The first two parts of this series examined how in the wake of Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] provincial sales tax regimes have gradually drifted beyond constitutional limits and evolved into internally contradictory systems marked by overlapping jurisdiction, excessive delegated legislation and harmful fiscal competition. The present framework has produced precisely the opposite of what a modern value added tax (VAT) system is supposed to achieve. Instead of simplicity, certainty and neutrality, Pakistan now has four competing provincial tax sovereignties imposing escalating compliance burdens upon businesses operating nationally.
The dilemma is not merely administrative. It is structural and constitutional. The provinces are constitutionally entitled to levy sales tax on services under Entry 49, Part I, Federal Legislative List (FLL), Fourth Schedule to the Constitution after the 18th Amendment, but fiscal autonomy does not mean fiscal fragmentation. Nor does provincial competence permit expansion of the constitutional field itself by converting “services” into an unlimited residual category embracing every economic activity not constituting goods.
A constitutional federation cannot function through competing and overlapping tax jurisdictions constantly struggling to maximize their respective tax claims. The existing model, therefore, requires serious restructuring before the present chaos further damages economic integration, investment and voluntary compliance. The starting point must be restoration of constitutional discipline.
Provincial sales tax laws should be amended to expressly confine taxability to services actually rendered within the territorial jurisdiction of the respective province. The present formulations based on origination, destination, consumption, residence, virtual presence and trans-provincial connection should be deleted. These provisions violate Article 141 of the Constitution and directly conflict with the principles laid down by the Supreme Court in Messers Sui Southern Gas Ltd v Federation of Pakistan (2018 SCMR 802).
The current practice whereby provinces simultaneously claim tax jurisdiction over the same transaction through competing theories of origination and consumption is constitutionally unsustainable. No modern VAT system can operate coherently if multiple jurisdictions tax the same service merely because different elements of the transaction touch different territories.
A clear constitutional rule is therefore necessary: provinces may tax only those services physically rendered or legally performed within their territorial boundaries. Trans-provincial services should be regulated through a harmonized inter-provincial mechanism rather than unilateral fiscal assertions until a consensus is reached for unified sales tax on goods and services to be collected by a federalised body.
The second reform must address the dangerously expansive definitions of “service” introduced after July 1, 2025. The present formulations—particularly those defining service as “anything which is not goods”—should be revisited. Such drafting effectively converts provincial sales tax into an unlimited residuary levy. Constitutional entries cannot be enlarged through legislative devices. The Supreme Court settled this principle long ago in Elahi Cotton Mills Ltd v Federation of Pakistan (1997) 76 TAX 5 (S.C. Pak.).
A modern VAT system requires precision, not conceptual infinity. The statutory definition of “service” should therefore be confined to identifiable commercial and economic activities involving provision of a discernible service for consideration. Terminal taxes covered under Entry 53, Part I of FLL, proprietary transactions, pure transfers of rights in immovable property, financial intermediation in its essential form and transactions already forming part of another constitutional taxing field should be expressly excluded.
This is particularly necessary in the case of renting of immovable property. The repeated attempts by provincial authorities to recharacterize proprietary rights as services have generated avoidable litigation despite clear judicial pronouncements to the contrary. The Sindh High Court and later the Supreme Court in Young’s (Pvt.) Ltd categorically held that mere letting out of immovable property does not constitute provision of taxable service. Continued legislative experimentation in defiance of settled constitutional doctrine only deepens uncertainty.
The third reform must involve rationalization of taxation of banking and financial services. At present, the provincial statutes simultaneously proceed on conflicting assumptions. The broad charging provisions potentially tax all forms of financial facilitation, while sector-specific rules continue to distinguish between taxable fee-based services and non-taxable financial intermediation. The resulting uncertainty is untenable for a sector operating nationally and digitally across provincial boundaries.
A uniform national framework for banking and financial services is urgently required through coordinated legislation by all provinces. Taxability should remain confined to identifiable fee-based and commission-based services while excluding core intermediation income such as markup, spreads and treasury operations unless Parliament itself undertakes broader constitutional restructuring through consensus.
The fourth reform concerns delegated legislation. Provincial revenue authorities presently possess excessive powers to alter taxable classifications, exemptions, schedules and procedures through notifications and executive instruments. This has transformed the tax system into an unstable administrative regime where taxability increasingly depends upon departmental interpretation rather than legislative certainty.
