ISLAMABAD (July 02 2009): India has improved its revenue collection remarkably from service tax which has become an example for countries like Pakistan to introduce such kind of tax on services. The FBR quarterly review issued on Wednesday thoroughly analysed service tax structure in India with viable recommendations to implement the same in Pakistan. In line with the Indian service tax, Pakistan should endeavour to improve the contribution of indirect taxes from services sector. It means during 2007-08, there was a potential to realise Rs 100 billion but only Rs 66 billion was actually collected. It implies that roughly, there is a further potential of Rs 34 billion in Pakistan, which could be generated additionally. In India, around 63 percent of service tax collection emanated from 10 services and remaining 40 percent has been spreading on remaining services. Like Pakistan, telephone services contributed the top collection. Surprisingly, while comparing Indian service tax top 10 revenue generating services, only two categories telephone, banking and insurance services have been taxed in Pakistan. Interestingly, the contribution of telecommunication has been 70 percent of the total collection of services in indirect taxes in Pakistan against only 17 percent in India. Prima facie, this is a case of limited tax base of services as well as enforcement issue. Interestingly, tax compliance by the taxpayers from 2001-02 has been up to the mark in services as tax returns have been regularly filed. Actual issue is the low contribution of service sector in tax revenues. The tax base of services is extremely narrow. There is an immediate need to augment the scope of services in tax net of FED in VAT mode. The most prolific services in Indian service tax which are out of tax net in Pakistan are suggested to be brought in the fold of FED VAT mode such as business auxiliary service, goods transport agency, insurance auxiliary service, maintenance or repair services, stock broker, consulting engineers and commercial or repair service. With the passage of time, gradual extension of base would be a great source of revenue generation among the service untaxed. For greater simplicity and distortion free system of service taxation, uniformity of tax rate is essential. The services taxed under indirect taxation are subject to varying rates. In Indian service tax, uniform rate for all the services is applied. A uniform rate of 15 percent would be more reasonable for all services under FED or sales tax. In order to improve collection and enforcement, separate set up of services tax administration can be helpful. Since services generate inadequate revenues except telecommunication, attention is paid to manufacturing sector on priority basis as bulk of revenues is generated by manufacturing sector. All the services in the net of FED and sales tax may be combined together into a new tax "Service Tax" like India. It would a serious step toward focusing on revenue generation through better enforcement and extension of base of services. The GST in Pakistan is an appropriate tax for services but there may a uniform rate of goods and services. On the other hand, although base of FED on services is extremely limited but still there is a variation in the FED rates. The uniformity of tax rates between sales tax on goods and services, and FED on services will help in reducing distortions and bring equity. Pakistan can also improve its tax revenues from services by expanding the scope of taxes to the untaxed services. There is also an option to combine all the services into a service tax in indirect taxes but again there might be a number of constitutional and administrative issues. One thing will be certain that it will be focused appropriately if combined. Provincial governments have some comparative advantage in administering the sales tax on services. The identification of liable taxpayers and the maintenance of the tax roll are comparative advantages of the province because of its greater familiarity with the local economy. Since the sales tax on services is a provincial revenue source, there should be more incentive to assess and collect the tax than is the case under the present centrally administered system. Finally, there might be some significant advantage to a co-ordinated collection of the sales tax on services, the professions tax and the urban property tax. A centrally administered system also has some advantages. Staff is familiar with sales tax because the provincial government would find it difficult to enforce the tax where powerful local interests are involved. In the long run, given the objectives of a fiscal federalism, the best options are either (a to move the administration of provincial taxes to the federal government, on a "readiness" basis, or (b) to have provincial rate setting under a shared sales tax on services, the report added.