Contradictions & Fiscal Balkanization Dr. Ikramul Haq Part I of this series examined how provincial sales tax regimes have gradually crossed constitutional boundaries by assuming extra-territorial jurisdiction contrary to Article 141 of the Constitution and the principles laid down by the Supreme Court in Messers Sui Southern Gas Ltd v Federation of Pakistan (2018 SCMR 802). The problem, however, is not confined to constitutional overreach alone. The provincial sales tax statutes have now inbuilt anomalies and contradictory provisions, especially after the sweeping amendments introduced through their respective Finance Acts of 2025. Until June 30, 2025, the provincial sales tax framework broadly operated through a "positive list" model. Taxability was linked to specified taxable services appearing in schedules appended to provincial laws. The charging provisions, classification schedules and rules generally worked within a relatively identifiable statutory structure, even though jurisdictional disputes and delegated legislation issues persisted. From July 1, 2025 onwards, all four provinces have shifted to an entirely different model under which every activity not constituting "goods" is presumed to be a taxable service unless specifically exempted. Khyber Pakhtunkhwa has expressed this transition most candidly by amending section 3 of the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 to provide that "any provision of service is a taxable service except such services as are explicitly listed in the First Schedule". Similar structural changes have now emerged in Sindh, Punjab and Balochistan. At first glance, the shift appears administratively attractive. Tax authorities prefer broad tax bases because they reduce classification disputes and widen fiscal reach. However, once examined closely, the new provincial framework reveals profound contradictions between charging provisions, definitions, schedules, rules and long-standing sector-specific tax regimes. The banking sector exposes these contradictions most vividly as elaborated in Part I. The amended charging sections of Punjab Sales Tax on Services Act, 2012, namely 3 and 3A, now broadly treat all services as taxable unless exempt. Yet the special procedures, valuation rules and operational framework governing banks still proceed on the earlier assumption that only fee-based and non-interest services constitute taxable services. The contradiction arises because the statutory framework built over more than a decade was originally designed around the distinction between financial intermediation and taxable ancillary services. Banking laws themselves recognize this distinction. Interest, markup and financial intermediation are fundamentally different from conventional commercial services. The Punjab Sales Tax on Services Act, 2012 and corresponding rules historically taxed identifiable non-interest services rendered for consideration by banks. However, after July 1, 2025, the broadened charging provisions 3 and 3A of Punjab Sales Tax on Services Act, 2012 potentially convert almost every banking activity into a taxable service while the old rules continue to speak in the language of "fee", "commission", "charges" and identifiable consideration. The contradiction becomes even sharper in Khyber Pakhtunkhwa. The newly substituted definition of "service" now includes "anything, which is not goods", including facilitation of financial transactions, utilities, advantages and digital activities "by whatever name called." Yet several operative provisions of the same statute still proceed on the assumption that taxability depends upon ascertainable consideration for a specific taxable service. Section 6 of Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 defines value of taxable service as "consideration in money" received by the provider. The conceptual problem immediately emerges: if all forms of financial facilitation are services, what precisely constitutes consideration? Is markup consideration for service? Is spread income taxable? Is treasury income taxable? Are inter-bank settlements taxable? The charging provisions suggest one answer while sectoral rules and long-standing practice suggest another. The same incoherence exists in input adjustment mechanisms. The laws continue to retain elaborate provisions restricting input adjustment for reduced-rate or exempt services. These restrictions were developed under a positive-list value-added tax (VAT) structure where identifiable taxable services existed. Once the tax base is converted into an unlimited "everything except exempted services" regime, the logic of these restrictions itself becomes unstable. This internal incoherence extends far beyond banking. The provincial statutes now attempt simultaneously to operate: – a broad residual tax model, – sector-specific exemptions, – reduced-rate regimes, – fixed tax regimes, – withholding tax systems, – reverse charge mechanisms, – and delegated classification frameworks. The result is a structurally inconsistent VAT structure. The issue becomes more serious in composite contracts involving both goods and services. Modern commerce rarely operates through pure transactions. Telecom services involve goods, software and infrastructure. Construction contracts involve materials and labour. Digital platforms combine technology licensing, data access and facilitation. Banking involves money, contracts, guarantees and financial intermediation. Logistics combines transportation, warehousing and documentation. Under the earlier framework, provincial authorities at least attempted to identify specific taxable service