The Supreme Court in Mustafa Impex v Government of Pakistan (2016 PTD 2269) and Pakistan Television Corporation Ltd v CIR (2019 SCMR 282) reaffirmed that essential elements of taxation cannot be delegated to the executive. Yet provincial statutes continue permitting revenue authorities effectively to redefine the taxable field itself through notifications. This practice must end.
The charge of tax, taxable field, rate structure and essential classification principles should remain exclusively within legislative control. Executive authorities may administer tax laws but should not possess powers to continuously reshape the constitutional scope of taxation itself.
The fifth reform is institutional harmonization. The National Tax Council (NTC), created after prolonged negotiations between federation and provinces, has so far failed to evolve into an effective coordinating mechanism. Instead of harmonization, provincial authorities continue operating independently with conflicting procedures, registration systems, audit frameworks and interpretations. The NTC should be made of part of Constitution having binding force of its decisions like Council of Common Interests.
Pakistan urgently requires a harmonized national VAT framework on goods and services while preserving constitutional distribution of revenues. Such harmonization does not necessarily require constitutional amendment. It can initially be achieved through coordinated legislation, uniform definitions, integrated technology systems and inter-provincial agreements under the existing constitutional structure [True federalism for fiscal stability, MinuteMirror, June 24, 2024 and Need for federalised tax structure, MinuteMirror, May 29, 2023].
A single national sales tax portal should be established allowing:
- one registration,
- one return,
- one audit framework,
- and one integrated adjustment mechanism.
Taxpayers operating nationally should not be forced to navigate multiple provincial systems with contradictory compliance obligations. The present structure imposes enormous administrative costs upon the formal sector and discourages documentation of the economy.
The sixth reform concerns dispute resolution. At present, jurisdictional conflicts between provinces themselves are effectively transferred onto taxpayers. Businesses receive notices from multiple provincial authorities for the same transactions while no effective inter-governmental dispute resolution mechanism exists.
The Constitution itself provides the solution. Article 175E grants exclusive original jurisdiction to the Federal Constitution Court (FCC) of Pakistan in disputes between governments. Instead of burdening taxpayers with endless litigation, the federation and provinces should jointly seek authoritative declaratory guidance from the FCC) regarding territorial limits of provincial sales taxation and principles governing trans-provincial services.
The seventh and perhaps most important reform involves long-term restructuring of Pakistan’s fragmented tax apparatus itself.
The present multiplicity of tax authorities has become economically inefficient and administratively irrational. Federal Board of Revenue (FBR), Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA) increasingly operate as competing bureaucratic silos rather than components of a coherent fiscal federation. This fragmentation raises compliance costs, duplicates administrative structures and weakens enforcement capacity.
Pakistan ultimately needs movement towards a harmonized national tax administration collecting taxes for all tiers of government while preserving constitutional revenue entitlements of provinces. Most successful federations have evolved integrated VAT systems precisely because fragmented indirect taxation damages economic integration.
A unified VAT model on goods and services with revenue-sharing arrangements under NFC-type mechanisms would:
- eliminate cascading jurisdictional disputes,
- reduce compliance costs,
- improve documentation,
- strengthen audit capacity,
- and encourage investment and formalization.
The present fragmented model, by contrast, incentivizes fiscal aggression rather than economic growth.
The tragedy is that Pakistan’s tax discourse continues revolving around extraction rather than rationality. Revenue authorities increasingly view taxpayers as competing fiscal territories rather than participants in national economic development. The objective of taxation in a constitutional democracy cannot merely be maximization of short-term collections through administrative expansionism.
A sound tax system must satisfy four conditions simultaneously: constitutional legitimacy, economic neutrality, administrative simplicity and public credibility. Pakistan’s current provincial sales tax regime increasingly satisfies none of them.
The constitutional promise of the 18th Amendment was cooperative federalism, not fiscal Balkanization. Provincial autonomy was meant to strengthen democratic decentralization while preserving national economic cohesion. Instead, Pakistan now risks evolving into a fragmented fiscal union where the same transaction may attract competing tax claims from multiple authorities operating under contradictory statutory frameworks.
The choice before policymakers is therefore becoming unavoidable. Either Pakistan moves towards a constitutionally coherent and harmonized VAT framework preserving both provincial autonomy and national economic integration, or the present system will continue generating constitutional litigation, compliance chaos and economic fragmentation detrimental to both taxpayers and provinces themselves. The Constitution permits fiscal autonomy. It does not sanction fiscal anarchy.
