Sales tax on services - I

Bill Maher once quoted US Fed Chairman Alan Greenspan, joking that "Bush's budget is such a mess that we're going to have to either cut spending, raise taxes or start a national sales tax. You know what that means - war with Syria." We are not different either. Fortunately, the Gilani-led government in Pakistan did not go for war; rather paved way for provincial sales tax after miserably failing to build a national consensus for a national integrated Goods & Services Tax (GST) or Value Added Tax (VAT). This started when the Parliament passed the 18th Amendment of the Constitution on April 8, 2010.
Accordingly, under Entry No 49 of 4th Schedule of the Federal Legislative List, the authority of the provinces regarding Sales Tax on Services was accepted and re-asserted by adding the words "except Sales Tax on Services". Sindh took the initiative by enacting the Sindh Sales Tax on Service Act 2011 (SSTSA) on 10th June 2011. SSTSA deals with levy of tax on services provided, rendered, initiated, received or consumed in the Province of Sindh. With strong IT support and penetration, the Sindh Revenue Authority (SRB) rapidly brought the service providers into the tax net. SRB was also able to address the teething problems arose in every new system implementation. Punjab followed suit in 2012 by legislating Punjab Sales Tax on Services Act 2012 (PSTSA) with an experienced sales tax officer as Chairman heading the Punjab Revenue Authority (PRA).
However, despite all the most powerful constitutional support, political and administrative aid and experienced tax team, both SRB and PRA have not been able to demonstrate enough acumen and wisdom that the taxpayers of this country expect from tax authorities. Resultantly, not a single difference of opinion, overlapping or shortcoming between the 2 provincial tax authorities has so far been solved; instead the list is growing day by day. The sole beneficiary of such scuffle if no one but - Federal Bureaucracy especially Ministry of Finance and the Federal Board of Revenue (FBR)!
FEDERAL EXCISE DUTY The most astonishing row between federal and provincial bureaucracies initiated when sales tax was levied on certain services under SSTSA but previously levied Federal Excise Duty (FED) thereon was not withdrawn by the Federal Government. This immediately caught the eyes of taxpayers and tax advisors only to be followed by issuance of a 'press release' by the FBR assuring that "the federal government has decided to withdraw legislation for collecting FED on services which are separately taxed under SSTSA to avoid double taxation upon taxpayers". What is more surprisingly and thought provoking is that despite lapse of almost 2 years since the issuance of such 'press release', necessary legislation has not been made in the statute to give legal protection to FBR's press announcement.
Later on, the then FBR Chairman Salman Siddique is on record to have admitted that GST on services had become a domain of provinces after the passage of the 18th Amendment. However, he claimed that as per an agreement, Sindh would only collect GST on standalone services, which included beauty parlours, clinics, slimming centres, laundries, etc. On the contrary, Sindh started collecting sales tax on all financial, logistics, advertisement, contractual and other services under the vires of SSTSA.
Incidentally, the SRB did not take stock of the apparent confusion or disagreement between Centre and Province and its consequences. Thus, SRB kept collecting provincial sales tax. With the passage of time, this issue cropped further with a deepening row between FBR & SRB. Consequently, the poor service providers of SRB are facing the wrath of SRB's ignorance and silence as FBR started not only issuing notices but creating demands on banks, financial institutions and other sectors for non payment of FED since Year 2011, notwithstanding payment of Sindh Sales Tax by such sectors into the coffers of SRB. All such matters are presently pending into litigation.
WITHHOLDING TAX This scribe has reviewed a couple of VAT laws across the globe only to find out that Pakistan is the unique country to have introduced withholding sales tax on goods and services. It simply means collection of indirect tax is also being made in a further indirect manner.
The concept of withholding sales tax was introduced in 2007 with the issuance of Sales Tax Special Procedure (Withholding) Rules 2007 under Section 3(7) of Sales Tax Act 1990 (the Act). The original SRO was SRO 660(I)/2007 dated 30 June 2007 whereby autonomous bodies, government departments and public sector organisations were made liable to STWH @ 1/5th of the sales tax charged by registered persons and 15% (or more), if they procure taxable goods from unregistered sector. This mechanism was primarily adopted to compel the unregistered sector to bring part of the tax base. However, with the passage of time and as expected from a weak tax machinery, the tool of withholding tax became the source of revenue for the government. Realising the importance of such a revenue yielding device, both the SRB and PRA also introduced withholding tax laws in their respective jurisdictions.
