tax because the recipient and consumption are in Punjab. The taxpayer can face two demands, two audits and years of litigation over one transaction. A uniform destination-based rule would identify one taxing province, give the purchaser the corresponding credit and transfer the revenue automatically. Tax should follow consumption, not the location that an authority finds administratively convenient. Refunds expose the same defect more severely. Suppose an exporter purchases Rs 100 million of taxable goods and Rs 10 million of taxable domestic services at the illustrative 15 percent rate. It has paid Rs 16. 5 million in input tax, while its export is zero-rated and generates no output tax. Refund of Rs 16. 5 million is not a subsidy or favour; it is what keeps exports free of domestic consumption tax. If the federal authority recognises goods credit while a provincial service credit remains unverified, non-adjustable or subject to a separate claim, working capital is immobilised. The state has effectively taken an interest-free loan from the exporter and exported Pakistan’s tax burden with the product. Government gains as much from fixing this chain as business does. A common invoice trail links every seller’s output with the purchaser’s input, reveals suppressed turnover, reduces rate-shopping and permits risk-based audits. The ‘World Bank’s 2023 Federal Public Expenditure Review’ found Pakistan’s GST C-efficiency below 30 percent in fiscal year(FY) 2020; three-quarters of comparator countries with rates between 16 and 18 percent collected more efficiently. The lesson is not to raise rates again. It is to broaden the base, remove cascading and collect a lower tax more honestly through a complete information chain. For taxpayers, genuine harmonisation means one registration, one return, one payment interface and one reconciled ledger. It also means one audit selection for a tax period instead of overlapping notices, consistent classification of goods and services, reciprocal recognition of credit, predictable refunds and a common dispute mechanism. These are not cosmetic conveniences. They lower compliance cost, release liquidity, encourage interprovincial supply chains and remove a powerful incentive to stay informal. Pakistan has announced part of this structure before. The National Tax Council considered a single portal in 2021, and the Finance Division stated in June 2022 that it had been developed and activated. The latest World Bank report records implementation only in telecom, oil and gas, and microfinance. A shared screen is useful, but a portal cannot cure contradictory statutes. Without common place-of-supply, credit and refund rules, it merely becomes one electronic doorway leading to several different rooms. The National Tax Council should now negotiate a binding intergovernmental GST compact, followed by matching federal and provincial legislation. Administration should be entrusted to an autonomous, federalised National Tax Authority jointly governed by the Federation and provinces. It would collect as agent for all governments; a digital clearing house would allocate revenue daily to the jurisdiction of destination. This preserves provincial taxing rights while ending duplicate bureaucracies, databases and coercive encounters. Policy representation must be equal and settlement data visible to every participating government. The compact needs a common negative list, one classification system, a uniform registration threshold, harmonised rates, destination-based place-of-supply rules, full reciprocal input adjustment, identical withholding principles and a single refund code. Electronic invoicing should feed one data warehouse. A taxpayer selected for audit should face a joint audit team and one consolidated order, followed by an independent national tax tribunal rather than parallel proceedings. Revenue allocation disputes between governments should never be financed from a taxpayer’s cash flow. Rate harmonisation must move downward, not standardise the highest prevailing burden. The reform model discussed in ‘Towards Broad, Flat, Low-rate and Predictable Taxes’ proposes a broad-based 10 percent single-stage sales tax at the final consumption point. Such a system would largely eliminate the input-credit and refund maze. It deserves serious national debate. Until that structural transition is made, the existing multi-stage GST cannot be legitimate or economically neutral unless every genuine business input is creditable and excess credit is refunded promptly. Refund protection must be written into the compact: a statutory disposal period, automated payment for low-risk claims, risk-based pre-refund verification, post-refund audit and interest when the state delays beyond the deadline. International experience surveyed by the ‘IMF on VAT refunds’ confirms that fraud control and timely payment must be designed together. Governments should attack false invoices through data and prosecution, not treat every compliant exporter or investor as a source of captive finance. The World Bank’s demand can supply momentum, but ownership must be Pakistani. Success will not be measured by another memorandum, loan milestone or portal launch. The practical test is the invoice: can a business pay tax once, obtain every lawful input adjustment, receive an excess-credit refund within a fixed time and see the revenue reach the correct government automatically? Until the answer is yes, Pakistan’s GST will remain a tax on production, investment and federal cohesion rather than a transparent tax on final consumption. Copyright Business Recorder, 2026

Read full story on Business Recorder