‘Skin-walker' of provincial taxation unleashed

Business Recorder

2 days ago

The modern 'Skin-walker' of provincial taxation, a creature of duality and shifting forms, has been unleashed upon Pakistan's compliant taxpayers. It is a beast not of myth and folklore but of conflicting tax regimes and legal ambiguity, leaving a trail of confusion and compliance headaches in its wake.
This creature has taken a particularly potent form in the recent adoption of 'Negative List' based service tax regimes by the federation and the provinces.
The concept is elegant in its simplicity: everything is a service and therefore taxable, except for the specific items explicitly listed as 'negative.' This is a stark departure from the previous 'Positive List' approach, where only the services mentioned in 2nd Schedules to respective Acts were subject to tax.
The Punjab Revenue Authority (PRA) and the Government of Punjab, through the Finance Bill 2025, have been among the first to fully embrace this new philosophy.
The Sindh Revenue Board (SRB) has followed a similar path, basing its negative list on the UN Central Product Classification system. Meanwhile, Khyber Pakhtunkhwa and the KPRA have opted for a hybrid approach, creating a patchwork of regulations that defy easy categorization.
This new landscape, however, is far from a clear-cut path to tax compliance. It is a murky swamp where the 'Skin-walker' thrives, and its most haunting manifestation is the default treatment of commercial renting as a 'service.' This move, while perhaps a logical extension of the negative list philosophy, creates a fundamental duality. Is commercial renting an act of service, or is it an act of property ownership and transfer of user rights? It is a question that, in the past, has been handled under different legal and tax frameworks. By default, and without explicit clarification, it now falls under the ambit of service tax, creating a new layer of complexity for landlords and businesses alike.
The 'Skin-walker' nature of this situation is not just about the conflicting classifications but also about the lack of transparency and clarity. With each province acting independently, taxpayers are left to navigate a labyrinth of different negative lists, different CPC classifications, varying tax rates, complex withholding rules and different interpretations of what constitutes a 'service.' A single company operating in multiple provinces may find itself subject to entirely different tax obligations for the same activity.
The burden of proof, the process of filing, and the very definition of a 'taxable service' can shift like sand, leaving no firm ground for compliant businesses to stand on.
The intent behind these changes is likely to broaden the tax base and increase provincial revenue. However, the current execution risks achieving the opposite effect. By creating a climate of uncertainty, the new regimes may inadvertently push businesses towards non-compliance, not out of malice, but out of sheer confusion.
Taxpayers are left to guess at the meaning of ambiguous clauses like 'Tax Free' services, fearing the penalties that come with an incorrect interpretation.
Taxpayers are left to their imagination about the treatment of 'Export of Service', the agriculture related services like 'baling a field', 'stock minding or rearing' and 'tooling' services. The list is a long one and the silence of authorities, sinister. They are perplexed about what to do with the cost consequences of those 'Input Tax Adjustments' resulting from deductions outside the VAT value chain.
To tame this 'Skin-walker' of provincial taxation, a concerted effort is needed from all stakeholders. Federal and Provincial governments must work towards greater harmonization of tax laws and a standardized approach to the much trumpeted negative list.
Tax authorities must issue clear, unambiguous guidelines and provide accessible channels for clarification. Most importantly, they must engage with the business community to understand their challenges and address them proactively. 'Public Consultation' is a decent norm of a fair and equitable tax system.
Until then, the 'Skin-walker' will continue its nightly prowl, a creature of two forms, leaving taxpayers to wonder whether their commercial rent is a 'service,' their provincial tax obligations are truly transparent, and when the sun will rise on a unified, clear, and fair tax regime for all.
Copyright Business Recorder, 2025