Now taxpayers have started receiving notices from both provincial authorities for not withholding sales tax on cross-border services received by them. Such a notion does not find enough support even from senior tax lawyers who vehemently assert that provincial withholding tax rules of a province cannot be invoked or implemented in another province for the basic reason of their geographical limitations and constraints, envisaged in Section 1(2) of SSTSA and PSTSA. Such an opinion derives strength from the fact that for sales tax laws, both Sindh and Punjab are like 2 distinct countries. In the absence of a specific treaty between 2 "countries", tax laws of state 1 cannot operate in another state. However, both SRB and PRA have done little to overcome such an issue.
Franchise SRB has always believed that any person having a registered office in Sindh and making the payment of franchise/royalty from its registered office is deemed to be a registered person under Section 9(2) of the SSTSA and is required to pay sales tax @ 10% on franchisee fee on entire amount that is being remitted from Sindh on account of franchise/royalty service received or consumed not only in Sindh but rest of Pakistan. The SRB had also assured the taxpayers that in case of any adverse reaction from FBR at any later stage(s), SRB would protect the taxpayer by taking up the matter directly with FBR so that the taxpayer may not be exposed to double taxation on this account.
On the other hand, PRA holds a different and contradictory stance, which says that royalty / franchise fee paid by the business to non-resident foreign franchiser is largely computed upon the turnover of the business, earned across the whole of Pakistan. On this analogy, PRA opines that service recipient is liable to pay sales tax @ 16% on franchise / royalty services attributable to its turnover earned in Sindh and Punjab; while it is liable to pay Federal Excise Duty (FED) to FBR on identical services for the rest of the country. Such an understanding is based upon the concept that royalty / franchise service cannot be construed to have been rendered to the registered office alone (situated in Sindh, Punjab or rest of Pakistan), from where the service recipient makes remittance to franchiser; rather it relates to the franchise/royalty arrangement (in the shape of formula, technical support, trade mark) which helps the business in making sales across the country.
In terms of Serial No 11 of Table II to the First Schedule of Federal Excise Act 2005 read with Rule 43A of Federal Excise Rules 2005, franchise services are charged to FED @ 10%. In the backdrop of 18th Amendment whereby provinces were authorised to levy and collect sales tax on services, this scribe made several written representations to FBR regarding the issue of payment of FED on franchise/royalty services, basis of computation thereof, bifurcation on the basis of territory/geography, etc and sought FBR's ruling/viewpoint in the matter. However, to date FBR has not clarified the issue in writing. In the wake of distinct excise/sales tax laws being implemented in respective Provinces and territories, businessmen operating from more than 1 location is facing sever confusion over the mechanism of payment of excise/sales tax on franchise services, basis and bifurcation thereof among FBR, SRB and PRA.
On the contrary, FBR field formations have started making assessments of duty where the taxpayer paid sales tax on account of franchise/royalty to SRB and PRA instead to FBR. To date, several identical cases are pending before the Appellate Tribunals or High Courts on this account.
EXPORT REFUNDS Sales tax refunds have been a matter of serious concern for exporters for a very long time. With the passage of time, the blocking of refunds has also been extended to taxable services.
SRB & PRA taxpayers issue sales tax invoices to registered exporters in Pakistan and charge provincial sales tax thereon. However, such invoices are not being validated by STARR system administered by FBR for (un)known reasons. As a result thereof, refund claims of millions of rupees are not released to genuine exporters by FBR. Such an adverse situation is also causing substantial damage both to exporters and service providers, in terms of both business and reputation.
Initially, it was conceived such refunds were not being processed and sanctioned due to non-data integration of database of SRB/PRA and that of STARR. However, later on FBR and SRB accorded their respective consents to PRAL to grant access to each other's data. Despite such an accord, PRAL officials contend that the issue is not merely that of a procedure; rather PRAL awaits a policy decision from FBR to address such taxpayers' concern.
SRB and PRA appear to be working hard to resolve such bottlenecks but the most adversely affected is the lost of taxpayers who are facing severe liquidity crunch considering that FBR has not released a single penny against sales tax invoices issued by service industry registered with SRB/PRA.
(To be continued. - The views expressed in this article are not necessarily those of the newspaper)