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CBR fails to bring services sector into tax net

ISLAMABAD (June 09 2007): The Central Board of Revenue (CBR) remained helpless in bringing services sector into the tax net during 2006-07. According to Economic Survey released on Friday, the services sector continued to perform strongly for third consecutive year in a row and grew by 8.0 percent in 2006-07 as against of 9.6 percent last.

Services sector has grown at an average rate of 8.7 percent per annum during the last three years, survey added. On the other hand, CBR data shows an entirely different story, sales tax collection from services sector stood at Rs 3,478 million during July-March 2006-2007 against Rs 3,037 million in the same period last fiscal, showing a growth of 14.5 percent.

The CBR has declared that revenue collection from construction, transport, storage and communication, sale, maintenance of motor vehicles and hotels and restaurants remained below their respective potential.

Economic Survey has specified 8 percent growth in services sector and at the same time, the CBR last quarterly review showed extremely poor excise collection from services.

According to survey, almost 60 percent contribution to this year's growth has come from services sector. All components of services sector registered strong growth with the exception of ownership of dwellings which continues to grow at 3.5 percent for the last four years. Transport and communication, wholesale and retail trade, finance and insurance and public administration and defence have growth robustly in 2006-2007.

On the other hand, CBR said that collection on account of services remained below expectations. During last budget, federal excise duty (FED) was imposed on additional services like cable TV operators, moneychangers, non-fund services by banks, international air travel etc. The annual estimated revenue impact of these policy changes was Rs 7.6 billion including major contribution from international air travel and non-fund services. The projected revenue estimate was 11 percent of the total FED target.

Compared to these projections, the collection from these measures has so far been Rs 2.1 billion, which is 4.4 percent of the FED revenue. Major contribution has been made by international air travel and non-fund services. If not captured in fourth quarter, services may create difficulties for achieving the overall FED target, the CBR study added.

The CBR further said that except for a few sub-sectors like telecom, finance and insurance, electricity and gas distribution, and sale maintenance and repair of motor vehicles, most of the other services have negligible tax contribution. When decomposed into direct and indirect taxes, it becomes immediately clear that barring finance and insurance and other services, no other sub-sector makes any significant direct tax contribution. While this situation improves slightly when indirect taxes are considered, it also remains worrisome.

Admittedly, services sector has always been a difficult-to-tax area, but a mechanism has to be developed to tax economic activities taking place in this sector. The tax administration cannot ignore services sector whose overall contribution to GDP is over 50 percent and this share is growing with the passage of time, quarterly review added.

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