elements. Under the post-2025 framework, however, virtually every composite economic activity risks being recharacterized as a taxable service merely because some facilitation or intangible component exists within it. This emerges from a recent judgement of Federal Constitution Court (FCC) of Pakistan in a case where composite agreement for goods and services was held to be taxable under Khyber Pakhtunkhwa Sales Tax on Services Act, 2022. This creates direct conflict with federal sales tax on goods and also threatens the constitutional distinction between different taxing entries. Provinces cannot transform Entry 49, Part I, Federal Legislative List, Fourth Schedule to the Constitution into a residuary taxing power merely by defining "service" in infinitely expansive language. As already discussed in Part I, the Supreme Court in Elahi Cotton Mills Ltd v Federation of Pakistan (1997) 76 TAX 5 (S.C. Pak.) clearly held that constitutional taxing entries cannot be artificially enlarged through legislative drafting. The same contradiction now appears in relation to renting of immovable property. Despite repeated judicial pronouncements that mere renting of immovable property does not constitute a taxable service, provincial authorities continue expanding the statutory language to justify taxation of rent. The Sindh High Court in Young's (Private) Limited v Province of Sindh (2019 PTD 389), later affirmed by the Supreme Court, categorically held that mere letting out of immovable property does not involve provision of taxable service. Yet provincial authorities continue treating property rights as services through repeated legislative amendments and delegated notifications. The contradiction relating to taxing rent per se as a service is deeper than classification. Provincial laws simultaneously claim: – that everything not constituting goods is a service; – that proprietary transactions may constitute services; – and that service taxation may extend to transactions traditionally governed by property law. This blurs constitutional boundaries between taxation of services, taxation of property and taxation of income. Another serious contradiction emerges from delegated legislation. Provincial statutes continue empowering revenue authorities to classify, amend and regulate taxable services through notifications and executive instruments. Section 12 of Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 authorizes amendment of schedules through notification. Similar powers exist in Sindh, Punjab and Balochistan. Consequently, the taxable field itself increasingly depends not upon legislative enactment but administrative interpretation. This creates profound uncertainty. A service may become taxable, exempt, partially taxable or differently classified merely because a provincial authority issues a notification. The result is not a stable VAT system of taxing services but an ever-changing administrative regime shaped through delegated legislation. The problem is aggravated because all four provinces now compete against each other fiscally. Instead of harmonization after the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment], Pakistan has effectively developed four competing sales tax sovereignties. Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA) increasingly seek to maximize territorial and transactional claims, especially over banks, telecom operators, airlines, digital services, franchises, logistics companies and financial institutions operating nationally. This competitive taxation produces what may rightly be called fiscal Balkanization. A single transaction may now simultaneously trigger: – origin-based taxation, – destination-based taxation, – reverse charge liability, – withholding obligations, – and competing jurisdictional claims. Businesses operating nationally face multiple registrations, multiple audits, multiple assessments and inconsistent interpretations. Compliance costs have escalated enormously. Instead of creating ease of doing business, provincial tax fragmentation is discouraging investment and formalization. Ironically, the present model harms provinces themselves. Excessive fragmentation suppresses economic integration and ultimately shrinks the very tax base provinces seek to expand. The constitutional vision underlying the 18th Amendment was cooperative federalism, not fiscal warfare. Provincial autonomy was intended to strengthen democratic decentralization within a unified economic federation. It was never intended to create four competing tax empires interpreting "services" according to administrative convenience. The post-2025 provincial sales tax framework now stands trapped in multiple contradictions: – between charging provisions and rules; – between constitutional limits and legislative ambition; – between service taxation and property taxation; – between VAT principles and administrative expansionism; – and between provincial autonomy and national economic integration. Unless these contradictions are resolved through harmonized reforms, litigation and uncertainty will continue multiplying. The final part of this series will examine how Pakistan can move towards a constitutionally coherent and harmonized provincial VAT framework through statutory amendments, inter-provincial coordination, limits on delegated legislation and ultimately a unified national approach to sales taxation on goods and services. ___________________________________________________________________ Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.
The Provincial sales tax chaos series: Provincial sales tax chaos-I · Provincial sales tax chaos-III